2022 has been a year to forget for crypto, after a historic 2021 that saw the industry flirt with mainstream acceptance. In the latest of the industry’s “Lehman Brothers” moments, FTX has filed for Chapter 11 bankruptcy. FTX was the world’s fourth largest exchange by volume, and its founder, Sam Bankman-Fried (SBF) was heralded as the JP Morgan of crypto for his attempts to bail out struggling crypto lenders like Voyager Digital and Celsius.
At the start of November, FTX was valued at $32bn and its founder, SBF, a cool $16bn. And in what we can describe as a snap of Thanos’ finger, the valuation crashed to zero. Filing for bankruptcy was the end of a tumultuous week for FTX and SBF. The genesis of their problems stems from FTX’s naive token, FTT.
You see, cryptocurrency exchanges have native tokens. These tokens are important in building an ecosystem for the crypto exchanges, and also customer loyalty, especially if the prices of the tokens keep rising. The native tokens can be described as coupons in a business. For example, if you join a club of a business and you keep shopping at that business, the business could reward you with discounts or points that you can use to purchase in that business, but you can't use them anywhere else.
This is what FTT native tokens were. Other exchanges like Binance also have their own tokens (Binance Coin or BNB for short). The thing about native tokens is that their fate is tied to the performance of the company. At the start of November, the FTT Token had a price of $24 but it has since fallen to $1.67 according to Coinmarket cap.
The FTT has suffered from a huge sell-off in events that unfolded almost in real-time on Twitter. The troubles started with the Coindesk story, which questioned the solvency of Alameda Research, a cryptocurrency trading firm that was founded by SBF as well. Two of Alemda Research's biggest assets totaling $5.76bn were all linked to FTX’s native FTT token.
Binance, the world’s largest crypto exchange by volume, also held a considerable position in FTT, due to an earlier deal with FTX. Binance dumped its FTT holdings due to the revelations by Coindesk, which triggered a chain reaction. Binance founder, Changpeng Zhao (CZ) announced the sell-off in a tweet on November 6th, which sent the price crushing to less than $3, a far cry from its peak of $78 in September 2021.
Binance’s dumping of its FTT position put FTX in a chokehold. Binance also tracked back on its November 8th offer to bail out the troubled exchange. SBF revealed in an interview with Reuters revealed that around $6bn in net withdrawals were made in the 72 hours before Binance’s offer was withdrawn. After Binance walked away, FTX suspended withdrawals and onboarding of new users.
What has happened to FTX can be equated to a downfall of a bank in mainstream finance. Essentially, imagine a large depositor in a bank withdrawing all their money and making an announcement before doing so. This could trigger massive withdrawals from account holders. At some point, the bank may not be able to meet the volume of withdrawals especially if it has the money invested in other projects. (Banks use deposits of account holders to invest in loans etc). Since the bank can not recover these funds immediately, it will most likely stop withdrawals to stem the flow.
To FTX, Alameda Research was its “loaning arm” even though SBF maintained they were two separate companies. Per the bankruptcy filings, over a million people and businesses are set to lose money. Some of these businesses include Galois Capital, a crypto fund with half of its capital now stuck on FTX; Genesis Trading, a crypto investment firm that has about $175m locked on FTX, while Multicoin Capital, the famed crypto and web3 venture capital firm that has nearly 10% of its assets under management trapped. Depending on how much the FTX assets are worth, these companies may or may not get their money back. Unlike banks, where deposits are protected by the Deposit Protection Fund (in Uganda’s case), cryptocurrency exchanges are largely unregulated.
How Does The Collapse of the SBF Empire Affect Africa?
The collapse of FTX is already being felt in Africa. SBF’s empire not only extended to Alameda Research, but to FTX Ventures as well. His empire has been an active investor in African Web3 startups. The early casualties include Nestcoin. In a tweet, its cofounder Yele Bedemosi revealed that the startup had to lay off employees because it held its assets (both cash and stablecoins) on FTX to manage its operational expenses. Also, Alameda Research was one of the investors in Nestcoins’ $6.45m pre-seed round in February 2022 and held a 1% stake in the startup.
