Fintech 🧠 Food - WTF Happened to FTX?

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Hey Fintech Nerds 👋

I’m hitting send early this week because, like you, I can’t keep up with everything FTX. So here it is. Early food. Breaking news Food. Brainfood.

Weird one this week. The FTX stuff just blew out everything I had in mind. So I've done less on news and reads than usual and done more scene setting on all things WTF Crypto in the Rant section. Hope it's useful.

Stay safe out there. Weird times.

PS. Last week I moaned that 2k words couldn't do justice to ESG as a subject, so how about 100k? Chris Skinner's latest book could be a good read for you if you still need to check it out. 

PPS. Who's the best Growth Marketer you have ever met? Get in touch ✉

Weekly Rant 📣

WTF just happened with FTX?

In a year full on shocks, this has to go down as the biggest.

FTX became the darling of Crypto with the FTX stadium and Superbowl ads. This whole year we couldn't escape "FTX buys X" headlines. FTX had become a byword for stability in a market filled with instability. 

CEO and Founder Sam Blankman-Fried (SBF) would regularly appear in mainstream news outlets talking in articulate ways about Crypto and the future of financial markets. He was a notable donor to both political parties and had become an active advocate for Crypto policy in Washington.

How did we get from that to Binance signing a non-binding agreement to acquire FTX?

What happened?

Last week large investors like Binance and Jump began to withdraw their funds. 

Perhaps prompted by this article from November 2nd, which breaks down the relationship between FTX and Alameda Capital as part of the "Sam Blankman-Fried empire." Alameda Capital is a market maker and trading firm founded before FTX and the primary source of liquidity to FTX

The journalist notes they had seen a financial report that Alameda's balance sheet was "full of FTX," namely the FTT token.

FTT is a token made up by FTX that grants discounts on trading fees at the exchange. If you hold more FTT, your trades become cheaper. 

These two facts in isolation aren't terrible (whatever you think about tokens made up out of thin air, if you replace "token" with loyalty point, it sort of makes sense).

What spooked people is that the biggest asset and liability for Alameda was the FTT token. They held $3.66bn of "unlocked FTT" and $2.16bn of FTT collateral as assets. They also had more than $3bn in "Crypto SOL" or Solana tokens. 

But when Crypto Twitter saw this, it also noticed that the biggest liquidity provider to one of the biggest exchanges was massively exposed to a token from that exchange. That's when the big investors started pulling out of FTX. 

SBF moved quickly to reassure investors, and for the most part, the industry and Crypto Twitter believed him.  

Enter Binance CEO Changpeng Zhao (CZ).

CZ and FTX had at one time a good relationship; Binance was an early investor in FTX and a supporter. But Binance, who was clearly the #1 Crypto exchange in the world by volume, quickly found itself looking over its shoulder as FTX became #2. 

When SBF became the cover of Fortune magazine, sponsored arenas, and won investments from sports stars, and FTX became the #2 exchange, Binance decided to sell its stake in FTX. 

Binance agreed to take some portion of the buyout as the FTT token, in fact, $2bn worth of FTT. Despite being competitors, if FTX did well in theory, FTT would do well, and Binance would be able to benefit.

Recently, the relationship soured when CZ accused SBF of talking negatively about Binance to regulators in Washington. 

At the same time, CZ announced his intent to liquidate his position in FTT.

For those of you keeping score at home, Alameda's balance sheet of $14.6bn assets in total that had at least $5bn exposure to FTT was about to see the value of that FTT token decrease dramatically. FTT token holders panic sell, pushing the price down ~20% in 24 hours.

But what about FTX?

Sam tweeted along the lines of everything is OK (tweet now deleted).

And the CEO of Alameda that she'll buy at $22. SBF had noted this $22 number a lot before. Was $22 a key support number for Alameda? And what is the relationship between Alameda and FTX?

That doubt leads to a spike in funds withdrawn from FTX, at least $1bn in 24 hours, and FTX is facing a liquidity crunch. Then withdrawals are paused. Then silence.


Since then, it has become clear that FTT, Alameda, and FTX were all interwoven, as this tweet explains.

This would look like legitimate credit agreements between two arms-length entities, but in practice, "customer funds" become available to Alameda for proprietary trading. As we learned in the Global Financial Crisis of 2008, you don't want customer funds anywhere near proprietary trading. 

Now consider that Alameda had debts at Voyager when Three Arrows Capital (3AC) folded after the collapse of Terra Luna. Suddenly FTX purchasing Voyager and Celcius looks a lot less like a position of strength and more like the cash cow FTX bailing out its liquidity provider Alameda.

While all along, Alameda was the most degen of the degen traders out there.

So, where does that leave us?

And Crypto?

We don't know. This situation is still evolving. As I type these words, it just broke that the SEC will investigate FTX and the relationship with Alameda. Rumors are also circulating that Binance might not complete the purchase.

