An illustration of the FTX logo floating in a swimming pool
Illustration: Christopher T. Fong/Protocol

FTX's house of cards?

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Good morning! Binance is no longer coming to the rescue of FTX, and the complex web of connections that the failing crypto exchange belongs to means that could have a profound effect on the broader industry. That's what we're digging into this morning.

But first a quick housekeeping note: We will be off tomorrow and on Sunday to commemorate Veterans Day. We'll be back in your inbox on Monday morning.

FTX fallout

Binance isn’t buying FTX after all. The crypto giant said Wednesday it had decided that it would "not pursue the potential acquisition” based on a “corporate due diligence” review.

  • The company cited recent reports that FTX allegedly “mishandled customer funds” and that the company is under investigation by U.S. regulators.
  • Binance said it had hoped “to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help.”
FTX is now scrambling to survive. "I'm working, as quickly as I can, on next steps here," CEO Sam Bankman-Fried wrote in a message to staff that was seen by Reuters. "I'm deeply sorry that we got into this place, and for my role in it ... That's on me, and me alone, and it sucks, and I'm sorry, not that it makes it any better."

The effects will ripple across the crypto industry. Most immediately, ether and bitcoin dropped in a broad sell-off, with bitcoin hitting a two-year low. It's also left D.C.’s crypto allies skeptical of the industry. But the ultimate impact has yet to be seen, as the trading firm’s complex web of relationships continues to unravel, writes Protocol’s Tomio Geron.

  • One of the largest global crypto exchanges, FTX holds deposits for a number of large investors in the crypto industry. FTX also has close ties to Alameda Research, one of the largest investors in the industry. Both firms were founded by Sam Bankman-Fried, and Alameda holds large stakes in many crypto projects and tokens, including Solana, which dropped precipitously this week.
  • The fallout from FTX comes after the bankruptcies of Three Arrows Capital, Celsius, Voyager, and others earlier this year following the collapse of the UST and luna cryptocurrencies. Those failures also had effects that could be seen across the industry.
  • Crypto industry watchers are wondering who else could be affected. As in those past incidents, the counterparties of these entities aren’t always known.

Such a tangled web makes predictions difficult. Alameda itself had exposure to several other crypto lending outfits that had collapsed earlier this year, including Voyager, to which it said it would repay $200 million in September, and BlockFi, which FTX backed with a line of credit earlier this year.

  • On-chain activity showed Alameda had loans on several DeFi lending protocols, analysts said.
  • The effects of FTX’s crisis will take time to become clear. But with the size of the entities involved, and the large investors involved either directly or as counterparties, there’s almost certain to be more fallout. The greatest irony, given the blockchain’s supposed virtues of transparency, may be just how little we know.
  • So it's perhaps not surprising that the situation is being referred to by some as crypto's Lehman Brothers moment.

Read more: The FTX fallout is spreading all over crypto

X marks the spot?

A lesser man would look at the battered fintech landscape and say, “Party over, oops, out of time.” But not Elon Musk! Musk is going to party like it’s 1999, with his new toy called Twitter, writes Protocol's Owen Thomas.

Musk wants to turn Twitter into a super app, a do-it-all service called X that encompasses communication, news, shopping, and payments. He's been talking about it for a while now.

  • In a Twitter Spaces chat yesterday, Musk talked about $10 bonuses for new accounts, high-yield savings accounts, sending money to other accounts, and eventually checking accounts and debit cards. Twitter seems serious: It’s registered with FinCEN, which helps oversee money transmitters.
  • One problem with his scheme: Those $10 bonuses for new accounts? Even the modern PayPal, which tried using them again last year to boost its user numbers, found that they attracted fraudsters. Can you imagine what the spambots will do if Musk waves cash money in their silicon faces?

Musk’s wannabe super app faces a ton of competitors that didn’t exist two decades ago. One of the chief ones is run by someone close to him.

  • Under Jack Dorsey, Cash App has become a major growth engine for Block. It already has those banklike features Musk is talking about. A lot of rappers, celebrities, and porn stars like to tweet their Cash App handles, or “cashtags,” which start with a dollar sign instead of a hashtag.
  • Rising rates have surprisingly boosted the fortunes of some neobanks, since consumers now have more of a reason to hunt for yield and consider dumping their paleobanks. If there’s a time to try an revival, it’s now.

But the biggest challenge Musk’s super app may face is Musk. As PayPal learned, getting people to trust you with their money requires painstaking attention to detail, from the design of a checkout button to fraud-catching algorithms. Musk hasn’t been in that business for decades. There’s a lot he missed the first time, and a lot he has to learn. And there is little sign that he has the patience required.

Read more:Elon Musk is recycling his playbook for Twitter

Meta’s metaverse pivot takes its toll

Meta announced its largest ever workforce reduction yesterday, with layoffs totaling more than 11,000 employees. It appears that very few business units were spared, including those responsible for building Meta’s metaverse vision: Reality Labs.

