WTF is happening in crypto right now?

hello, hi.

Everything in the world of crypto is on fire right now, so here's what happened and why it might matter.

I was at WebSummit last week in Lisbon, so look for my thoughts on that in the next few days.

- Erin, @erin_gee

The past 72 hours or so have been an absolutely wild ride in the crypto space as the CEOs of the two biggest crypto exchanges have been duking it out semi-publicly.

I should add a caveat that as of writing things are still very much in a volatile state and no one knows what's going on (literally four new developments have happened since I began writing this).

I started noticing something weird happening on crypto Twitter around mid-afternoon Sunday, November 6th. As it turns out, Chengpeng Zhao (CZ), the CEO of Binance, the largest crypto exchange, publicly announced that he would begin selling off his FTT tokens (about $2B worth), the crypto token/currency native to FTX, the second largest crypto exchange whose CEO is Sam Bankman-Fried (SBF). This, of course, started a bit of a bank run on FTT, causing its value to decrease and by late Monday/early Tuesday, the token was down roughly 30%.

And then the true mayhem started.

FTX went on to halt all withdrawals, never a good sign for any crypto exchange but was a curious course of action for the second-largest exchange that spent much of summer 2022 acquiring smaller exchanges. It was also especially strange since in June 2022, in an exclusive with Forbes Crypto SBF said that some crypto exchanges were "secretly insolvent". I wouldn't have thought that he meant his own company.

Three hours later, both SBF and CZ announced that Binance had signed a Letter of Intent (LOI) to purchase FTX as they were facing a significant liquidity crunch. Here's a thread with some other context.

Multiple sources then confirmed that FTX actually was insolvent by about $1 billion (LOL) and that SBF had been poking around in the valley to raise more money. So, because Binance/CZ entered into an LOI, they have a way out of the transaction if DD finds that things are....sketchy.

Lo and behold, on November 9th CoinDesk starts to report that the deal may fall through because things are much worse than they seem; so bad that US regulators are launching an investigation into FTX and its lending practices.

At the time of writing, the latest update is that parts of FTX are currently offline and much of the legal team has quit.

Update 2:50pm: seems like Binance is pulling out of the deal.

There is, of course, a Canadian angle in all of this. The Ontario Teachers' Pension Plan (OTPP) is an investor of FTX. They led the Series B round with Sequoia Capital (one of the largest VC firms in the world) in October 2021 and then were part of the Series C round in January 2022 when the company was valued at $32 billion.

The question is now what happens to those funds, especially given that Binance may re-neg on the LOI and FTX may go under.

I emailed the OTPP to ask about all of this and they said that "given the fluid nature of the situation, we are unable to comment."

While the drama of this whole situation has been entertaining to watch, it makes sense to wonder why any of this matters, especially if you think crypto is a scam. Here are some potential reasons:

• Consolidation and monopolies are bad. Whether or not Binance's acquisition goes through, it seems like FTX is more or less done, leaving Binance as the king of crypto exchanges. Other smaller ones will continue to exist, for now, but there is increasing centralization, which is ironic given that the crypto community advocates for decentralization.

• SBF was supposed to be different. He was politically active and advocating for regulations in Washington. Many crypto evangelists didn't necessarily agree with his proposals, but he was at least lobbying the industry, instead of retroactively complying like Binance.

• What does this mean for the future of crypto/Web3 VC? Sequoia is taking a big L here and a16z's crypto fund reportedly posted losses of 40% (i.e., billions) for the first half of 2022. Sure, it's a bear market, but...

• Clearly regulations are needed in the industry. CZ criticized SBF by saying that FTT should never have been used as collateral and that the company should never have taken on debt. What would it look like to regulate an exchange? Should we?

Before all of this, I was working on a thesis about SBF being the next Mark Zuckerberg. He was politically active, buying up competitors, etc. Turns out like everyone else I was wrong and, in fact, SBF is the Elizabeth Holmes of crypto.