The war of the CEXes

The collapse and eventual filing for bankruptcy by centralised exchange FTX may just be the first shot amongst many that will be fired in what may best be described as a war of sorts among the centralised exchanges. What began as a series of accusations and counter accusations between the CEOs of FTX (SBF) and Binance (CZ) respectively seems to have snowballed into one of the most devastating blows that the cryptospace has received in the year 2022.

In a November 6 tweet, the Binance CEO had announced that it would be liquidating its holdings of the FTT token which it had acquired for being an early investor in the FTX exchange. Its equity or investment in FTX was bought off by FTX in July last year.

CZ's announcement triggered a massive market wide sell off FTT tokens resulting in a plunge in the value of the token by about 85%.

In the early stages of the FTX crisis , a glimmer of hope sprung up when reports emerged that Binance was considering salvaging the sinking FTX ship by buying it. However in a dramatic twist Binance decided that FTX was simply too hot to handle and that it was shelving plans for its purchase.

While some speculate that the actions of Binance accelerated the fall of FTX, recent reports suggest that it was only a matter of time before it happened. Reports have emerged that Sam Bankman-Fried (SBF) was not running the exchange by the books . In fact the revelations emerging indicate that the so called board of FTX was nothing but a sham. SBF is alleged to have moved about 10 billion USD worth of funds from FTX to Alameda through a secret backdoor that had been built into their accounting software.

Millions of investors, individual as well as corporate have been badly hit by the FTXgate scandal. The Ontario teachers fund is reported to have lost about 95 million USD while Galois Capital, a hedge fund is reported to have had half of it's capital in the FTX exchange which is now stuck there. The list goes on and on as events continue to unfold.

In response corporate bodies that had agreements with FTX have started taking action to distance themselves from the exchange. Mercedes has removed FTX logos from its formula 1 racing cars and has suspended the sponsorship deal it had with the exchange. Miami Heat has also terminated its partnership deal with FTX and is now seeking for a new naming rights partner for its arena.

The demise of FTX will certainly have a ripple effect across the entire crypto space. FTX and Alameda Research operated like a hydra with its tentacles spreading across several sectors in the cryptospace such as the metaverse and DeFi. The implication of the FTX fall is that projects strongly linked to it will be strongly shaken that is if they don't eventually collapse.

Another fall out of the FTXgate is increased clamour amongst investors in the crypto community for exchanges to show proof of reserve. The display of the proof of reserve is hoped to reassure or boost investors confidence in the exchanges. However in the case of Crypto.com, it had the reverse effect as it proof of reserve indicated that the exchange had a higher holding of $SHIB (about 20 %)as compared to Ethereum (17%)which gives a lot of room for concern considering the price stability of $SHIB.

Similarly some pundits in the cryptospace have warned investors to be wary of the proof of reserve being displayed by some to the exchanges as there are suspicions that they may be borrowing funds from each other prior to these snapshots in order to project a false picture of their financial reserves.

In what appears to be an escalation of the ongoing exchange war, several operations are due to be executed by some of the exchanges in what I can only best describe as offensive manoeuvres (It is commonly said that "the best defense is a good offense"). A few a highlighted below:

November 13: Binance pauses $FTT deposits due to what it describes as suspicious activity relating to the transfer of the token. Other exchanges expected to follow suit.

November 16: CoinJar to delist Crypto.com's $CRO token

November 17: Whitebit to delist $BNB

The case of FTX exchange is not the first and neither will it be the last time a centralised exchange will collapse. It further reiterates the need for ones assets to be kept off centralised exchanges except there's a cogent need to interact with them such as trading.

This incident also serves as a warning for care to be taken in utilizing or holding (especially for long term) the native tokens of centralised exchanges as such tokens could become worthless or quickly depreciate in value if the exchange is hacked or runs into problems.

The mention of the name SBF will definitely leave a sour taste in the mouths of many especially those who have lost funds as a result of FTX filing for bankruptcy.

Thank you for reading.