From Russia Sanctions to the Downfall of SFB — FTX Case Exposes Future of Digital Assets & Global Commodities
The Weekend Brief (TWB) is inspired by Eminem’s and Snoop Dogg’s latest collaboration. I suggest listening to From The D 2 The LBC as you read TWB.
This co-production couldn’t have been done without the necessary permisson from Nima Asgari for whom I am so grateful to have as a writer on Areas & Producers. There’s going to be more content about legal cases and digital assets on the publication. Stay tuned by signing up for TWB.
Press play: https://youtu.be/kcgLOQG_uvk
The FTX legal case is an extensive story. Let’s start with the events occuring on 21 December 2022 when founder of FTX and Alameda Reseach, Sam Bankman-Fried (SFB), and two of his associates, Caroline Ellison and Gary Wang, are all facing charges of financial fraud at the federal level. SFB gave in to US authorities in The Bahamas by agreeing to be extradited to the US to face his crimes, while Ellison and Wang both plead guilty to defraduing crypto investors on the FTX crypto exchange platform.
To know more about the background of FTX as a company based in The Bahamas, I suggest reading more about the culprits in this story by Euronews.next: What do we know about Caroline Ellison and Gary Wang, the senior associates behind FTX’s downfall?
SFB initially filed for Chapter 11 Bankruptcy on 11 November 2022 setting off a wave of investigations and scandals surrounding the founder of FTX. This caused SFB to step down as CEO of FTX, replaced by John J. Ray III, who released this public statement following the proceedings:
The FTX Group has valuable assets that can only be effectively administered in an organized, joint process. I want to ensure every employee, customer, creditor, contract party, stockholder, investor, governmental authority and other stakeholder that we are going to conduct this effort with diligence, thoroughness and transparency.
The FTX’s digital assets were indeed valuable to many people and organizations who had got on the bandwagon of a promising digital currency revolution in bitcoin mining and crypto-market exchanges.
According to a report by Better Markets, much of this sentiment revolved around SFB’s “vision” for a future world where cryptocurrency markets dominated the digital age of money and finance, and instead of using its resources to support the industry, CFTC should have taken action to regulate the crypto markets at an earlier time. Read the full analysis here.
That not being the case, however, the downfall of SFB and his crypto exchange platform FTX pose some serious qustions about the future of international banking and financial markets. For instance, Bank of England deputy governor Sir Jon Cunliffe gave an in-depth interview with Sky News about the global financial system’s exposure to cryptocurrency markets. In the interview with Sky News, Cunliffe discussed the regulatory procedures that should be put in place to cover digital assets and blockchain technologies in the global financial markets — i.e., the fintech industry.
Those regulations around fintech might prove to be critical in preserving the momentum toward digital financing and payments for consumers and investors around the world. While some analysts suggest that the outcome of the FTX case could result in a ban on centralized crypto exchanges because the SEC investigations prioritize security regulation in the crypto industry. In this case, the FTT — a crypto-token offered by FTX — was declared by the SEC as an asset offered to protect crypto investors from risk on the FTX exchange platform. Therefore, it must be classified as a security in financial markets parlance.
Does this mean that the outcome of the FTX platform’s survivability rests on the interpretation of a security? According to this definition, the SEC is striving to prove that FTX cannot survive as a cryto exchange due to the nature of its FTT. Crypto-tokens serve as a vehicle for hedging against risk for crypto-investors in the same way traditional securities do for financial markets. Yet, this means that the rules would have to apply to all cryto-exchange platforms at present and in the future.
As for SFB, his historical $250 million pre-trial bail agreement nearly coincides with with the $200 million amount of FTX customer deposits that were diverted from the platform to invest in two other fintech companies — Dave and Mysten Labs — by which the SEC has laid grounds to charge the FTX founder with widespread fradulent schemes and financial misconduct.
“Binance Exchange is Bleeding, FUD Around and Find Out” was originally published on HiExchange Blog by Nima Asgari.
Binance exchange, the largest cryptocurrency exchange by volume in the world started a war with FTX. Yes, we all know that it was in fact a good call. FTX was as big a scam and Larry David found out the hard way. For sure, Sam Bankman-Fried and his team were a bunch of Amphetamine-crazed kids who could have used a bit more bullying in school. All of a sudden, Changpeng Zhao, the CEO of Binance went on a tactical mission carried out via Twitter soldiers against FTX and the rest is history. And now, as Michael Scott in “The Office” would say, well, well, how the turntables!
A Few days ago, Reuters revealed insider information that the US Justice Department is likely to charge Binance. According to the report, Binance is under investigation for money laundering and criminal sanctions violations. So naturally, they are torn whether to proceed with these allegations or sign a plea deal with their attorney. So far, it’s all been speculations and rumors. However, the FUD may be carrying a stronger force. After all, these are still buy the rumor and sell the news times in crypto market.
Yesterday, Binance exchange responded to Reuters by stating that they got it wrong. Furthermore, CZ posted a Tweet and said FUD helps us grow. Apparently, using the term “grow” may have been counter intuitive.
In the meantime, Reuters had another article saying Binance exchange has had over $1.9 billion in withdrawals. Let’s put it this way, if yesterday was CZ’s worse day, it would have been his worst day yet!
Today reports indicate that Binance has had over $3 billion in withdrawals in the past seven days. According to crypto data analyzer Nansen, Binance exchange has had $8.78 billion in outflows and $5.12 billion inflows.
While CZ is under Federal investigation for potential money laundering allegations, he has said that they are fine. Today, he addressed the withdrawals on Twitter. It would be an understatement to say that he tried to downplay the issue. And in a witty move, CZ pulled an UNO Reverse card by stating that the withdrawals are actually a “stress test” that show how solid their platform is.