Nestcoin isn't the only African startup on the receiving end of funds from the now-defunct SBF empire. Both FTX and Alameda Research, alongside other investors like Sequoia Capital, backed the $150m Series C extension round of Chipper Cash, an African cross-border payments startup. This funding enabled Chipper Cash to introduce crypto trading on its platform.
Alameda Research has also backed the African Web 3 startup, MARA in its $23m seed round in May 2022, a round that included Coinbase Ventures, the investment arm of Coinbase, another crypto exchange. Other beneficiaries of funding from Alameda Research include South African crypto exchange startup VALR, Congolese Web 3 startup Jambo, and the Nigerian crypto exchange platform, Bitnob.
But apart from funding, the collapse of SBF’s empire will be felt in other ways across the continent. To discover how, I talked to Brian Tweheyo, the CEO of Binusu, a local crypto exchange in Uganda and one of the first in the market.
“It (the collapse of the SBF empire) is a big, big blow in crypto. We haven't had positive news about crypto in a long while!” Brian tells me. “And the regulators want consumer protection.” For context, the regulator, the Bank of Uganda has been hostile towards crypto adoption in Uganda, instructing all licensed financial institutions to cease facilitating crypto transactions in May 2022. This applied to mobile money operators that had to stop withdraws and deposits to different crypto exchanges in Uganda. Mobile money is one of the most common ways of transacting in Uganda.
But the Bank of Uganda made a dramatic U-turn in June 2022, welcoming crypto firms to its regulatory sandbox. But FTX’s collapse could be a vote of no confidence. The regulators could use it as a legitimate excuse to continue hostility towards crypto regulations.
“Regulators want consumer protection, and when they hear that millions have lost money with an exchange, it is a big blow for those trying to push for friendly regulations. But I also have to mention that this is not the first time this has happened, and for any young industry, this is expected. I mean, even in the tradition of the financial industry, as mature as it is, we've seen banks fail.”,
“But also, it can be a positive way to quicken the actions of these regulators. As a matter of fact, crypto is not going anywhere. So now it would be on how fast the regulator is going to act so that they don't allow more of what happened with FTX and in case it happens, they have measures in place to protect the users. And I don't think these regulations will happen in just Uganda or Africa, but the whole world. I think it's just going to increase the speed at which regulation happens.”
Brian advises the users to educate and protect themselves. ”If you're a new person who is just starting up with very little capital, you probably need to spend more time learning. But if you're someone who has been in there for a while and probably have a good amount of money invested in crypto, it is not good to put all your eggs in one basket. it's important to combine both centralized exchanges and decentralized exchanges.”
Centralized exchanges are intermediaries between a buyer and seller, and make money through commissions and transaction fees. Examples of these exchanges include Coinbase, crypto.com, Gemini, and Binance. On the other hand, decentralized exchanges allow peer-to-peer transactions directly from your digital wallet without going through an intermediary.
But Brian also urges users to keep monitoring the exchanges that they are using. “You can continue using centralized exchanges and also keep monitoring their progress. How good are they? Are they getting any problems? For example, the problems at FTX have been talked about for months!”
We will discuss this topic further on Friday at 8PM EAT via the Digest Africa Twitter Space. Our panelists will include Brian Tweheyo, the CEO of Binusu; Bobby Muhumuza, the General Manager of Ultiro EA; Abel Namureba, the country manager of Yellow Card Uganda and Kenneth Legesi, the Chief Investment Officer of Ortus Africa Capital. Click here to set a reminder.
Cover Photo/Bloomberg
The writer is a retired founder, and now Editor-in-Chief at Digest Africa. You can reach him at +256771162922 or [email protected]
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