The latest FTX fallout, explained
The Bahamas finds itself in the eye of the crypto storm in the wake of FTX’s collapse. [Image via Spenser Sembrat]
FTX contagion weighs on the crypto industry. BlockFi filed for bankruptcy and firms began to show “proof of reserves.”
Ethereum developers are determining the blockchain’s next upgrade. A closer look at the “Shanghai” upgrade and what it could entail.
Noteworthy numbers. The amount of BTC small investors have added since FTX’s collapse and key figures from this week.
MARKET UPDATE
The latest FTX fallout: BlockFi’s bankruptcy and the race for ‘proof of reserves’
It’s been about three weeks since FTX collapsed, and tremors are still reverberating throughout the crypto industry. As the company’s former CEO faces investigations from the SEC, the U.S. Justice Department, and agencies in the Bahamas (where FTX was based), firms that were financially entangled with FTX are now facing liquidity crunches and, in the case of crypto lender BlockFi, bankruptcy. The ongoing situation has prompted a slew of questions from industry leaders about the best path forward, contagion risks, and the international regulatory landscape. Let’s dive in on the latest.
Crypto lending firm BlockFi declared bankruptcy on Monday. Another lender, Genesis, is at risk.
BlockFi, formerly a leading lender in the crypto industry, said that “significant exposure” to FTX and its sister company Alameda Research was a key contributing factor to the firm’s bankruptcy filing. In June, FTX agreed to supply the company with a roughly $400 million credit line after BlockFi didn’t have enough cash to meet customer withdrawals. BlockFi had already suspended customer withdrawals earlier this month amid FTX’s collapse.
BlockFi now owes creditors at least $1.2 billion, and has just $257 million in cash on hand. Alameda Research also owed BlockFi about $680 million in unpaid loans, according to bankruptcy documents.
Genesis Global Capital, another crypto lender that dealt with FTX, is also reportedly at risk of filing for bankruptcy. The firm had about $175 million in assets that were frozen on the exchange and has also halted customer withdrawals.
After revelations that FTX misused customer funds, many in the industry began calling for centralized exchanges to prove that their reserves are 1:1 with customer assets via on-chain records.
Coinbase, which regularly proves its reserves via audited financial statements, said in a blog post that it’s exploring “various novel ways to prove reserves using more crypto native methods,” and announced a $500,000 developer fund aimed to support on-chain accounting initiatives.
Binance CEO Changpeng Zhao said that the company would begin to publish its reserves, starting with its BTC reserves. In a web page published Nov. 25, Binance revealed that it held 582,485 BTC, compared with 575,742 BTC in deposits, and said it would be adding information for more tokens soon.
Jesse Powell, the co-founder of the crypto exchange Kraken, called Binance’s attestation incomplete, however, saying that the “statement of assets is pointless without liabilities.” Kraken has provided regular proof of reserve audits for years, using an advanced cryptographic procedure called a “merkle tree” that is conducted by an independent auditor.
The Bahamas, a country with aims to become a crypto hub, is now facing increased scrutiny for its regulatory capabilities.
The Bahamas was betting big on crypto as its industry of the future. FTX was considered a launchpad for this ambition, but the collapse of the $32 billion firm under Bahamian regulators’ watch — and their reaction to the initial aftermath — has dampened the country’s credibility as a crypto hub.
Almost immediately after FTX declared bankruptcy, Bahamian regulators forced the firm to move hundreds of millions of dollars, including some money owed to Bahamian citizens, into a wallet controlled by the government, an unusual action amid a bankruptcy proceeding. Bahamian regulators have also contested the U.S.’s jurisdiction over the bankruptcy (FTX filed in Delaware), setting up a potential fight for control.
Responding to critics, Bahamian Attorney General Ryan Pinder defended his actions in a nationwide address about the issue on Sunday. “Any attempt to lay the entirety of this debacle at the feet of the Bahamas, because FTX is headquartered here, would be a gross oversimplification of reality,” he said.
Why it matters… FTX’s collapse has put the topic of crypto regulation into focus for the incoming U.S. Congress. As calls for regulatory clarity emerge from both sides of the aisle, some members of Congress are acknowledging that FTX’s transgressions are not unique to crypto. Tom Emmer, a Republican representative from Minnesota, and co-chair of the Congressional Blockchain Caucus, said that FTX’s collapse isn’t a failure of crypto, but “a failure of centralized finance and a failure of Sam Bankman-Fried."
SHANGHAI SOON
What will Ethereum’s next major upgrade entail?
Just months after migrating the second-biggest blockchain to Proof of Stake and drastically reducing its carbon footprint, Ethereum’s developers are already actively planning the network’s next upgrade following the Merge, known as Shanghai.
Last Thursday, Ethereum developers met to consider which new Ethereum Improvement Proposals (EIPs) to include in Shanghai. While the upgrade’s timing is still unclear (likely sometime in 2023), the group has whittled the list of EIPs down to eight. Let’s take a closer look at a few.
EIP 4895 will finally enable users to withdraw staked (hence, Proof of Stake) ether, which has been accumulating on Ethereum’s blockchain since December 2020. Right now, more than $18 billion worth of ETH is staked and locked into Ethereum’s Beacon Chain.
EIP 4844, which is also known as (the colorfully named) proto-danksharding, is an improvement that would make Ethereum more scalable via a method that splits up the network into smaller “shards” to increase capacity and lower gas fees.
The Ethereum Virtual Machine will see five new EIPs. The EVM is responsible for the network’s deployment of smart contracts, and the collection of proposed improvements aim to make smart contract execution safer.
NUMBERS TO KNOW
$1 million
The approximate sale price of Bored Ape Yacht Club NFT #232 when it changed hands last Wednesday. The eye-popping sum defies the broader crypto winter, which has seen the NFT market lose a staggering 97% of its trading volume since its January peak.
96,200 BTC
The amount that so-called BTC “shrimps” (BTC investors with less than 1 BTC) added to their holdings since FTX collapsed, an all-time high balance increase, per Glassnode. Shrimps now account for 6.3% of BTC’s circulating supply.
66%
Percentage of crypto leaders that indicated plans to expand their crypto portfolios over the next month, according to a new research survey from BDC Consulting. The survey asked 53 managers of top crypto projects in sectors like DeFi and crypto payments about their sentiments after the collapse of FTX.
AROUND COINBASE
Analyzing what the midterm elections mean for crypto, and more Coinbase news
On the latest episode of the Around the Block podcast, Brian Armstrong leads a discussion about what the U.S. midterm election results could mean for crypto and how we can work with policymakers to establish rules that protect crypto investors and users.
Coinbase has collaborated with Code.org on developing a game to teach students the basics of crypto as part of the annual Hour of Code event. You can play the game here and/or share it with your kids, friends, and family. Code.org’s mission is to bring more students into the world of technology.
WooCommerce merchants can now offer consumers the flexibility to pay with crypto through a partnership with Coinbase Commerce. WooCommerce is the most popular open source e-commerce platform in the world, and its merchants are now able to accept Bitcoin, Bitcoin Cash, DAI, Ethereum, Litecoin, Dogecoin, or USD Coin.
TOKEN TRIVIA
What is a seed phrase?
A
The basic set of rules that allow data to be shared between computers
B
A series of words generated by your crypto wallet that give you access to your funds
C
A string of letters and numbers that allows you to send or receive crypto
D
What farmers say to their sprouts
Find the answer below.
Trivia Answer
B
A series of words generated by your crypto wallet that give you access to your funds
