FTX’s downfall, U.S. October CPI

1. FTX files for Chapter 11 bankruptcy as Sam Bankman-Fried resigns as CEO

The Facts:

Dear reader, as this whole mess is subject to highly changing dynamics, by the time you read this week’s wrap, news might already be outdated or shine in a different light. We try our best to reflect everything that happened as clear as possible and provide digestible information before you head into the weekend.

• This week saw FTX related headlines all over leading to a culmination today with Sam Bankman-Fried stepping down as CEO of FTX and one of the world’s largest crypto exchanges filing for Chapter 11 bankruptcy.
• The filing reveals that FTX (exchange) and Alameda Research (connected trading firm) have liabilities that range from $10b-$50b.
• Overall, 134 firms of FTX filed for bankruptcy, even the U.S. entities that according to SBF’s thread from yesterday were supposed to be “fine”.
• The avalanche started with a CoinDesk report that leaked the balance sheet of the dangerously intertwined Alameda Research revealing that a significant amount of their balance sheet was held in FTT, FTX’s platform utility and access token.
• Despite having limited utility and liquidity, FTT was extensively leveraged in DeFi, on FTX and as collateral in Alameda’s books.
• FTX reportedly bailed out Alameda, that suffered losses connected to 3AC and the Luna collapse in May and accepted Alameda’s FTT collateral in exchange for funds that at least in portion belonged to their customers - new information came to light yesterday when WSJ titled “FTX Tapped Into Customer Accounts to Fund Risky Bets, Setting Up Its Downfall” revealing that FTX had $16b in customer assets and gave $10b to Alameda who blew it.
• Following a tweet from CZ, CEO of Binance, stating that they liquidate their FTT holdings received as FTX exit equity, a bankrun on FTX started; shortly after, FTX halted withdrawals followed up by a post of CZ announcing a non-binding LOI between FTX and Binance only to then back out of the deal one day later because “the issues are beyond our ability to control or help.”
• Contagious effects already started to pop up as Genesis confirmed having $175m stuck in FTX, crypto lender BlockFi, that was previously bailed out by FTX, being highly exposed or CoinShares having a $30.3m exposure.
• U.S. SEC and Justice Department among other jurisdictions started investigating FTX.
• Some crypto projects were affected as well as FTX ventures funded various projects such as Solana (FTX holding $1b in SOL) or recently launched Aptos; It is yet unclear if wrapped tokens like oBTC ($290m) and soETH ($640m) are issued by FTX too.

Why it’s important:

• If this year wasn’t bad enough already after Celsius and other CeFi companies blew up, the crypto industry faced possibly the worst hit in history as FTX erodes trust in centralized financial vehicles by completely exploiting and mismanaging user funds in morally highly questionable actions.
• The bankruptcy will likely have even more cascading effects to entities and companies close to FTX and entities that have significant exposure.
• It will take months until the daisy chain of affected entities will be fully visible as most likely far more OTC desks, project treasuries, firms and even wrapped assets are exposed to FTX and its different arms.
• After voices became loud as trust is now completely wiped, Binance and Crypto.com were quick to provide Proof of Reserves.
• It is probably going to set the space back significantly and create lots of efforts to educate and help policymakers and regulators to understand why DeFi is different.
• It is very important to highlight that this is no issue of crypto, as immutable smart contracts and decentralized infrastructure are not able to mismanage funds in an opaque environment.
• Operating on decentralized, open and immutable infrastructure enabled DeFi to operate as intended: Aave is still facilitating loans, Uniswap is still swapping coins, MakerDao is still minting DAI, and Curve is still providing low slippage on stablecoins.
• Ironically, the wild west perceived DeFi space provides Proof of Reserves (PoR) by design whereas apparently regulated and compliant centralized exchanges don’t.
• Even more ironically, Caroline Ellison, CEO at Alameda Research stated some months ago that "Why would you want to trade on a DEX when you could just trade on FTX, or whatever?"
• Moving on, it has to be mandatory to separate trading and venture arms of companies from exchange operations and provide disclosures of native tokens on balance sheets to mitigate contagion risk.
• While the White House is already pushing for more crypto regulation as stated in a recent press conference FTX's failure doesn't justify a rush to regulate crypto itself as all centralized entities should be subject to disclosures like PoR and liquidity before debating DeFi regulation.
• According to Brian Armstrong, CEO of Coinbase “The problem is that the SEC failed to create regulatory clarity here in the US, so many American investors (and 95% of trading activity) went offshore.”
• The chilling effect of a possible upcoming regulatory purge may last long and exchanges as well as custodians will likely face stricter oversight while self-custody and DeFi will likely gain importance.

Source: (Data) Tradingview, (Chart) Bitcoin Suisse Research

2. October U.S. CPI comes in surprisingly low

The Facts:

• The YoY U.S. CPI of October came down surprising low at 7.7%, significantly below the estimate of 8% and 0.5% lower than previous month’s rise of 8.2%, as energy costs and especially gas slumped further.
• The rather sticky core U.S. CPI that excludes food and energy came in below expectations too at 6.3% YoY in October (estimated at 6.5%), 0.3% higher than previous month’s YoY core CPI.
• MoM U.S. CPI in October came in at 0.4% (estimated at -0.6%), same as in September, while core MoM U.S. CPI fell to 0.3% (estimated at 0.5%) down 0.3% from previous month.
• Primarily medical services, used vehicles and apparel came down and eased inflationary pressure while shelter cost hit a new 30-year high of MoM increase.
• Energy and food remain key elements of the current inflation problems.
• The report was received positively by markets and treasury yields tumbled alongside.

Why it’s important:

• The lower than expected October CPI numbers raises hopes that inflation finally peaked after the FED deployed a series of aggressive rate hikes in the recent months.
• With inflation possibly rolling over, a “Powell pivot” is coming to a closer distance as the FED is more likely to slow or stop their aggressive pace of a tight monetary policy.
• This might lead to a less severe rate hike, currently estimated at 50bps, at the next FOMC happening from 13-14 December.
• Interestingly, the next CPI numbers will come in one day before the next FOMC
• However, we are still far away from the FED’s target rate of 2% and therefore not out of the woods yet.
• Especially the high shelter cost is of concern regarding the real estate markets as lots of owners are exposed to variable mortgage rates.

Source: (Data) U.S Bureau of Labor Statistics, (Chart) Bitcoin Suisse Research

In other news

• Hong Kong is looking at authorizing crypto futures ETFs (via Bitcoin.com)
• SEC wins case against LBRY, a major blow to token issuance (via Reuters)
• Cirlce expands Euro Coin towards Solana in 2023 (via CoinDesk)
• Art Blocks collections rally in heavy market conditions (via Delphi Digital)
• Grayscale Bitcoin Trust trading at record 40% discount (via Decrypt)
• Tether’s USDT and TRON’s USDD depegs (via Cointelegraph)
• U.S. Department of Justice seizes $3.36b in Silk Road BTC (via CNBC)
• Russia’s central bank to integrate crypto into their financial system (via The Block)
• MiCA plenary vote delayed to February 2023 (via Twitter)

Source: (Data) ultrasound.money

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