“Interest income was $33 million, up 211% compared to Q1. The increase was primarily driven by our USDC activity, as well as higher interest rates as we generate interest on fiat customer custodial funds… at the end of Q2, we had $6.2 billion in total $USD resources. In addition, we had $428 million of crypto assets.” [14]
When the letter was released in late August 2022, interest on USDC holdings for 12 months was up to 4.7%, while one-month yields were an even 4%. By November 16, 2022, USDC yields were down to 0% across all time frames.[15]
“1) Binance converts USDC –> BUSD, and we see the change in supplies. Thus begins the Second Great Stablecoin War.”
– @SBF, October 23, 2022 [16]
On September 4, 2022, Binance announced that it would be auto-converting all USDC, USDP and TUSD, three major dollar stablecoins, into its self-issued BUSD, effective in just 25 days. [17] This led to continued concerns about Binance’s solvency with the preceding few months, especially July 2022, seeing the largest known outflows of bitcoin in the exchange’s history, eclipsing even March 2020’s black swan bottom.
On October 11, 216 days after Biden’s executive order with the aforementioned 210-day clause, BNY Mellon, the world’s largest custodian bank with over $43 trillion on the books, and coincidentally, the custodian of Circle’s reserves backing USDC, announced the launch of its digital asset custody program. [18] Involved with more than 20% of the world’s investable assets, the bank founded by the first secretary of the treasury, Alexander Hamilton, was also listed as a partner in the FedNow pilot. [19]
Despite these institutional developments, a continued bear market weighed heavily on the now-plummeting bitcoin price. Paradoxically, more and more Bitcoin hash rate poured onto the network. These concurrent movements saw Bitcoin’s hash price plummet to an all-time low, spurring a massive liquidation of bitcoin liabilities off mining operators books. On October 26, Core Scientific, then the largest Bitcoin mining operation in the world, filed for bankruptcy with millions of dollars in debt liabilities, thousands of ASICs, and yet in their filings, held only 24 bitcoin total when the circus came to town. [20] Where exactly did all this bitcoin go? On that same day, barely two weeks before the FTX collapse, Binance saw its largest single day outflow, with 71,579 coins, totalling over $1.1 billion in dollar terms. [21] This pushed net outflows to nearly 95,000 coins from the world’s largest exchange since just that July. Again, where exactly did all this bitcoin go? The very next day, October 27, 2022, SBF appeared on The Big Whale and announced future plans for FTX to launch its very own stablecoin. [22]
More Sand Than Dollars
“CIA and Mossad and pedo elite are running some kind of sex trafficking entrapment blackmail ring out of Puerto Rico and caribbean islands. They are going to frame me with a laptop planted by my ex gf who was a spy. They will torture me to death.”
– Nikolai Muchgian, October 28, 2022 [23]
On October 24, 2022, the MakerDAO approved a community proposal to custody nearly $1.6 billion USDC with Coinbase Prime. [24] Four days later, Nikolai Muchigan, the co-founder of MakerDAO and inventor of Rai, a DAI-fork stablecoin, tweeted that his life was in danger due to a Caribbean island blackmail ring, supposedly backed by Israeli and U.S. intelligence agents. Three days later, on Halloween, the 29-year-old coder Muchigan was found dead, having drowned in the sea off Condado Beach in Puerto Rico. [25]
Two days later, on November 2, 2022, CoinDesk reporter Ian Allison released findings that over a third of all assets – around $5.8 billion of $14.6 billion – on the balance sheet of SBF’s Alameda Research was intrinsically, and soon to be fatally, linked to FTX’s exchange token FTT. A “bank” run commenced, and after three days of nearly $6 billion in withdrawals, FTX was left with literally one single bitcoin. Where exactly did all this bitcoin go? The next day in an interview with Fortune, Coinbase founder and CEO Brian Armstrong made note that USDC will become the de facto central bank digital currency in the U.S. [26]
“The policymakers in the U.S. will set the framework that need to be followed so that the private market will actually create the solutions, and USD coin has been on a really rapid rise… the regulatory environment is one of the biggest unlocks we’re going to have in terms of growing this industry and perhaps even getting the prices to go back up in the right direction”
– Brian Armstrong, November 3, 2022
On November 6, CZ announced Binance would liquidate a remaining portion of FTT it had acquired from exiting FTX’s equity, having received around $2.1 billion in BUSD and FTT. Minutes after his announcement, Caroline Ellison, SBF’s partner and the CEO of Alameda Research, offered to purchase the tokens at $22 each, in an over-the-counter fashion. [27] By November 8, CZ and SBF had a phone call and seemingly came to a tentative deal for acquisition, reserving the right to back out of the deal at any time, while interestingly also leaving both U.S.-based proprietary exchanges, Binance.us and FTX.us, outside the scope of the deal.
“Things have come full circle, and FTX.com’s first, and last, investors are the same: we have come to an agreement on a strategic transaction with Binance for FTX.com (pending DD etc)”, SBF tweeted. [28]
Later that evening, FTX officially suspended all asset withdrawals. As part of the conditions of the acquisition, SBF was forced to open the FTX books and show the bottom of his pockets; seeing more sand than dollars, CZ backed out of the deal. A few important statements were made in the 48 hours or so that led up to this sudden cataclysm, including from the awfully-quiet U.S. Securities and Exchange Commission itself.
