FTX collapse is ironic and sad

A wave of withdrawal requests has descended upon FTX, the world’s second-largest cryptocurrency exchange, over the last 48 hours.

This was in response to fears over FTX’s solvency as it was revealed FTX’s native token, FTT, was being used as collateral despite them creating that very same token.

Reports then revealed that the FTT token was a large portion of sister trading firm Alameda’s assets, calling into question its abilities to monetise a lot of its balance sheet, should its liabilities be called.

Fast forward a few hours, which is a lifetime in crypto terms, and FTX switched off withdrawals. Now the concern was full-blown panic, and industry leader Binance was forced to step in and prop up FTX, announcing a deal had been struck to acquire FTX amid this “liquidity crunch” (deep dive of the whole fiasco published this morning here).

And there is a very big irony here.

Proof of reserves

This whole panic was sparked as people began to fear that FTX were insolvent. Sam Bankman-Fried insisted on Twitter that they were, adamant client assets were safe in a tweet that has since been deleted.

The next day, withdrawals were suspended. And then SBF deleted the tweet.

But why are we all waiting for a tweet from a billionaire to assure us our assets are safe? What about…and hear me out with this… using the blockchain to solve this? I tweeted this out on Monday – isn’t it ironic that in an industry built upon blockchain, one of the biggest use cases for it is being ignored?

Would all the insolvency chat not be solved if FTX had some sort of on-chain proof of reserves?

Seems ironic in the crypto industry that we are all talking about whether or not FTX are good for it. Is it not meant to be transparent in crypto ?

— Dan Ashmore (@DanniiAshmore) November 7, 2022

Ultimately, FTX weren’t good for it. I have no idea what they were doing with client assets, but they were not where they should have been. Which is horrific, because customers deposited funds into their exchange to buy crypto, not to have FTX sent elsewhere.

Which again, could have been shown if they agreed to publicise an on-chain wallet. But instead, their CEO assured everyone that the funds were safe and client assets were not used elsewhere, while withdrawals would continue to be processed. And then he shut off withdrawals. And then he deleted the tweet.

Binance agree to on-chain

As it turns out, CZ listened to me moaning on Twitter. Or, you know, the entire world looking at laughing at crypto, as the whole thing descended into madness.

“All crypto exchanges should do merkle-tree proof-of-reserves” he said last night. “Banks will start to do proof-of-reserves soon”.

All crypto exchanges should do merkle-tree proof-of-reserves.

Banks run on fractional reserves.
Crypto exchanges should not.@Binance will start to do proof-of-reserves soon. Full transparency.

— CZ ? Binance (@cz_binance) November 8, 2022

Ironic. Ironic and sad.

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