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This Crypto, Is It The Lehman Brothers?


The Shift

Here’s how to make sense of the industry-shaking collapse of FTX.

Sam Bankman-Fried, wearing a suit with a blue striped tie and with frizzy dark hair, speaks in front of a microphone at a Senate hearing.
Sam Bankman-Fried, the founder and chief executive of FTX, had been viewed as a sort of poster boy for the crypto industry.Credit...Sarah Silbiger/Bloomberg

Kevin Roose

Roose is a technology columnist for The Times and host of the Hard Fork podcast alongside Casey Newton. You can listen to them dissect the FTX fiasco on their next pod.

The crypto industry is known for dramatic twists, roller-coaster prices and fortunes that appear and disappear overnight.

But even by crypto standards, what happened this week was bonkers.

To non-crypto watchers, the news — the collapse of FTX, one of the largest cryptocurrency exchanges in the world — might sound boring or esoteric, the kind of story you’d happily scroll past on your way to reading about Elon Musk’s latest Twitter tempest.

But within the crypto world, it is already being referred to as the industry’s “Lehman moment” — a reference to the 2008 collapse of Lehman Brothers, which set off a global financial panic and made it clear to laypeople just how much trouble Wall Street was in.

Indeed, FTX’s fall — including a failed attempt to sell itself to the rival crypto exchange Binance — may turn out to be the most gripping crypto narrative of the year, a “Succession”-level drama involving feuding billionaires, rumors of sabotage and high-stakes battles over the future of the industry. It’s a stunning, sudden fall from grace for one of the crypto world’s biggest celebrities. And it signals that the industry, already reeling from a brutal year of losses, may be in for even tougher times.

Making sense of this deal, though, requires knowing some of the complicated back story that got us here. Here’s a rough outline:

  • There are two exchanges where a majority of cryptocurrency trading around the world happens: Binance and FTX.

  • Binance, the bigger of the two exchanges, is run by the Chinese-born billionaire Changpeng Zhao, who is known in crypto circles as CZ. Binance’s operations are somewhat murky — it has no official headquarters, and it has tangled with authorities and regulators in many countries where it operates — but it has been extremely successful, and currently controls roughly half of the cryptocurrency exchange market.

  • FTX, which has its headquarters in the Bahamas, is run by Sam Bankman-Fried, a 30-year-old American billionaire and major Democratic donor. It had a valuation of $32 billion as of its last fund-raising round. FTX is also better known than Binance in the United States, partly because it has spent millions of dollars on Super Bowl ads, naming rights for sports stadiums (the Miami Heat play at FTX Arena) and throwing fancy conferences where celebrities like Bill Clinton and Tom Brady show up.

  • FTX is also regarded (or was, until this week) as one of crypto’s “blue chip” companies — the kind of stable, well-capitalized businesses that survived even when the rest of the crypto market was in free fall. In fact, it spent much of this year bailing out other crypto firms, and was generally regarded by investors as a responsible, grown-up firm that didn’t engage in risky, speculative trading or gamble with customers’ funds.

  • Mr. Bankman-Fried, known as SBF, has become very famous as a result of FTX’s success — a sort of poster boy for the entire crypto industry. He is a quirky, unpretentious nerd who wears cargo shorts and sports frizzy, unkempt hair, and he has been cultivating a reputation as the law-abiding crypto mogul. (On a recent cover, Fortune magazine called him “the next Warren Buffett.”)

  • Mr. Zhao, on the other hand, is known as something of a renegade. He has resisted calls for more crypto regulation, and Binance has been banned in several countries for operating without proper licenses. (Under pressure from regulators, Binance blocked U.S. users from its main platform in 2019 and set up Binance.us, a separate exchange that was meant to operate legally in America.)

  • This year, as the industry came under scrutiny in Washington, Mr. Bankman-Fried and FTX began lobbying on Capitol Hill, spending millions to win over skeptical lawmakers and get crypto-friendly regulations put into place. These lobbying efforts have been divisive. Some crypto fans supported FTX’s push for more regulation, but others accused Mr. Bankman-Fried of trying to throw the rest of the crypto industry under the bus by pushing for laws that would hurt competitors but leave FTX’s business intact.

  • Mr. Zhao was among those who objected to FTX’s lobbying push. “We won’t support people who lobby against other industry players behind their backs,” he wrote on Twitter. He and Mr. Bankman-Fried had once been friendly — Binance was an early investor in FTX, and received a large number of FTT tokens, the native cryptocurrency token of FTX’s exchange, when it sold its stake in the company last year. But the two billionaires drifted apart as their companies’ goals diverged. And now they are officially feuding over the lobbying efforts.

