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November 9, 2022
This Week's FTX Collapse

November 9, 2022

Dear Partners,

As many of you know, this week in crypto was marked by the sudden collapse of the world's fourth largest crypto exchange, FTX.com. While the situation is still very much developing, we've been actively communicating with our portfolio funds and wanted to share what we know so far. 

I. Our Exposure

Across our portfolio, we have less than 1% total exposure to any FTX-related entities or cash held on the exchange. Fortunately this is the extent of our direct exposure at this stage, but given the potential effects on the industry in the coming days and months, we've also included more detail below. 

II. What Happened

Hot off the presses this morning, this report from Reuters is the most complete summary we've seen so far. It corroborates earlier speculations that Alameda would have blown up back in May/June (alongside Terra/Luna, 3AC, Celsius, etc...) had it not been for a bail out by FTX using customer funds. These funds were collateralized by FTT. This is something on-chain sleuths have been tracking down over the last 48 hours as well. We'll spare you the play-by-play, but highly recommend the Reuters read. 

III. Why it Matters

Over the last 5 days, total crypto market cap has declined by roughly (-25%), dropping to levels not seen since December 2020. Without a cash infusion or acquirer to cover FTX's estimated $8B shortfall, a bankruptcy seems imminent. US regulators are now investigating whether FTX was trading customer funds, so we're not holding our breath for a transaction to close. Yesterday, Binance, the world's largest crypto exchange, walked away from a non-binding LOI, and at the time of this letter, billionaire founder of Tron, Justin Sun, seems to be FTX's last hope.

The likely immediate fallout from an FTX bankruptcy would be:

  • FTX Equity Wiped Out -- arguably the least important in terms of contagion, but still ~$1.7B+ of investor capital. Sequoia, for example, already sent a letter to its partners announcing a full writedown of their $213.5M investment. Even if someone buys FTX (ie: assumes its liabilities), the equity would still be worth $0. 
  • Customer Funds on FTX Wiped Out or Severely Impaired -- FTX's customers are primarily large institutional clients, sophisticated market makers and hedge funds. Despite over $6B being withdrawn from FTX over the last several days, it remains unclear how much remains stuck and compromised on FTX.com.  
  • Unknown Amount of Outstanding Liabilities - it remains unclear whether more is owed by either FTX or Alameda to counterparties across the space. 

The above are all obviously painful for investors and customers, but could have significant second order effects as well, so we will continue to monitor closely. 

The last several days have been a disappointing blemish on the industry, but also a reminder of how important decentralized, self-custodial, transparent financial rails are in preventing exactly this type of situation. We believe the future of finance is one where an exchange won't secretly lend customer funds because they cannot secretly lend customer funds, one where public proof-of-reserves are the norm, one where risk isn't hidden in a black box (FTX, Celsius, 3AC, Blockfi) but is open for its participants to see. 

We appreciate your continued support in that journey and welcome any questions you have over the coming days and weeks.