Clash of the Titans

• Nov 08, 2022
Clash of the Titans

by Ryan Shea

Key Take-away

·      Crypto has woken up from its recent slumber as two of the biggest names in the sector go to war. The winter just got extended

Two of the biggest names in the crypto-sphere – Sam Bankman-Fried (SBF) and Changpeng Zhao (CZ) – have been dominating crypto headlines this week and it is all centered on the cryptocurrency FTT.

Over the weekend CZ published the following tweet:

Source: Twitter
Source: Twitter

Immediately after this tweet CZ stated that Binance will seek to offload it’s not inconsiderable holding of FTT(1) “in a way that minimizes market impact. Due to market conditions and limited liquidity, we expect this will take a few months to complete.”

Pre-announcing your intention to offload such a sizeable holding of the native token of a competitor exchange (FTX was founded by SBF) is not exactly the best way to ensure that you will maximize the potential revenue from disposing of the asset, nor is it the best way to minimize market impact, especially when the reason given is “recent revelations”.  Indeed, since CZ’s tweet was published the value of FTT dropped more than 20%.

Despite CZ adding that Binance always encourages collaboration between crypto industry players, it is hard not to conclude that there is more to this announcement than Binance simply wishing to be open and transparent with its user base.

Recent Revelations

While the tweet did not outline what the recent revelations were, one does not need to be a genius to connect the dots. Just a few days prior Coindesk published an article(2) detailing that Alameda Research – SBF’s trading firm – had more than $5.8bn of FTT on it’s books, by far the largest contributor to its $14.6bn assets. The optics of a crypto trading firm having such large holdings of a token issued by an exchange co-founded by someone who set up said trading firm is clearly far from optimal. To make matters worse, the outstanding circulating supply of FTT is only around $3.0bn, meaning the price that the assets are marked on Alameda’s balance sheet look less like mark-to-market and more like mark-to-myth as it would be impossible to liquidate their FTT at anything like the price they are marked on Alameda’s books(3).

Naturally, this has provided considerable fuel for the sceptics(4), who have been quick to make comparisons with the crypto lending firm Celsius Network that went bankrupt in July amid accusations that it had been inflating its balance sheet by manipulating its native token CEL(5). CZ’s decision to tag LUNA in a follow-up tweet, clearly did little to damp such speculation(6).

The C Word

For financial firms, holding illiquid assets is not that unusual, in fact it is how tradfi commercial banks operate. However, this business model requires another key asset, one that is not included on their balance sheets: confidence. When that gets called into question things become rather dicey. If creditors decide to recall their loans then a liquidity crisis can quickly transform into a solvency crisis because unlike fiat in crypto there is no central bank to provide a lender-of-last resort function and selling illiquid assets in a hurry almost always results in a horrendous price slippage. Certainly, there is evidence that withdrawals from its users have surged given FTX’s exchange reserve of stablecoins has slumped – see chart.

FTX Exchange Reserve – All Stablecoins

Source: @cryptoquant (via twitter)
Source: @cryptoquant (via twitter)

In recognition of this, SBF published the following tweet and made it clear that FTX does not invest client assets, that all withdrawals have been processed (there have been several complaints about slow withdrawals) and that the company has more than $1bn in excess cash. Comments clearly intended to differentiate themselves from other crypto firms that got into trouble earlier in the year.

Source: Twitter
Source: Twitter

Whether such assurances stem the pace of withdrawals from FTX remains to be seen(7). By virtue of it being an exchange as opposed to crypto lender, FTX should not have balance sheet risk per se and hence while the infrastructure might come under pressure leading to delayed transactions as users seek to withdrawal funds it should not constitute an existential threat. However, where things get a bit trickier is that the FTT token is quasi-equity capital for FTX so if it’s value were to fall sharply then it would undermine FTX’s financials making its business model entirely reliant on trading fees to cover its cost base. This may well be sufficient revenues, but it may not.  

