The collapse of FTX, once the world’s third-largest crypto exchange, is because it operates as a “fractional-reserve” bank with high leverage, said Crypto Megan, also known as by Megan Nilsson, crypto educator and consultant.
“The whole thing with FTX is that they ran FTX like a bank,” she said. “Banks are authorized to mobilize up to 90% of people’s deposits, and [Sam Bankman-Fried] handled his exchange like that.
Calling it the “craziest thing in crypto history,” Nilsson claimed that FTX CEO Sam Bankman-Fried pumped FTX’s native token, known as FTT, and dumped it. used to inflate the value of FTX.
“He created a token from scratch and printed money like the Fed,” she said. “Then he pumped the token, showed the gains to investors on a balance sheet, raised money from investors, then took the money and used it to buy more companies.”
Nilsson spoke with David Lin, Presenter and Producer at Kitco News, at the AIBC Summit in Malta.
FTX as a “Ponzi scheme”
Bankman-Fried also founded Alameda Research, a quantitative trading firm, which was affiliated with FTX. In early November, it was discovered that most of Alameda’s assets were made up of FTT tokens. The company was otherwise insolvent.
“[Bankman-Fried] embezzled about $4 billion from user funds alone to try to save its failing hedge fund [Alameda]said Nilsson. “The exchanges are not backed by the US dollar and they do not have proof of funds at this time. There is no transparency.”
She further suggested that Bankman-Fried could have used FTX users’ money and leveraged it to make risky trades.
“In this case, he took users’ funds and exploited them, it’s pure gambling,” she said. “The only way it works is through this Ponzi scheme.”
Binance versus FTX
Although Nilsson was critical of FTX and the way it handled client funds, she had a more positive view of Binance, FTX’s competitor.
“I’ve been using Binance since the beginning, and they have high liquidity,” Nilsson said. “Nothing is untouchable, but…they haven’t thrown money into the bull market like crypto.com or like FTX.”
Binance has been a big player in the run-up to FTX’s collapse. Binance CEO Changpeng Zhao, commonly referred to as CZ, tweeted earlier this month that his company would liquidate its holdings of FTT, FTX’s native token. This caused the price of FTT to crash, triggering the failures of Alameda and FTX.
“That Tweet was pretty much what started it all,” Nilsson said. “That’s what started this whole cascading effect. Sam Bankman-Fried came out and he had a Lehman Brothers moment…and in less than 24 hours it was all done.
To check out Crypto Megan’s bitcoin investment thesis, watch the video above.
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