Back
FTX Collapse: Economic Brief 23-09
webrichmondfed.org·richmondfed.org/publications/research/economic_brief/2023...
A Federal Reserve economic brief providing regulatory and economic analysis of FTX's collapse; tangentially relevant to AI safety as a case study in governance failures of rapidly-scaled, under-regulated technology platforms.
Metadata
Importance: 22/100organizational reportanalysis
Summary
This Federal Reserve Bank of Richmond economic brief analyzes the structure and collapse of FTX by framing it as a 'crypto conglomerate' integrating exchange, token issuance, and proprietary trading arms. It explains how vertical integration of these functions created systemic risks and discusses regulatory challenges posed by such entities.
Key Points
- •FTX is characterized as a crypto conglomerate with three arms: exchange (FTX), token issuance (FTT), and trading/hedge fund (Alameda Research).
- •Vertical integration of multiple financial functions in crypto platforms mirrors traditional financial conglomerates but lacks equivalent regulation.
- •The interconnection between FTX's arms enabled contagion: Alameda's losses and FTT's collapse brought down the entire structure.
- •The Financial Stability Board identified crypto platforms' multi-function nature as a key structural risk requiring targeted regulatory oversight.
- •Effective regulation must account for the conglomerate structure rather than treating each crypto entity as an isolated actor.
Cited by 1 page
| Page | Type | Quality |
|---|---|---|
| FTX | Organization | 74.0 |
Cached Content Preview
HTTP 200Fetched Mar 20, 202624 KB
[Skip to Main Content](https://www.richmondfed.org/publications/research/economic_brief/2023/eb_23-09#content)
# What Is a Crypto Conglomerate Like FTX? Economics and Regulations
By
Jonathan Chiu and [Russell Wong](https://www.richmondfed.org/research/people/wong)
**Economic Brief**
March 2023, No. 23-09
We explain the economics behind the rise and fall of FTX. We view FTX and its associates as components making up one large entity: a crypto conglomerate. Understanding the economics of crypto conglomerates is crucial for designing effective regulations.
* * *
FTX, once among the world's biggest crypto exchanges, shook the world by [filing for bankruptcy](https://restructuring.ra.kroll.com/FTX/Home-Index) in November, leaving 1 million customers and other investors facing total losses in the billions. FTX offered its customers a wide range of crypto products to trade, including its own cryptocurrency FTT, and its affiliate Alameda Research traded many of these crypto products directly like a hedge fund. Each of these entities is an important player on its own:
- FTX was [valued at $32 billion](https://www.bloomberg.com/news/articles/2022-01-31/bankman-fried-s-ftx-valued-at-32-billion-after-latest-round) in 2022 [1](https://www.richmondfed.org/publications/research/economic_brief/2023/eb_23-09#footnote1)
[1](https://www.richmondfed.org/publications/research/economic_brief/2023/eb_23-09#footnote1)
To compare with the traditional exchange, the market cap of the ICE group — which owns the New York Stock Exchange and other major exchanges — is about $57 billion. To compared with the traditional hedge fund, the assets under management of Citadel — the best performing hedge fund last year — is about $56 billion.
and cleared on average [$16 billion](https://www.cftc.gov/media/7986/enfftxtradingcomplaint121322/download) worth of customer trades every day.
- The market cap of FTT was about $3.5 billion before FTX's bankruptcy filing.
- The cryptocurrency exchange is said to owe its 50 largest creditors alone nearly $3.1 billion.
While cryptocurrencies and lending schemes have failed before, what makes this time different is that FTX — together with other affiliates under founder and CEO Sam Bankman-Fried (SBF)'s control — is a crypto conglomeratethat connects these failures. In this article, we will discuss what a crypto conglomerate is, why they form and what issues are faced in regulating them.
## What Is a Crypto Conglomerate?
According to the 2022 report " [Regulation, Supervision and Oversight of Crypto-Asset Activities and Market](https://www.fsb.org/2022/10/regulation-supervision-and-oversight-of-crypto-asset-activities-and-markets-consultative-report/)" from the Financial Stability Board, "One prominent feature of the crypto-asset market structure is that service providers often engage in a wide range of functions. Some trading platforms, besides their primary functions as exchanges and intermediaries, also engage in … issuance dis
... (truncated, 24 KB total)Resource ID:
3115c72cb1131f41 | Stable ID: OTdjODRlOT