1 November 2022; Speaker Changpeng Zhao, Binance, on Centre Stage during the opening night of Web Summit 2022 at the Altice Arena in Lisbon, Portugal. Photo by Ramsey Cardy/Web Summit via Sportsfile
Photo: Ramsey Cardy/Web Summit via Sportsfile

FTX’s collapse has rattled the crypto industry

Protocol Fintech

Good morning, and welcome to Protocol Fintech. This Wednesday: how FTX collapsed, the midterms, and Zelle’s real fraud problem.

Off the chain

The midterm elections didn’t deliver any clear wins to the crypto industry, though Rep. Patrick McHenry’s likely ascension to the chair of the House Financial Services Committee could place a blockchain enthusiast in a key role. That committee will also be a thorn in the side of the CFPB’s Rohit Chopra: Expect lots of hearings about the consumer-protection agency’s push to rein in fintechs. The Senate remains a question mark, but FTX’s sudden collapse is producing a bipartisan consensus: Crypto needs better regulation sooner rather than later.

— Owen Thomas (email | twitter)

A brawl, a shotgun wedding, and the aftermath

Binance’s shock announcement of a plan to rescue archrival FTX — after days of open feuding by the companies’ CEOs on Twitter — has rattled an industry still reeling from a dramatic crash and growing regulatory scrutiny. The high-profile brawl that turned into a shotgun wedding reinforced the fear that despite the industry’s rapid growth, the crypto realm remains murky and erratic.

Can you explain this, Sam? The brouhaha began with a report that raised serious questions about FTX and Alameda Research, the trading house owned by FTX CEO Sam Bankman-Fried.

  • A CoinDesk report based on a leaked balance sheet for Alameda found that much of its reserves were based on FTT, “FTX’s own centrally controlled and printed-out-of-thin-air token,” Swan Bitcoin CEO Cory Klippsten told CoinDesk.
  • FTX uses FTT as a reward currency for trading discounts, but it’s thinly traded, and its price began to wobble Sunday after Binance CEO Changpeng “CZ” Zhao said his company planned to sell its FTT holdings, which dated back to an early investment by Binance in FTX. CZ compared FTT to luna, another token Binance had backed, which imploded this year. The price of FTT plummeted by another 75% on Tuesday after CZ revealed his takeover plan.
  • It was a stunning turnabout for a company that seemed to be one of the winners of crypto winter. Just about four months ago, FTX stepped in to save BlockFi with a $240 million credit financing agreement — a deal in which FTX gained the option to buy the crypto lender.

The Binance-FTX rivalry has deep roots. CZ hinted that Binance’s beef with its archrival went beyond Alameda’s fuzzy finances.

  • “We gave support before, but we won't pretend to make love after divorce,” he said. “We are not against anyone. But we won't support people who lobby against other industry players behind their backs.”
  • It was an apparent dig at SBF’s aggressive lobbying in Washington. Bankman-Fried is known for his plan — since disavowed — to spend $1 billion in the next presidential election cycle. But he and FTX have also actively lobbied behind the scenes to shape crypto and other financial regulation.

Did FTX suddenly run out of options? SBF fired back Monday in a now-deleted tweet that claimed “a competitor is trying to go after us with false rumors” and stressed that “FTX is fine. Assets are fine.”

  • Things were definitely not fine. FTX paused withdrawals for customers Tuesday and faced a “significant liquidity crunch,” according to CZ.
  • Shortly thereafter, CZ and SBF were friends again. SBF portrayed the deal as “an agreement on a strategic transaction with Binance.” CZ was blunter, saying that FTX “asked for our help.”
  • Of course, FTX needed Binance’s help because of a wave of withdrawals arguably encouraged by Binance’s decision to publicly announce its plan to liquidate its FTT holdings. That hurt FTX’s credibility and sent its cryptocurrency crashing, which effectively forced it to sell. Semafor reported that SBF had been scrambling, unsuccessfully, to raise more than $1 billion in financing before signing the deal with Binance.

Will the deal stick? The way CZ announced the merger plan struck some as odd.

  • At this point, Binance has only signed a “nonbinding” letter of intent, according to Zhao. He stressed that Binance is in “a highly dynamic situation” in which it has “the discretion to pull out from the deal at any time.”
  • Binance Chief Strategy Officer Patrick Hillmann didn’t offer much more clarity, saying in a tweet that the company knows there are “a lot of questions” and it will “have more to say in the coming days.”
  • Bankman-Fried’s communications with FTX investors such as Sequoia Capital and Paradigm were hardly more reassuring. In a letter, he told them they were his “second priority” after FTX customers.
  • Crypto critic Molly White told Protocol that she was “giving it decent odds that the deal doesn't go through, or that Binance threatens to pull out if they're not given very friendly terms in the deal.”

