CoinDesk Turns 10: 2022 – How Crypto Gods Turn Into Monsters

2022 for crypto was an unprecedented hellscape of disasters – and the collapse of FTX was its culmination.

It was also unprecedented for CoinDesk. Unlike any previous moment of failure in crypto history, this time we found ourselves at the epicenter, as our reporting triggered the events that unfolded.

This resulted in a weird mix of bad and good news for CoinDesk itself. On one hand, Ian Allison and Tracy Wang’s coverage of FTX – including its egregious balance sheet and chaotic corporate governance – brought CoinDesk its first prestigious journalistic prize, the George Polk Award. CoinDesk received more  mainstream recognition than at any time during the company’s 10 years of existence.

This feature is part of our “CoinDesk Turns 10” series looking back at seminal stories from crypto history. This feature about FTX, and other scandals, is our choice for 2022.

On the other hand, the tsunami wave triggered by the FTX collapse shook pretty much every significant company in crypto, including CoinDesk’s parent company DCG and its trading subsidiary Genesis. That unraveling has led directly to talks about CoinDesk’s potential sale.

With major companies like Celsius, Terra/Luna and Three Arrows Capital also collapsing, 2022 was quite a year.

Before his disgrace, Sam Bankman-Fried was one of the biggest names in crypto, a fixture on the Washington D.C. lobbying circuit and a regular on the front pages of the financial press.

“Sam Bankman-Fried was a true celebrity in crypto, and once you’re that level of famous, people kind of assume: yeah, he must be legit,” says Tracy Wang, one of CoinDesk’s award-winning journalists who, together with Ian Allison, lead the coverage of FTX’s crash.

On Nov. 2, 2022, Ian Allison’s revealed the weak balance sheets of the FTX-affiliated trading firm Alameda Research, which started both companies’ undoing. It turned out Alameda, despite SBF’s repeated claims it was absolutely separate of FTX, relied heavily on tokens created by FTX and, more importantly, on its unassuming users’ money.

The exchange’s revenue was off the charts the previous year and it made regular headlines after partnering with sports and music events, buying stadium naming rights and hiring celebrities as brand ambassadors. Meanwhile, FTX grew into a formidable force in crypto politics, with SBF making rounds in D.C. and FTX joining mainstream finance trade groups, like the International Swaps and Derivatives Association.

All that made FTX look like a big and reliable institution, and at first, CoinDesk’s findings of Alameda’s misdeeds did not seem like something potentially “cataclysmic,” Allison says now. It did not feel like he was revealing anything that seismic. Even as the dominos started falling, it seemed like “Sam could fix it,” Wang said.

“We thought that it was interesting that so much of Alameda’s balance sheet was the FTT token, but then we did not expect the company to go to zero,” Allison said.

Yet, it did. Following Allison’s scoop, the CEO of Binance, FTX’s archrival, said he was going to sell all the FTT Binance owned, pushing down its price (FTT plunged from $25 to $1 in a matter of two weeks) and prompting fears of an FTX insolvency. What followed was akin to a bank run on FTX: users withdrew $6 billion from FTX in 24 hours starting on Nov. 8.

To end insult to injury, it turned out that both FTX and Alameda had been led by a close-knit group of SBF’s friends, sharing the same mansion in the Bahamas with no clear delineation between personal, business and romantic relationships. That “gang of kids in the Bahamas,” as Tracy Wang put it in her piece, ruled FTX and Alameda as they saw fit, with little transparency and accountability.

Later, the new FTX CEO John J. Ray III said in the bankruptcy proceedings that “the FTX Group was tightly controlled by a small group of individuals who showed little interest in instituting an appropriate oversight or control framework.”

They “commingled and misused corporate and customer funds, lied to third parties about their business, joked internally about their tendency to lose track of millions of dollars in assets, and thereby caused the FTX Group to collapse as swiftly as it had grown,” Ray wrote.

“We were shocked when FTX collapsed: wow, there was this fraud going on in front of our faces, and all we knew about FTX had been a lie,” said Wang. FTX staffers “were as shocked as the rest of us,” and “a lot of employees felt betrayed by Sam.”

Although things looked bright for FTX even right before its downfall, at least some players on the market could smell something suspicious around the workings of Alameda, Allison says. It was not a secret that Alameda did market-making for FTX, he said, showing that the two companies, if technically separate, were at least working closely together.