  • Last week, the crypto news outlet CoinDesk reported on a leaked document that claimed Mr. Bankman-Fried’s crypto hedge fund, Alameda Research, had unusually large holdings of FTT tokens. The report suggested that FTX and Alameda, which were nominally separate businesses, were in fact closely related. (Some crypto watchers have speculated that Mr. Zhao and Binance may have leaked the document in order to sow doubts about FTX’s stability, but Binance has denied this.)

  • After the report, Mr. Zhao announced that Binance would sell its entire stake of FTT tokens — worth about $500 million — because of “recent revelations” about Alameda and FTX. The announcement caused FTT’s value to plummet.

  • Fearful of losing their money, investors pulled more than $6 billion out of FTX’s exchange over a three-day period, leaving the firm scrambling for cash to cover its obligations. Mr. Bankman-Fried tried to reassure investors, tweeting that “FTX is fine” and that “a competitor is trying to go after us with false rumors.” But the panic continued, and after unsuccessfully trying to arrange a bailout from private investors, Mr. Bankman-Fried announced on Tuesday that he would sell his firm (except for the U.S.-regulated part, known as FTX.us) to Mr. Zhao and Binance.

  • On Wednesday, Binance changed its mind and announced that it would walk away from the deal, saying that after examining the company’s books, it decided that FTX’s “issues are beyond our control or ability to help.”

All of this played out in real time on Twitter, where both Mr. Zhao and Mr. Bankman-Fried are active. (And where Mr. Zhao, as of last week, is a part owner — Binance invested roughly $500 million in Elon Musk’s takeover of the company.)

As crypto Twitter reeled from the news of FTX’s collapse, FTX’s employees and investors tried to make sense of what had happened. Mr. Bankman-Fried, in a letter to investors, apologized for not taking better precautions.

“I’m sorry I didn’t do better,” he wrote.

Mr. Zhao, on the other hand, appeared to revel in the conquest of his biggest rival, tweeting out lessons like “Never use a token you created as collateral.”


Changpeng Zhao, chief executive of Binance, the world’s largest cryptocurrency exchange.Credit...Ore Huiying for The New York Times

The sudden collapse of FTX raises lots of questions about crypto’s future.

First, what will happen to FTX’s customers and their money? Unlike deposits in a traditional bank account, deposits on crypto exchanges aren’t insured by the government, and there are questions about whether FTX has enough assets to make its remaining customers whole. If the company files for bankruptcy protection, as the crypto firms Voyager Digital and Celsius Network did this year, investors could be left to fight for their money — or what remains of it — through the courts.

Second, is crypto’s regulatory future in jeopardy? FTX, after all, was one of only a handful of U.S. crypto firms that had invested heavily in lobbying, and Mr. Bankman-Fried was seen as a “white knight” who stood the best chance of persuading skeptical lawmakers of crypto’s value. Now, it appears that those efforts have stalled, at best — and that regulators who want to portray crypto as an out-of-control Wild West will have one more example to point to. Katherine Wu, a crypto investor, tweeted on Tuesday that it was a “truly sickening news day- can’t even begin to assess the potential damage our industry will have to face.”

Third, will FTX’s collapse set off a broader market failure, as the collapse of Lehman Brothers did in 2008?

Already, the news has rippled out into the rest of the crypto market. Bitcoin and Ether prices both fell on Tuesday, and the price of Solana (a cryptocurrency that FTX has supported) fell roughly 20 percent. Shares in publicly traded crypto companies, such as Coinbase, were down as well. FTX’s investors, which included Sequoia Capital, Lightspeed Venture Partners and SoftBank, will most likely lose most or all of their investments. And given how interwoven FTX was with the rest of the crypto economy, it may be a while before we know the full extent of the damage.

The hope, of course, is that in contrast to 2008, when Wall Street’s collapse cascaded into a global financial crisis that led to millions of Americans losing their jobs and homes, the fallout from FTX’s collapse will stay mostly contained to the crypto industry. But it’s still too early to tell.

And lastly, what will become of Mr. Bankman-Fried? Until this week, he was the undisputed king of crypto — and an increasingly powerful force in American politics, thanks to his big donations to Democratic candidates and causes. His fortune, which was estimated at more than $15 billion before the Binance sale, has propped up philanthropies (he is a major donor to the effective altruism movement), media organizations (he is an investor in Semafor) and companies both inside and outside crypto (he is a major shareholder in Robinhood, the stock-trading app).

Mr. Bankman-Fried’s days as a crypto mogul may be over. (On Tuesday, Bloomberg estimated that his net worth had fallen 94 percent and that he was no longer a billionaire.) But the bigger question, for crypto investors, is whether his empire was unusually wobbly, or whether it was just the first to fall.

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