FTX was running like a “fractional reserve” bank; its collapse is “the craziest thing” in crypto history – Crypto Megan – Kitco NEWS

FTX was running like a “fractional reserve” bank; its collapse is “the craziest thing” in crypto history – Crypto Megan – Kitco NEWS

Blockchain Crypto Market Technology
November 20, 2022 by Coinvasity
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Follow us on:Follow us on:Follow us on:Kitco NewsShare this article:The collapse of FTX, once the world’s third largest crypto exchange, is due to it operating like a “fractional-reserve” bank with high leverage, said Crypto Megan, also known as Megan Nilsson, a crypto educator and consultant.“The whole issue with FTX is they ran FTX like a
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The collapse of FTX, once the world’s third largest crypto exchange, is due to it operating like a “fractional-reserve” bank with high leverage, said Crypto Megan, also known as Megan Nilsson, a crypto educator and consultant.
“The whole issue with FTX is they ran FTX like a bank,” she said. “Banks are allowed to leverage up to 90 percent of people’s deposits, and [Sam Bankman-Fried] has been running his exchange like that.”
Calling this the “craziest thing in crypto history,” Nilsson claimed that FTX’s CEO Sam Bankman-Fried had pumped FTX’s native token, known as FTT, and used it to inflate FTX’s value.
“He created a token out of thin air, and printed money just like the Fed,” she said. “Then he pumped the token, showed the gains to investors on a balance sheet, raised money from investors, and then took the money and leveraged it to buy more companies.”
Nilsson spoke with David Lin, Anchor 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 consisted of FTT tokens. The firm was otherwise insolvent.
“[Bankman-Fried] misappropriated about $4 billion in users’ funds alone to try and save his failing hedge fund [Alameda],” Nilsson claimed. “Exchanges aren’t backed by the U.S. dollar, and they don’t have proof of funds as of now. There’s no transparency.”
She further suggested that Bankman-Fried may have used FTX users’ money and leveraged it to make risky trades.
“In this case, he took users’ funds and leveraged them, it’s pure gambling,” she said. “The only way this works is through this Ponzi scheme.”
Binance vs. 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,” said Nilsson. “Nothing is untouchable, but… they didn’t throw money around in the bull market like crypto.com, or like FTX.”
Binance was a leading player in the leadup to the FTX collapse. Binance’s CEO Changpeng Zhao, commonly known as CZ, tweeted early this month that his company would be liquidating its holdings of FTT, FTX’s native token. This caused the price of FTT to collapse, triggering the failures of Alameda and FTX.
“It was pretty much that Tweet that triggered everything,” said Nilsson. “That’s what triggered this whole cascading effect. Sam Bankman-Fried came out and he had a Lehman Brothers’ moment… and in less than 24 hours, everything was done.”
To find out Crypto Megan’s Bitcoin investment thesis, watch the video above.
Follow David Lin on Twitter: @davidlin_TV
Follow Kitco News on Twitter: @KitcoNewsNOW
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