Around September 2022, one of Allison’s sources briefly mentioned that Alameda’s balance sheet is “weaker than everyone thought it was.” Allison started talking to more sources about this and soon enough, “one of those people who had obviously been trading with Alameda provided more recent snapshots of the balance sheet,” he says. Those snapshots revealed how weak that balance sheet was was and how much Alameda and FTX had been intertwined, Allison said.

It was not entirely surprising in a way. “The whole crypto market was at a very precarious point at that moment,” Allison said. The market crash and multiple crypto bankruptcies of 2022 came as a tough hangover after the intoxicating bull market of 2021, when ambitions and arrogance in the crypto-verse went off charts.

Back then, founders of Three Arrows Capital fund (now bankrupt) teased the public with promises of infinite growth in crypto, or so-called “supercycle,” and terraUSD (UST) stablecoin founder Do Kwon (now under arrest) trolled prominent VCs on Twitter.

The awakening was harsh. In May 2022, Do Kwon’s algorithmic stablecoin UST lost its peg to dollar and crashed, revealing the poor design of the coin and throwing a shade on algorithmic stablecoins as a concept. In July, Three Arrows Capital (3AC), which bet heavily on UST and its sister cryptocurrency LUNA, filed for bankruptcy.

Soon, it turned out some major players on the crypto market trusted and invested in 3AC success too much, so companies like Voyager, Genesis, BlockFi and Celsius also went underwater and filed for bankruptcy. FTX was the latest addition to this list, but the most spectacular one, given the fame and ambitions of Sam Bankman-Fried.

Wang says before the crash, some people on the market could see that Alameda might also fall in the ongoing industry purge: “A lot of people have been thinking that Alameda might have been more levered than they assumed and they were scared that it could have been another 3AC scenario,” she said.

There was another, as Wang calls it, “orange flag” (not bad enough to be red, but still worrying, she explained): SBF’s “effective altruism” showed his larger-than-life ambitions and willingness to make FTX a success at any cost.

“Sam was definitely an envelope-pusher. That kind of risk-taking helped FTX become wildly successful in a short amount of time, until it all caught up to him,” Wang said.

The consequences of the FTX collapse were as big as its success used to be – or even bigger. It definitely frustrated the regulators, who had been talking to SBF and, like almost everyone else, assumed FTX was a well-run, responsible business. As lobbyist Kristin Smith said on stage at this year’s Consensus Festival, after the failure of FTX, decision-makers in D.C. “realized they couldn’t tell a good guy from a bad guy.”

Some people connected the FTX collapse to the recent wave of de-banking in crypto, when the financial institutions the industry relied on – Signature Bank, Silicone Value Bank and Silvergate bank – were shut down by the regulators, leaving crypto clients scrambling for alternatives.

The chain of shutdowns, dubbed “Operation Choke Point 2.0,” was the Securities and Exchange Commission’s “chemotherapy for a $14 billion ‘Ponzi cancer’,” which hurt even the healthy parts of the system, said another Consensus speaker, founder and CEO of BCB Group Oliver von Landsberg-Sadie.

FTX made people pay attention to crypto even if they had no intention to before. Its failure made them question the merits of this industry before they learned anything good about it. But the context of this story is also important.

Wang believes the FTX story was CoinDesk’s true time to shine because over the years, the newsroom accumulated all the unique expertise needed to assess the situation when stakes got that high.To any mainstream reporter, Alameda’s balance sheet might not have told anything, because few people actually know what FTT, SRM, MAPS, OXY and FIDA were – and why having these non-liquid tokens dominating your balance sheet might be a bad idea.

“It was CoinDesk [that broke the story] because we knew what to do with the balance sheet,” she said.

And we also knew that FTX was not the first giant to fail in crypto and won’t be the last – just take a look at other stories in CoinDesk’s 10th anniversary series. And the death of companies doesn’t mean the demise of the underlying technology and its revolutionary value to the world.

But crypto skeptics have been proven right this time for a reason. How many crypto companies might actually operate on the same flimsy terms as FTX and Alameda did and would fall apart immediately if someone exposed their doings the way CoinDesk did?

Allison laughs, and says: “Don’t ask!”