“Liquidating our FTT is just post-exit risk management, learning from LUNA. We gave support before, but we won’t pretend to make love after divorce. We are not against anyone. But we won’t support people who lobby against other industry players behind their backs. Onwards.”
– CZ, November 6, 2022 [29]
On November 7, 2022, the SEC officially deemed LBRY, or Library Coin, an unregistered security offering, setting a devastating precedent throughout the extended cryptocurrency market. [30] In the United States District Court for the District of New Hampshire, the memorandum and order read, “The Securities and Exchange Commission (SEC) contends that LBRY, Inc. offered and sold unregistered securities in violation of Section 5 of the Securities Act of 1933”, the act colloquially known as The Howey Test.
Due to LBRY reserving a pre-mine of nearly 400 million LBC tokens, and the knowledge that the company to date had spent approximately half of its pre-mined LBC, the SEC determined common enterprise complete with a lack of disclosure and proper filing of its now alleged security offering through required channels in the Gary Gensler-chaired SEC. The implications of this filing sent shockwaves across the pre-mined token industry, including exchanges listing these tokens as well as the entities behind their issuance. Conveniently, the next day was November 8, the United States’ midterm elections, with the balance of the senate and the house — and perhaps the regulatory path of the digital asset industry — once again at stake.
Searching for FTX on FEC.gov brings up 456 individual campaign contributions from SBF, CEO Ryan Salame, and others. [31] Salame’s contributions total over $14 million towards GOP candidates, while SBF’s “effective altruism” contributed over $20 million in donations to DNC politicians. Having been the second leading donor to the Biden campaign, by the time the final tallies from election night rolled in, SBF’s bankroll had finally caught up with his morals, and he found himself nearly completely bankrupt.
By November 9, the day after the elections, SBF had reportedly lost 94% of his net worth, down to $1 billion from more than $15 billion, leaving him with the largest single-day loss by a person according to the Bloomberg Billionaire Index. [32] Early in the morning of November 10, SBF took to Twitter to explain what happened, writing “I’m sorry. That’s the biggest thing. I fucked up, and should have done better”, before making a specific note that “THIS IS ALL ABOUT FTX INTERNATIONAL, THE NON-US EXCHANGE. FTX US USERS ARE FINE!” [33]
Chapter 11
“The administration […] has consistently maintained that without proper oversight, cryptocurrencies risk harming everyday Americans…The most recent news further underscores these concerns and highlights why prudent regulation of cryptocurrencies is indeed needed.”
– White House Press Secretary Karine Jean-Pierre, November 10, 2022 [34]
On the eleventh day of the eleventh month, FTX and Alameda Research officially filed for Chapter 11 bankruptcy protection, and SBF stepped down as CEO. In addition, 130 affiliated companies connected or associated with FTX also commenced voluntary proceedings under Chapter 11. [35] The tide had gone out, and nearly everyone involved got caught swimming naked, as a near-endless tidal wave of dollar-denominated liquidations made quick work of SBF’s Caribbean empire.
While the first trickles of a dollar CBDC may have started in the Bahamas, the monsoon of coming regulation and contagion of the Second Great Stablecoin War is far from over. The dollar, having fallen 10% off 35-year DXY highs since September, looks for new ways to innovate and further dollarize markets across the globe.
On November 15, just four days after the SBF tsunami crashed to shore, BNY Mellon, as well as a dozen or so other banking institutions, announced the start of a twelve-week digital dollar pilot program with the Federal Reserve Bank of New York. [36] On the very same day, BlockFi announced plans for bankruptcy filings, only five months after taking a $250 million loan from FTX, and Circle announced users would now be able to settle payments by accepting Apple Pay. [37,38] With a significant 43% discount now showing on the highly-regulated Grayscale Bitcoin Trust, further community requests for proof of reserves are growing around Genesis and Grayscale, both owned by the Digital Currency Group, and even their custodian, Coinbase Custody. [39,40] As of this writing, these requests have so far been denied for security reasons.
While appearing to be riding the wave of the booming digital asset revolution, gathering celebrity endorsements and political allies alike, it turns out SBF was drowning in debt and capital misallocation amongst the loud, mainstream praise. Later that month, on November 30, SBF was set to appear in person at a New York Times event, sponsored by Accenture, alongside Secretary Yellen, Meta CEO Mark Zuckerberg, Ukraine President Volodymyr Zelensky, BlackRock CEO Larry Fink, TikTok CEO Shou Chew, former Vice President Michael Pence, Amazon CEO Andy Jassy, Netflix co-founder and CEO Reed Hastings, New York City Mayor Eric Adams, and others; tickets for the event were listed at $2,499 per attendee.[41] The interview between SBF and Andrew Ross Sorkin was streamed as advertised, albeit with both parties shooting remotely.
Bitcoin tends to be a ballast of truth, bringing all sorts of ballooning fraud rushing to the surface. FTX and Alameda Research will take their place amongst the seemingly too-big-to-sink players that ended up doing just that. They will certainly not be the last. However the following weeks, months, and years play out, it is clear that SBF was but a small fish in an ocean-sized, dollarized pond. And as he quickly found out, there is always a bigger fish.
“At some point I might have more to say about a particular sparring partner, so to speak. But you know, glass houses. So for now, all I’ll say is: well played; you won.” [42]
– Sam Bankman-Fried, November 10, 2022