“We saw some withdrawals today (net $1.14 billionish). We have seen this before. Some days we have net withdrawals; some days we have net deposits. Business as usual for us.
I actually think it is a good idea to ‘stress test withdrawals’ on each CEX (centralized exchange) on a rotating basis.
Centralized exchanges such as Binance have been a hot topic of conversation. Last week, rumors of a possible crypto.com insolvency were all over social media. In case of Binance, they have not been transparent regarding their finances or their proof-of-reserve. So far, Binance exchange is handling all transactions smoothly. But, for an exchange of such scale, $3.6 billion in withdrawals is not considered a serious stress test.
In the meantime, since everyone is attacking everyone, Jesse Powell, the founder of Kraken exchange has also been FUDing around with Binance.
Nonetheless, retail investors keep losing money as they are paying the collateral in this crypto war. Perhaps, the DOJ’s approach to handle Binance is now much more likely to turn violent as the public knows about their allegations.
“Binance Exchange is Bleeding, FUD Around and Find Out” was originally published on HiExchange Blog by Nima Asgari.
Lobbyists for fintech and digital assets should continue to play a big role in the outcomes for crypto exchange markets. For example, read more about the Binance case for crypto lobbying to know more about those aspects.
What does this mean for decentralization trends in global financial markets?
Decentralization has been a critical topic for the emergence of cryptocurrencies and digital finance via the fintech industry and advancements in blockchain technologies. It’s believed by many crypto advocates that decentralization should be the only form of digital payments, with no control by authorities such as a central banking institution. With the FTX case, I’m afraid that those advocates are on the losing side of the argument. Crypto regulation is already in the works and the downfall of SFB and FTX is a symptom — albiet one with enormous legal consequences — of the plunge in cryptocurrency markets as of late.
The so-called crypto winter frames some of the issues about crypto’s place in the global financial system as a commodity. Central Bank Digital Currencies (CBDCs) are a thorny issue for governments as a lack of control over digital currencies could have devestating effects on hard currencies.
Meanwhile, China’s digital yuan is being touted as a viable alternative for money circulation within the People’s Republic of China (PRC).
The nature of the FTX case, on the other hand, further adds on to my findings that scenarios for global commodities have been disrupted in profound ways. That’s why lobbying for digital assets isn’t going away any time soon: as they become more aligned with other global commodities, tighter regulations from governments will follow.
My opinion is that the US Department of Justice (DOJ) will have more power over the issues pertaining to crypto regulation after the FTX case due to the corruption of SFB and his associates.
The outcomes of the DOJ’s investigation in the Glencore Oil Market Manipulation and Bribery Case show some paralells with the FTX case. Both cases were the result of a DOJ-CFTC joint investigation across multiple international jurisdictions. My questions are: What will be the jurisdictional parameters of crypto markets regulation? How will governments coordinate investigations over digital assets in the future?
The outcomes of the case between FTX, Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) have revealed that crypto-tokens and crypto-currencies will be designated as a security and commodity by the SEC and CFTC, respectively.
This outcome will place crytocurrencies and crypto-market exchange platforms under the scope of US economic regulatory authorities in the future.
With the US Dollar (USD) seen by many consumers as losing its value over the decades to come, the scrutiny of gold assets and cryptocurrencies will be crucial to how the US authorities regulate commodity markets and digital assets. This means that the time has come to start analyzing trends in digital assets among the broader base of global commodities — just look at what’s happening with energy markets and how sanctions on Russia are being regulated in the broader dynamics of volatile commodity markets.
The divergent and convergent scenarios for global commodities have unfolded in the aftermath of the Covid-19 pandemic, Russia-Ukraine conflict, and now for the legal cases against FTX for its financial fraud schemes in crypto-markets.
Disruptions to global commodities indicate how vulnerable countries are to food and energy dependence on Russia and Ukraine. The geopolitical trends around grain markets and natural gas/liquified natural gas (LNG) production are case in points to prove this theory.
Energy market volatility has been directly impacted by Russia’s actions, particularly oil and coal production on international markets, which have been affected by the G7’s price cap on Russian oil on December 5, 2022.
The gas price cap by the European Union reveals how sanctions on Russia are bringing global commodities to the forefront of geopolitics, and thus revealing the changes to industrial polices among the world’s core areas and critical producers.
Geopolitics are playing a much greater role in many countries’ industrial policies as a result of Russia’s, European Union’s and the United States’ politicization of crude oil, coal and natural gas — arguably the three most important commodities in terms of short- to medium-term risk in global commodity markets. After the Covid-19 pandemic disrupted industrial value chains and energy supplies worldwide, the sanctions on Russia are taking effect in the global economy, proving that the future of energy supplies continue to revolve around global markets for oil, gas and coal.
As the three commodities take an important share of the overall energy mix for industrial production, the regulatory scenarios for energy markets have been made less complicated since Russia’s oil, coal and gas supplies were subject to sanctions by the United States and European Union. However, that’s not the case with cryptocurrencies, as the FTX case has revealed the vulnerabilites to regulatory control over digital assets in the global financial markets.
I’ll be publishing The Weekend Brief (TWB) regularly touching on aspects of the global markets (including stock markets) which are at the nexus of tech, industrials and global commodities. Please follow the publication Areas & Producers to read more content about the future of core areas and critical producers of the global economy.
Sign up for TWB newsletter here to read about how publicly-traded companies, like Nestle & Starbucks, are competing in the long game for global markets.