This is bad news for crypto no matter what. Whether or not the Binance-FTX merger happens, the way the drama unfolded is bound to shake confidence in crypto as a whole.

  • Coinbase, crypto’s second-largest marketplace, saw its stock plunge 14% on Tuesday. Robinhood’s stock also tumbled 19%, likely due to worries about SBF’s nearly 8% stake in the online trading app, which has a strong crypto focus.
  • Expressing “sympathy for everyone” caught in the FTX situation, Coinbase CEO Brian Armstrong said that “it's stressful any time there is potential for customer loss.”
  • Outgoing Kraken CEO Jesse Powell said the deal is sure to draw “significant scrutiny” given the “allegations flying around” and the prospect of customer losses. The government might scrutinize a merger, he added.
  • Cathy Yoon, chief legal officer at MPCH, is also “fearful of how U.S. policymakers and regulators will see this event” and its impact on the progress the industry has made “from a policy perspective.” “I’m afraid this will set us back a bit,” she told Protocol.

The FTX crisis unfolded the way crypto meltdowns typically hit — suddenly and opaquely. And the drama is far from over. “It's remarkable, again and again, how crypto personalities like SBF will claim that everything is fine up until the very second they have to admit it isn't,” White said.

— Benjamin Pimentel (email | twitter)


Don’t miss out! Register today to hear some of the biggest players in fintech discuss the industry’s most pressing issues at the Financial Technology Association’s inaugural Fintech Summit: Shaping the Future of Finance. Produced in partnership with Protocol, all sessions of the event will be live-streamed on November 16th.

Learn more and reserve your spot here.

On the money

Goldman Sachs is fintech shopping. The investment bank has expressed interest in buying a payments-technology firm to further build out its credit card capabilities, The Wall Street Journal reported. That includes reaching out to Deserve, a company that provides card-issuing technology. (This wouldn’t be Goldman’s first buy in the category.)

Affirm shares plunged after its earnings report. The stock dropped as much as 18% after the “buy now, pay later” company revealed a weak forecast. Executives pointed to struggles at Peloton, a key partner for its installment loans.

U.S. credit card balances surged to a record high in the third quarter. Balances increased 19% to $866 billion, with average credit lines also climbing to an all-time high, according to TransUnion data.

Robinhood gave users access to IPO flops. All 23 IPOs that Robinhood opened up to customers through its IPO Access program have declined by double-digit percentages since the stocks debuted, Bloomberg found.

German regulators called on Coinbase to clean up its act. BaFin, the country's financial watchdog, ordered Coinbase's local unit to ensure it has effective risk management and internal controls in place after uncovering "organizational deficiencies."

Crypto venture investors are still pumping the brakes. October data showed the pace of crypto VC investment fell under $1 billion per month, according to a J.P. Morgan research report, less than a third of last year's pace.


Disgraced pharma executive turned crypto token promoter Martin Shkreli had some advice for Terraform Labs’ Do Kwon on the “UpOnly” podcast: “Jail is not that bad."

Say now, regret later? “We're just good at managing,” Affirm CEO Max Levchin told analysts on a call to discuss the “buy now, pay later” company’s earnings. Investors didn’t seem to agree

Just one question for Ravi Loganathan, head of financial institution services at Sardine

Before Sardine, Loganathan was the chief data officer of Early Warning, the fintech company behind Zelle that’s owned by the country’s seven largest banks. Now, at Sardine, he helps protect financial institutions against payment fraud.

Elizabeth Warren has been very outspoken about fraud on Zelle recently. How bad is the problem?

As we move to real-time payments and instant settlement, the fraud vectors you're seeing on the Zelle network will manifest themselves in all of these other rails and any other emerging rail that comes our way. The reason for that is, if you take a look at Zelle, or if you take a look at [The Clearing House] or what FedNow is going to be, these network operators are only transmitting messages back and forth between the sending bank and the receiver. But the majority of the fraud controls, and all of the liability, are with the sending bank.

To go a little bit deeper, think: How do you send a transaction on the Zelle network? You go to your bank's mobile banking app, you click on Zelle on the login page, and the bank is doing the fraud detection from that point onward.

The fraud vector that Zelle is fraught with is social engineering fraud. That is a fraudster, for example, using a third-party application like TeamViewer and socially engineering a relationship with the bank customer so that bank customer gives them access, or the fraudster hacking into their accounts. Then they’re now logging in to that bank account and initiating a transaction. In that instance, what failed was the fraud and risk capability on the bank’s online and mobile banking application, not the Zelle network.


Don’t miss out! Register today to hear some of the biggest players in fintech discuss the industry’s most pressing issues at the Financial Technology Association’s inaugural Fintech Summit: Shaping the Future of Finance. Produced in partnership with Protocol, all sessions of the event will be live-streamed on November 16th.

RSVP today.

Thanks for reading — see you tomorrow!

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