Reducing head count in Reality Labs is meaningful. A cut of any degreethere is a telling sign of just how difficult the road ahead might be in achieving Zuckerberg’s vision of the “holy grail” of social networks, as he characterized the metaverse at the 2022 SXSW conference, Protocol’s Nick Statt writes.

  • Reality Labs, the unit responsible for not only AR and VR but also prototypes in emerging technologies like mixed reality and brain-computer interfaces, is far and away the most ambitious — and costly — big bet at the company.

The recent rate of spending speaks volumes about how much Zuckerberg has prioritized the company’s shift toward building the metaverse. Meta has continued to spend lavishly on Reality Labs.

  • Just this year alone, Meta has incurred more than $9 billion in losses on the division, and it reported just north of $10 billion in operating losses on the division last year. The company said it expects Reality Labs to lose even more money in 2023.
  • At the end of its third quarter this year, Meta employed an eye-popping 87,314 employees, a 28% year-over-year increase to its highest-ever employment level.

The concern now is that Zuckerberg might be too ambitious and too early to the next-generation internet that he envisions. With its stock price having plunged by nearly 70% this year, Meta is taking drastic measures to ensure the company can survive in the short term — at least until the technology evolves to where it needs to be to enable the types of products and experiences Zuckerberg seems to be banking on.

  • “The pressures Meta’s business is facing in 2022 are acute, significant, and not metaverse-related,” metaverse expert and investor Matthew Ball told The New York Times last month. “And there is a risk that almost everything Mark has outlined about the metaverse is right, except the timing is farther out than he imagined.”

Read more:Meta layoffs are a sign the metaverse might not save the company after all

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People are talking

President Joe Biden thinks Elon Musk’s links to foreign countries deserve some scrutiny:

  • “I think that Elon Musk’s co-operation and/or technical relationships with other countries is worthy of being looked at."

And Sophie in ‘t Veld, a member of the European Parliament, has other concerns about Musk:

  • “I think we also want to be reassured that Twitter is not going to be, let’s say, a threat to democracy.”

Al Gore said he hopes the greenhouse gas inventory will give climate negotiators a critical tool to hone in on the most polluting sites in individual countries:

  • “What’s different about this [database] is the accurate apportioning of who’s responsible for what and the granularity that allows us a focus on specific emissions sources.”

Upstart CEO Dave Girouard said fintech lenders are going to feel the squeeze of high interest rates in 2023:

  • "We’ve chosen to take a conservative position with respect to the direction of the economy in the coming quarters. In other words, we assume the worst is in front of us."

Making moves

Redfin laid off 862 employees, or 13% of its workforce. It’s also shuttering its iBuyer business, RedfinNow.

Aerospace startup Astra laid off 16% of its staff after the company had tripled its headcount in the past year to more than 400 employees.

Nintendo has a new subsidiary. Nintendo and DeNA, a mobile games company, are creating a joint venture company called Nintendo Systems to “strengthen the digitalization” of Nintendo’s business.

In other news

Elon Musk mandated in-office work at Twitter in his first email to staff, which was seen by Bloomberg. The new rule, effective immediately, requires employees spend at least 40 hours in the office each week. Musk also warned of “difficult times" to come, adding: “The road ahead is arduous and will require intense work to succeed.”

RIP Twitter’s short-lived “Official” badge. The company scrapped the program aimed at high-profile users the day it rolled it out. And fake accounts are already embracing pay-for verification, presaging the chaos that is yet to come.

A name you may want to know better: Yoel Roth,Twitter’s global head of safety and security. He seems to have become somewhat of an ally to Elon Musk, and the WSJ has a profile of him.

John Kerry unveiled the Energy Transition Accelerator, a new carbon credit program aimed at mobilizing private capital to help middle-income countries transition away from coal and toward renewable energy.

GitHub debuted private vulnerability reporting on the platform, aiming to avoid surprise disclosures of zero-day vulnerabilities in open-source software projects.

Okta updated its passwordless authentication system with a new capability aimed at countering the illegitimate use of biometric login data.

IBM is in talks with the Biden administration on potential export controls for quantum computers. As Protocol was first to report last week, there’s mounting pressure to move quickly — particularly from the National Security Agency and other intelligence agencies, which see China’s progress on quantum as a significant concern.

Zooming to a theater near you

Zoom is expanding outside of the home office. The company is collaborating with AMC to offer work meetings on the silver screen for groups that are between 75 and 150 people. The theater company is even providing “food and beverage offerings, possible movie viewings, and concierge-style personalized handling of meeting needs.” Just think: Next year, you might be able to buy fresh movie theater popcorn, Red Vines, and a Coke before your quarterly all-hands.

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