Usually, I have thoughts and takes and a ton to say on any subject. But on this, it's mostly just a sort of sadness. Regular readers would know; I would point at FTX and go, "look what we could have in capital markets if we used tokens!" 

And I wasn't alone; many major Wall St players looked at how FTX could do clever things like cross-margining using any asset as collateral. It operated globally, 24/7, and 365, and it was always lightning fast. It wasn't just Wall St and me either; most of Crypto Twitter, famous traders, and accounts like Cobie liked using FTX. It was and is a good product.

The tagline is "by traders for traders."

So here are the 30,000ft principles I'm using to orient with

Crypto needs to rebuild its credibility. The FTX brand is now toxic, Crypto prices are cratering, and the market is filled with fear. The DeFi crowd says, "this is why you need to custody your own assets and need truly decentralized finance," and the TradFi crowd says, "this is why we need regulated banks." 

Ultimately, we need something that consumers and the market can trust. That T-word. It keeps coming up again and again. 

Trust that my funds will still be there. Trust that I'll be able to make a transaction. Trust that if something goes wrong, I'll be made whole. That's the promise we make to consumers and the promise we need to keep as anyone in financial services.

FTX broke that trust, and there's no way back for them.

Let's not throw the baby out with the bathwater. I'm still massively bullish on a global, 24/7, programmable financial system and capital market infrastructure. That is transformational in a way very few things will ever be.

Let's not confuse FTX with DeFi. Uniswap, AAVE, Compound, and the other true DeFi protocols and self-hosted wallets are all running perfectly. Ethereum continues to process transactions, as do many other networks. This is a critical distinction for anyone in financial services, especially the government, to understand in the wake of this news.

Alameda and FTX look like "wildcat banking" of the 1830s-era US, where local banks could create and issue their own dollars with little regulatory oversight. This made so much carnage and such a boom-and-bust cycle the US created a law for a national currency based on federal debt. 

We need to ensure the protection of customer funds. Europe already has passed a regulation to ensure this called MiCA. But it should be a principle we adhere to. Whether it's self-hosted wallets with amazing op-sec, recovery, and user experience or centralized exchanges not contorting themselves into complex legal structures to trade customer funds. Thou shalt not fuck with customer funds.

But remember, Crypto is global. Any regulation passed at a national level won't impact everywhere else. It is estimated 95% of FTX revenue, and "empire" existed outside of the US. 

Crypto has to face all of its demons. Crypto has massive scams, hacks, and fraud problems. $2bn has been lost to hacks alone, and that number doesn't come close to the fraud which isn't reported. If your first experience using Crypto is the wallet being drained, you will prefer centralization.

Market abuse is a consistent problem. It's not just wash trading NFTs, but anon wallets and investors controlling governance in DAOs and creating outcomes that benefit them. An abused market will struggle to scale and gain liquidity. Again if we want DeFi to replace TradFi rails and create more transparency, we have to fix it.

Not everyone is ready to be their own bank. Wallet creators and entrepreneurs are working on better wallet designs, and key management is improving, but we have a long way to go before this good op-sec is mainstream and effortless. In DeFi, being your own bank means building defenses from bank robbers.

And if we don't do that, we lose the dream of making a more inclusive global financial system. 

We can make a better Crypto ecosystem. We need much better risk mitigation in Crypto. But notice I said risk mitigations, not regulation. Regulation is a blunt instrument for solving market failures. Regulation may not be required if the market succeeds at creating social good. 

The bankless podcast guys describe Crypto like the wild west and say life on the frontier isn't for everyone. Still, if we want this tech to take off and have an impact, it eventually needs to turn into California with a movie business and tech hub and everything. 

Which prompts a philosophical question, how do we want to solve these problems?

  1. Disclosures. Ryan Selkis and Chris Brummer have pushed for disclosures to help with market manipulation, but will all DeFi protocols, wallets, and more sign up for it and speak with one voice to global governments saying, "We got this"?

  2. Scams, hacks, and fraud. Are we willing to say that theft is bad even if a user allowed the transaction and that a user should be made whole? We have the on-chain data to spot negative patterns of behavior. We have the Fintech operators and companies with the experience to manage this stuff. How do we keep the promise to consumers that they will be made whole? It will work.

Lessons will be learned.

Every 10 years, humanity re-learns the first principles of financial services.

In Crypto, it's every 10 months.

But in Crypto, we need a conversation. A conversation about the real problems in DeFi and the potential solutions. Because regulators are humans who are trying to solve problems with a limited tool set.

The Crypto ecosystem has unlimited creativity and potential; can we do better? 

4 Fintech Companies 💸

1. ORO - Procurement automation platform

  • ORO helps ensure every process is followed between departments before a contract is signed, like the MSA, security audit, and any quality checks are complete. It also gives companies a "CRM of their suppliers" and the ability to easily create workflows between multiple systems they already operate (Like ERP and Docusign). 

