the “JPMorgan of crypto”

In the months that followed, Sam Bankman-Fried (SBF), VC darling and head of Bahamas-based exchange FTX and its sister trading-house Alameda, earned the ironic title of the “JPMorgan of crypto” for his efforts trying to “save” some of the troubled crypto lenders.

Yet by November, a run on FTX exposed that Alameda had suffered losses stemming from the May debacle but covered them, using FTX customer deposits. Further allegations include the use of customer funds to purchase real estate, extend political donations and pump frontier tokens, including FTX’s own highly centralized FTT token. The artificially inflated FTT valuation had then been used as collateral by Alameda, further increasing the system’s fragility.

Fraud is not new; but the consequences for the crypto ecosystem are dire because, unlike the traditional banking system, it operates with no lender of last resort. There is no central bank nor FDIC ready to backstop depositors who may have misguidedly understood FTX as a quasi-bank.

Contagion then delivered the final blow to crypto lenders BlockFi and Genesis. The latter’s parent company Digital Currency Group (DCG) is also the parent company of Grayscale Bitcoin Trust (GBTC), which saw its discount fall beyond 40% to the underlying as fears on the potential dissolution of the trust began to weigh on prices.

In the meantime, trading, borrowing and lending in decentralized exchanges (DeFi) operated smoothly during the whole debacle. The centralized players mentioned above, and their management’s misconduct, turned out to be the weak link.