A little-traded digital currency created by Sam Bankman-Fried’s now-bankrupt FTX cryptocurrency exchange played a crucial role in the company’s collapse.
The digital currency is FTT, which was created by FTX. It isn’t unusual for a crypto exchange to issue its own currency, both to allow founders and early investors to profit if the value rises and to motivate traders to use the exchange.
FTT was different though because of the tight connection between FTX and Mr. Bankman-Fried’s trading firm, Alameda Research, which also collapsed last week. Alameda played an unusual dual role by holding most of the FTT outstanding and being the main trading partner for the currency, according to people familiar with the transactions.
Alameda then used FTT as collateral to get hundreds of millions in loans, people familiar with the matter said. The Wall Street Journal also reported FTX lent cryptocurrencies from its own customers to Alameda. It couldn’t be determined if FTT was used as collateral for the customer loans.
Mr. Bankman-Fried, FTX and Alameda didn’t respond to requests for comment. Ryne Miller, general counsel for FTX’s U.S. arm, said he isn’t answering media requests.
The arrangement also proved to be Mr. Bankman-Fried’s undoing. A CoinDesk report that a chunk of Alameda’s assets were made up of FTT, and that it may have overvalued those holdings, set off a run on FTX. Last week, Mr. Bankman-Fried said people repeating that claim were spreading “false rumors.”
FTX allegedly used customer money to prop it up, a person familiar with the order flows said. An FTX spokesman last week declined to comment. FTX and Alameda filed for bankruptcy on Friday.
Before FTT’s price cratered last week, Alameda owed a total of $1.5 billion in loans to counterparties outside of FTX, the Journal previously reported. Alameda made a series of venture investments using the loans, The Wall Street Journal reported.
At the same time, FTX was also on a spending spree, buying stadium naming rights and spending on Super Bowl ads. Mr. Bankman-Fried said in a tweet this past week the exchange had borrowed more than 1.7 times the value of its assets.
A blurred line existed between FTX and Alameda’s finances, people familiar with the matter say. On one recent occasion, an Alameda bank account paid millions of dollars to an FTX contractor, one of the people said.
The CoinDesk report that set off the run on FTX said Alameda had $5.82 billion in the tokens as of June 30, out of $14.6 billion in assets. At that valuation, Alameda’s holdings would have been worth more than the tokens’ $3.4 billion market capitalization at the time.
The news sent FTX customers and investors scrambling to withdraw their money from FTX, fearful Mr. Bankman-Fried’s businesses were less solid than they looked. Most have been unable to get their money back.
Some crypto exchanges have issued their own tokens, with founders and other early investors keeping a chunk to themselves and hoping their value will soar as customers trade them. To motivate buying, the exchanges offer trading discounts for users who hold their tokens. They also try to list the digital coins in several exchanges to increase their liquidity.
While the coin isn’t quite analogous to a stock, it does act as a barometer of how optimistic or pessimistic people feel about the platform. If traders have confidence in FTX’s growth, it’s an incentive to buy and hold. When that faith is shaken, traders sell.
Some FTX employees opted to take all or part of their salaries in FTX’s cryptocurrency, according to people familiar with the matter.
FTT, which was created in 2019, was a top-25 token by market capitalization at the start of the month. But the dollar-value of its daily trading only stood at roughly $60 million, according to CoinMarketCap. On the same day, BNB, which is a token issued by competitor exchange Binance, had $1.3 billion in trading volume.
Companies that accepted FTT as collateral from Alameda included crypto lender Genesis, according to people familiar with the matter. The Wall Street Journal couldn’t determine the size of those loans. Genesis has said that it hedged and sold collateral last week, resulting in a total loss of roughly $7 million across all counterparties, including Alameda.
Alameda has long used FTT tokens as collateral, people who interacted with the company said. In the summer of 2021, Alameda approached cryptocurrency market maker B2C2 to borrow $100 million, using FTT collateral, said Max Boonen, the B2C2’s co-founder. The company declined to offer the loan, Mr. Boonen said.
After the CoinDesk report was published, investors started selling the token heavily, according to cryptocurrency data provider Kaiko. For a while, however, price moves were modest, indicating there were buyers on the other side.
When the value of FTT fell, FTX allegedly used customer money to prop it up, a person familiar with the order flows said.