  • 🤔 Procurement automation is the missing 90% of "payment automation" and the hidden schlep of every company. Buying gets harder as you scale, especially in a regulated industry. As a buyer inside a company, you often don't know what processes you need to follow, and as a seller, it is impossible to understand what forms you need to fill out to complete the process. ORO brings transparency to both sides. I'm surprised someone hasn't done this sooner. It would fit neatly alongside accounting or any other back office function SaaS. As someone who has sold to big banks, I'd love it if they all had something like this! You need this if you're scaling Fintech in B2C or B2B.

2. Antic - Add co-ownership to anything

  • Antic allows developers and artists to make any asset "co-ownable" and collectible. Artists can allow their audience to co-own bits of IP and own a fraction of future revenue streams. The service creates a simple wallet for audiences, and developers focus on its API's simplicity.

  • 🤔 The word "NFT" doesn't appear anywhere on the homepage; this is all IP and ownership. NFTs are quietly being rebranded as "digital collectibles" in many corners as brands look at the experiences they can create and focus less on the technology. Big things in digital always seem to happen when brands and users get closer together. Maybe this hints at what web3 or Web 3.0 as Tim Berners Lee prefers, might actually become? 

3. Nilos - Unified Fiat and Crypto treasury

  • Nilos allows users to pay, reconcile and track Crypto wallets and fiat accounts on the same system. Payments that come in via Crypto can be routed to pay out immediately via fiat rails directly to suppliers. 

  • 🤔 This looks a little like the payment automation and CFO tools we've seen in Fintech for the past 18 months but for Crypto. Some competitors do similar things, but the focus on automation and workflow is pragmatic. I wonder about the timing here; with Crypto in the doldrums, how many Crypto businesses are buying big new suppliers?

4. Atlar - Modern Treasury for Nordics / DACH region

  • Altar lets companies create and collect payments and aggregate bank data in a single API and dashboard. Users can reconcile payments from multiple banks against their accounting platform, initiate one-off payments and set up recurring payment collections (direct debits). The service also handles errors, returns, and refunds.

  • 🤔 There is no lack of payment automation platforms, but the region focus here is powerful. Europe is a big place, but generally, there is a good deal of cross-border trade in the Nordics and DACH region. It's also a more complicated region for UK and US-based companies to penetrate. With Atlar, you get that whole region in a single automation platform “out of the box.”

Things to know 👀

Apple will accept Venmo tap to pay via iPhones, and Paypal will make Apple pay available in its unbranded checkout. From next year US-based customers can also add Venmo and PayPal branded cards to their Apple Wallet.

  • 🤔 timing is everything. This announcement comes a week after Amazon announced Venmo would be available as a payment option there too. Venmo has a real shot at becoming a full-fledged payments brand if it continues down the partnership route.

  • 🤔 The market is now as short Fintech in 2022 as long Fintech in 2021. PayPal delivered $6.85bn in quarterly revenue with $1.15 EPS, and the market sold on weak guidance. It trades at a 3.6x quarterly run rate and signed Amazon and Apple as partners. In a bull market, people would lose their minds at this news.

  • 🤔 I think we might be hitting peak despair for Fintech. Don't get me wrong; unfortunately, there will still be layoffs and pain to come, but the productive assets are producing in market and valuation terms. Smart investors buy low and sell high, and Fintech looks all-time cheap. 

Good Reads 📚

Bradley talks about the proven benefits of 1:1-backed Stablecoins (like USDC, USDP, and GUSD). Namely, global 24/7 liquidity, a low-cost solution for international remittance, and financial empowerment for freelancers. 

  • 🤔 The key that unlocks all use cases is instant, global, and 24/7 liquidity. Once you Grok that, you grok why Stablecoins > CBDC. Payments exist on many rails; in many countries, banks and intermediaries whose systems create delays. This means merchants and intermediaries must hold local cash in local markets until they can move it. That cash isn't making yield or allowing you to get more stock to sell; it just sits there.

  • 🤔 The problem with instant payments is instant risks. Real-time payments, and especially Stablecoins, have no taksey-backsies. Once a Stablecoin has gone, it is gone, whether it was a user error, a scam, fraud, or something else. And today, there's no industry-driven solution to that.

  • 🤔The problem with the dollar being used globally for instant liquidity is that it won't be popular with some central banks and governments. Just look at how dollar strength has weakened major currencies like the Euro and GBP. If global consumers adopt a dollar equivalent, the economy of the US would have an even more outsized impact. 

  • 🤔 Most financial services companies hold dollars off-shore at their bank today (called Eurodollars). And I think there's an argument that merchants and consumers should have them because that's a net positive.

Tweets of the week 🕊

Jason’s whole thread on lessons to take from this moment are interesting but this especially stood out.

That's all, folks. 👋

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