FTX Tapped Into Customer Accounts to Fund Risky Bets, Setting Up Its Downfall
FTX’s chief executive told investors this week that an affiliated trading firm owes the crypto exchange about $10 billion
3 min
Crypto exchange FTX lent billions of dollars worth of customer assets to fund risky bets by its affiliated trading firm, Alameda Research, setting the stage for the exchange’s implosion, a person familiar with the matter said.
FTX Chief Executive Sam Bankman-Fried said in investor meetings this week that Alameda owes FTX about $10 billion, people familiar with the matter said. FTX extended loans to Alameda using money that customers had deposited on the exchange for trading purposes, a decision that Mr. Bankman-Fried described as a poor judgment call, one of the people said.
All in all, FTX had $16 billion in customer assets, the people said, so FTX lent more than half of its customer funds to its sister company Alameda.
Alameda took out additional loans from other financial firms, according to people familiar with the matter. As of Monday, Alameda owed $1.5 billion in loans to counterparties outside of FTX, the people said.
An FTX spokesman declined to comment.
FTX paused customer withdrawals earlier this week after it was hit with roughly $5 billion worth of withdrawal requests on Sunday, according to a Thursday morning tweet from Mr. Bankman-Fried. The crisis forced FTX to scramble for an emergency investment.
FTX struck a deal to sell itself to its giant rival Binance on Tuesday, but Binance walked away from the deal the next day, saying FTX’s problems were “beyond our control or ability to help.”
The failure of FTX to fill withdrawal requests shocked crypto investors and badly tarnished the reputation of Mr. Bankman-Fried, who had embraced regulation of digital currencies and branded himself as a crypto entrepreneur driven by ethics and philanthropy.
“An exchange really shouldn’t have problems getting its customers their deposits,” said Frances Coppola, a U.K.-based economist. “It shouldn’t be doing anything with those assets. They should literally be sitting there so people can use them.”
As questions were brewing about FTX’s health on Monday, Mr. Bankman-Fried tweeted: “FTX has enough to cover all client holdings. We don’t invest client assets (even in treasuries).” He later deleted the tweet.
On Thursday morning Mr. Bankman-Fried said in a tweet that Alameda Research was winding down trading.
In traditional markets, brokers must keep client funds segregated from other company assets and regulators can punish violations. In 2013, for instance, the Commodity Futures Trading Commission fined brokerage MF Global $100 million for misuse of customer funds during its messy collapse two years earlier—a downfall also driven by risky bets gone wrong.
But MF Global customers were ultimately made whole after a years long bankruptcy process. With FTX, operating in the Wild West of crypto, it is unclear whether customers will ever get their money back.
The revelation of the loans suggests that the root of FTX’s downfall lay in its relationship with Alameda, a firm known for aggressive trading strategies funded by borrowed money. Some crypto traders have voiced wariness of the affiliation, worrying that it posed a conflict of interest for an exchange to be attached to a trading business.
Mr. Bankman-Fried founded and is the majority owner of both firms. He was CEO of Alameda until last year, when he stepped back from the role to focus on FTX.
Alameda’s CEO is Caroline Ellison, a Stanford University graduate who like Mr. Bankman-Fried previously worked for quantitative trading firm Jane Street Capital. Alameda is based in Hong Kong, where FTX was headquartered before relocating to the Bahamas last year.
In theory, exchanges like FTX make money by allowing customers to trade cryptocurrencies and collecting fees for transactions. Alameda pursued a variety of trading strategies to make money from volatility, a riskier business model.
Among the strategies that Alameda engaged in after Mr. Bankman-Fried founded the firm in 2017 was arbitrage—buying a coin in one location and selling it elsewhere for more. One early winning trade involved buying bitcoin on U.S. exchanges and selling in Japan, where it commanded a premium over its U.S. price.
Another business at Alameda is market-making—offering to buy and sell assets on crypto exchanges throughout the day, and collecting a spread between the buying and selling price.
More recently Alameda has become one of the biggest players in “yield farming,” or investing in tokens that pay interest-rate-like rewards, according to analysts who used public blockchain data to track the firm’s activities. One crypto wallet controlled by Alameda has generated more than $550 million in trading profit since 2020, according to blockchain analytics firm Nansen.
Yield farming can be risky because the tokens often have an initial run-up in price as investors pile in, seeking the rewards, then a crash as they get out.
“It’s essentially like picking up pennies before a steamroller,” said independent blockchain analyst Andrew Van Aken. “You use dollars, or stablecoins, to get these very speculative coins.”
—Peter Rudegeair and Caitlin Ostroff contributed to this article.
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Continued stagflation and cost of living pressures are causing couples to think twice about starting a family, new data has revealed, with long term impacts expected
2 min
Australia is in the midst of a ‘baby recession’ with preliminary estimates showing the number of births in 2023 fell by more than four percent to the lowest level since 2006, according to KPMG. The consultancy firm says this reflects the impact of cost-of-living pressures on the feasibility of younger Australians starting a family.
KPMG estimates that 289,100 babies were born in 2023. This compares to 300,684 babies in 2022 and 309,996 in 2021, according to the Australian Bureau of Statistics (ABS). KPMG urban economist Terry Rawnsley said weak economic growth often leads to a reduced number of births. In 2023, ABS data shows gross domestic product (GDP) fell to 1.5 percent. Despite the population growing by 2.5 percent in 2023, GDP on a per capita basis went into negative territory, down one percent over the 12 months.
“Birth rates provide insight into long-term population growth as well as the current confidence of Australian families,” said Mr Rawnsley. “We haven’t seen such a sharp drop in births in Australia since the period of economic stagflation in the 1970s, which coincided with the initial widespread adoption of the contraceptive pill.”
Mr Rawnsley said many Australian couples delayed starting a family while the pandemic played out in 2020. The number of births fell from 305,832 in 2019 to 294,369 in 2020. Then in 2021, strong employment and vast amounts of stimulus money, along with high household savings due to lockdowns, gave couples better financial means to have a baby. This led to a rebound in births.
However, the re-opening of the global economy in 2022 led to soaring inflation. By the start of 2023, the Australian consumer price index (CPI) had risen to its highest level since 1990 at 7.8 percent per annum. By that stage, the Reserve Bank had already commenced an aggressive rate-hiking strategy to fight inflation and had raised the cash rate every month between May and December 2022.
Five more rate hikes during 2023 put further pressure on couples with mortgages and put the brakes on family formation. “This combination of the pandemic and rapid economic changes explains the spike and subsequent sharp decline in birth rates we have observed over the past four years,” Mr Rawnsley said.
The impact of high costs of living on couples’ decision to have a baby is highlighted in births data for the capital cities. KPMG estimates there were 60,860 births in Sydney in 2023, down 8.6 percent from 2019. There were 56,270 births in Melbourne, down 7.3 percent. In Perth, there were 25,020 births, down 6 percent, while in Brisbane there were 30,250 births, down 4.3 percent. Canberra was the only capital city where there was no fall in the number of births in 2023 compared to 2019.
“CPI growth in Canberra has been slightly subdued compared to that in other major cities, and the economic outlook has remained strong,” Mr Rawnsley said. “This means families have not been hurting as much as those in other capital cities, and in turn, we’ve seen a stabilisation of births in the ACT.”
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