Sam Bankman-Fried, the former CEO of FTX, encouraged customers of the cryptocurrency exchange to buy his own cryptocurrency, called FTX Token.

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Sam Bankman-Fried, the former CEO of FTX, encouraged customers of the cryptocurrency exchange to buy his own cryptocurrency, called FTX Token.

Saul Loeb/AFP via Getty Images

Shortly after launching the now bankrupt cryptocurrency exchange FTX, Sam Bankman-Fried and his co-founders decided to create their own virtual currency a la bitcoin.

“There’s no reason, if you’re into crypto, not to create tokens,” says American University Washington College of Law professor Hilary Allen. “You can create tokens from scratch.”

The FTX token, or FTT as it is more widely known, debuted in 2019, and a few years later the digital currency was valued at nearly $80. Today, there are nearly 250 million FTX tokens in circulation.

Not bad for something that’s just data.

Although it was a major source of income for FTX and helped keep Bankman-Fried’s hedge fund afloat, the FTX token ultimately proved to be the company’s downfall.

After an article in CoinDesk earlier this month raised questions about FTX’s finances, Binance CEO Changing Zhao decided to offload his company’s large FTT holdings. This spooked investors, and as the news spread, the value of the token plummeted.

Like airline miles, tokens rewarded customers but did little outside of the business

The FTX token was part of an elaborate reward-based marketing system to attract buyers.

“I think of it as air miles,” says Ariel Zetlin-Jones, who teaches economics at Carnegie Mellon University. “Like loyalty points for using the exchange.”

Customers who purchased FTT were able to execute trades on the company’s stock exchange at a discount. They could also use the tokens as collateral. The company viewed token holders as VIPs.

On its website, Bankman-Fried’s company called FTT “the backbone of the FTX ecosystem.”

But customers were unaware that these tens of millions of tokens were not widely distributed, which is essential for a market to determine the price or value of any currency. In fact, much of FTT was owned by FTX and its affiliates, as well as Bankman-Fried’s hedge fund, Alameda Research.

Funneling money to a hedge fund making risky bets

FTX collapsed rapidly and there is still much to learn about its mind-blowing collapse. But it is clear that Alameda Research has used FTT to make speculative bets on other complex cryptocurrencies and financial products.

In other words, these “VIPs” handed over real money to buy a purely digital token from FTX, and all of this served as a basis for making risky and speculative investments.

The token acted “as the conduit through which money flowed from the FTX cryptocurrency exchange to Alameda Research,” says Eswar Prasad, author of “The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance “.

This inappropriate and unseemly practice has escaped scrutiny in the largely unregulated world of crypto, which Securities and Exchange Commission Chairman Gary Gensler, Wall Street’s top cop, has likened to the “Wild West.”

“It was a very murky set of financial practices with no transparency, no investor protections, and no financial safeguards of any kind,” says Prasad, who is also a professor of economics at Cornell University.

About a week ago, Binance’s Zhao announced on Twitter that his company was selling hundreds of millions of dollars worth of FTT. An old-fashioned bank run ensued, and soon the tokens were all but useless.

According to Prasad, that was to be expected.

“The moment there is even the slightest concern about the token, the value of that token can disappear practically in a flash,” Prasad said. “That’s what happened here.”

Today, FTT still trades on select exchanges, even though FTX has entered Chapter 11 bankruptcy proceedings, and Bankman-Fried is undergoing legal and regulatory scrutiny in the United States and the rest of the world. world.

FTT is now valued at less than $2, but surprisingly there is still a market for it.

When FTX collapsed, its customers struggled to withdraw their assets from the cryptocurrency exchange.

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When FTX collapsed, its customers struggled to withdraw their assets from the cryptocurrency exchange.

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“I think the expectation is that once you clear all the embers of this conflagration, there will be some value left in the exchange,” Prasad said. “There will remain assets that will still have marginal value, and the token can be used to extract value from those assets.”

But, he added, he expects FTT’s value to fall even further in the coming days as we learn more about how a company that had been valued at more than $30 billion dollars has imploded so dramatically.

Zetlin-Jones says there may be investors out there who are hoping someone will buy out FTX in the event of bankruptcy, and then their tokens will be worth something again.

But he suggests there could be another reason why there is still a market for FTT.

“People are buying Zimbabwean trillion dollar notes because it’s an anecdote and they might like them as collectibles,” Zeitland-Jones said. “Maybe FTT is the new collectible that will amaze us in 100 years.”

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