Liquidity Mismatch

Like SBF, the CEO of Alameda Research Caroline Ellison, sought to assure the market that the original Coindesk article that triggered this latest crypto “incident” did not include $10bn of additional assets and also did not take into account any offsetting hedges. She also, rather provocatively published the following tweet:

Source: twitter
Source: twitter

Clearly, if CZ intended to live up to his promise to minimize the impact of Binance’s FTT disposal then taking up Alameda Research’s offer would seem to be a sensible approach. However, at the time of writing this does not appear likely, especially given CZ has publicly questioned whether Alameda Research has sufficient funds to make the purchase(8), something that simply reinforces the impression that CZ’s motivations for announcing the sale of its FTT holdings are not just to be fully transparent to its users.

Relative to FTX, the situation for Alameda Research looks more precarious. Caroline Ellison did not dispute the figures quoted in the Coindesk article meaning that while they may not be complete, those that were included are (or rather were as of the end of June) likely accurate. As a result, crypto players are fully aware as to how much of a liquidity mismatch Alameda Research has. Anyone with a passing knowledge of game theory readily understands this is problematic because as former BoE governor Lord King noted in the run-up to the Great Recession(9).

“Once the [bank] run starts it was then rational for other people to join in”

Courtesy of the Dune dashboard (link available in footnote seven) we already know that there are substantial net outflows from Alameda Research’s known crypto wallets, so it it is fair to conclude that the run has started.

More anecdotally, according to the original Coindesk article, in addition to large holdings of FTT, Alameda Research also owns significant amounts of Solana, $292 million of “unlocked SOL,” $863million of “locked SOL” and $41 million of “SOL collateral.” Interestingly, SOL dropped more than 12% on Monday – an even greater decline than seen in FTT – a move that could be due to Alameda Research selling the more liquid parts of its portfolio in order to boost its cash buffer or it could be other crypto players front-running the possibility that such a liquidation trade may occur in the near future. Either way, declining asset valuations are not positive for Alameda Research’s balance sheet and in febrile markets where confidence is being questioned and it is often a case of “shoot first, ask questions later”, the dynamics could turn ugly in a very short space of time.

Ready For Regs

The clash between SBF and CZ is formally polite, with each publicly calling for collaboration and cooperation between crypto players. SBF even tagged CZ personally in the twitter thread posted above asking if they could “work together”(10). However, it is clear that these two crypto titans are engaged in a turf war because CZ’s actions are not those of someone seeking to minimize market impact despite this being his stated aim.

Whatever the outcome for these two personally and/or the entities they are connected to, it comes at an unfortunate time for the broader crypto market. The nascent recovery in crypto prices is being jeopardized by negative sentiment (#cryptocrash is trending on Twitter) and after the torrid summer we experienced, not to mention the still troubling macro backdrop(11), the last thing the sector needs is more rumours of potentially dubious or nefarious behaviour.

That said, perhaps in the longer-run it may turn out for the best. SBF recently published a document outlining his preliminary thoughts on crypto regulation(12). Needless to say his comments didn’t go down well with everyone in the crypto world, including it would seem CZ given his comment that “we won't support people who lobby against other industry players behind their backs”(13). But, if the latest episode serves to speed up crypto regulation then it could be just the catalyst that brings crypto to a wider audience and this is a good thing (this applies even to die-hard crypto-anarchists) for reasons I outlined in an earlier research note(14).


Clash of the Titans

Until next time.

Ryan Shea, Crypto economist

(1) To be clear it is uncertain what the percentages between BNB and FTT that makes up the $2.1bn.

(2) See:

(3) Mark-to-myth was a coined during the Great Recession by none other than Warren Buffet – see:

(4) See:

(5) I covered Celsius in an earlier research note - see:

(6) See: Source: twitter

(7) On the Dune platform some users have created a dashboard that tracks net flows of tokens from known FTX and Alameda wallets – see:

(8) See:

(9) See:

(10) See:

(11) See:

(12) See:

(13) See:

(14) See:

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