Digital Asset Friday Update 11.11.22 | Arbor Digital

Digital Asset Friday 11.11.22

To everyone who trusted FTX and has been adversely affected by the ongoing FTX events, our hearts go out to you. Digital Asset markets are global, so when something like this occurs, everyone is affected. It will take more time to see the full contagion effects as FTX, Alameda Research, and other direct partners are still in the process of unwinding. Please expect extreme volatility in the short term.

If you are an investor or financial advisor who needs help or simply someone to talk to about all this, even if you are not a client of ours, please reach out. You can reach me directly at marc@arbordigital.io, DM me on LinkedIn, or schedule time with us here. We are here for you.

Below we will answer important questions first, dive into what you should be doing, what we are doing at Arbor Digital, what we think this all means for the industry, and finish with a timeline and explanation of how we got here. The story is evolving rapidly so please be aware that some information may be outdated after you read this.

What should I be doing?

If you are an investor, you should be actively looking at your portfolio and understanding what you may have exposure to. CoinDesk released a great updated piece on FTX Exposure here and dives into FTX Ventures’ biggest investments as well. If you are not sure of your exposure, please reach me directly at marc@arbordigital.io, DM me on LinkedIn, or schedule time with us here. We are here for you.

If you are an advisor, you should be asking yourself these four questions:

  1. Do I invest in crypto/digital assets?
  2. Where do I hold your crypto/digital assets?
  3. What is my exposure to FTX or any of its 130-linked partnerships?
  4. Am I open to having Arbor Digital help me with my crypto/digital asset management?

If you are unsure how to engage with people on crypto/digital assets, or are receiving phone calls from potential clients about their digital assets and unsure how to move forward, please reach me directly at marc@arbordigital.io, DM me on LinkedIn, or schedule time with us here. We are here for you. This is your opportunity to help people who may not have understood how valuable you could be to them!

What is the impact of FTX on Arbor Digital?

While it will take more time to see the full contagion effects, aside from the price volatility, FTX’s fall will have no impact on Arbor Digital.

  • Arbor Digital does not hold any assets on FTX or Binance. All assets remain with Gemini. A US-regulated qualified custodian exchange underneath the purview of the NYDFS (New York Division of Financial Services).
  • Arbor Digital does not invest in Centralized Finance companies like FTX. FTX is not a decentralized crypto company. They are a traditional company servicing crypto.
  • Arbor Digital has never held positions in FTT of BNB.
  • All client funds held within Gemini are backed 1:1 in reserves and able to access 24/7.

What is the impact of FTX on Gemini?

  • In short, none. The impact showcases how Gemini and others that are regulated as qualified custodians in the US are different and well-positioned.
  • Gemini is a full reserve with additional capital requirements imposed by their regulator, the NYDFS.
  • Isn’t Gemini also a centralized exchange like FTX? Yes, but underneath Gemini BITRIA they are regulated very differently and are subject to regulatory requirements as a qualified custodian by the NYDFS.
  • Gemini does not use GUSD in any form for its exchange and custodial business.
  • Gemini Frontier Fund and Gemini Exchange are separate entities, both with no exposure to FTT, FTX, or Binance.

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Are client assets safe at Gemini?

Yes. Due to significant regulations imposed by the NYDFS, there are additional layers of segregation for client assets within Gemini. There are also added layers of protection for the movement of client assets that are different from Gemini retail.

What is Arbor Digital doing?

We have been doing what Financial Advisors do in times of crisis, be there for our clients. We are available and have done office visits, joined on calls, and hosted video chats with advisors and their clients to help them make sense of what is happening.

Our investment thesis hasn’t changed due to recent events, in fact, these events highlight the need for what open source decentralized blockchains can bring to current systems. Arbor Digital will be taking advantage of opportunities born from these events.

What does this all mean for the industry?

Trust destroyed.

Financial services are based on trust. Whether you are trusting people or code. FTX and SBF are other examples of a person and centralized company taking client trust and destroying it. Transparent and trustless systems; are core to the technology of open-sourced decentralized blockchains. FTX and SBF were neither transparent nor trustless systems. It was opaque and all trust lay within one person. FTX was a traditional centralized finance company masquerading as a crypto-decentralized finance organization. This is the same with everyone else – Celsius, 3AC, Voyager, BlockFi – who has fallen this year.

Regulators are going to come heavy-handed and rightfully so.

We believe in sound and responsible regulation. What is sad about this is the centralized bad actors are going to cause the code and technology to be regulated as if these were the things that failed and caused everything, when it was what we have seen playout throughout the history of all financial markets, people who misused client funds, over levered, and had poor risk management.

Where are we today?

The situation is ongoing. As of 10:00 am Friday, November 11th:

How did we get here?

Jesse Coghlan at Cointelegraph has been maintaining a continuously updated piece on the FTX sage. Read the full article here. Below I will list the main timeline pieces.

  • November 2017 – This was the beginning of the founding of Alameda Research, a quant trading firm, by Sam Bankman Fried. SBF rose to prominence with its arbitrage trade on what was called the “Kimchi Premium”. Alameda subsequently became one of the most influential venture capitalists, trading firms, and market makers in crypto.
  • May 2019 – SBF starts FTX as a centralized crypto exchange that specializes in derivatives and leveraged products.
  • December 2019 – Binance becomes an investor in FTX. SBF stated that “the investment will help accelerate the growth of FTX with support and strategic advisory from Binance while FTX maintains its independent operations.”
  • Mid 2021 – Binance sells its equity share in FTX in exchange for $2.1B of FTT token and USD.
  • November 2, 2022 – The saga kicked off on Nov. 2 after reports that a leaked balance sheet from the Sam Bankman-Fried-founded trading firm Alameda Research suggested the company held a significant amount of FTX Token, FTT, the native token of the FTX exchange.
  • November 5, 2022 – Twitter account Whale Alert, which tracks significant on-chain crypto movements, notified its users that nearly 23 million FTT worth over $584.5 million moved onto Binance.
  • November 6, 2022 – Alameda CEO Caroline Ellison tried to quell any panic in a Nov. 6 tweet saying the leaked balance sheet wasn’t reflective of the whole story and noted that sheet, in particular, was only for “a subset of our corporate entities” and other assets worth over $10 billion “aren’t reflected there.” On the same day, Binance CEO Changpeng “CZ” Zhao said his exchange would liquidate its entire FTT holdings, citing “recent revelations that have come to light” believed to be in reference to the Alameda balance sheet. Zhao said Binance held around $2.1 billion equivalent in Binance USD (BUSD) and FTT due to its FTX divestment last year but didn’t clarify Binance’s current FTT holdings. He added it would sell the tokens in a way that “minimizes market impact,” expecting the token sales to take “a few months to complete.”
  • November 8, 2022 – FTX faces a “liquidity crunch,” moves to sell exchange to Binance
  • November 9, 2022 – Binance backs out of the deal after 24 hours of due diligence, SBF tells investors he needs $8 billion in emergency funding and crypto markets sell off.

The content presented is for information purposes only and should not be considered specific or individualized financial advice. Arbor Digital is a Division of federally registered Arbor Capital Management, Inc. (ACM) CRD # 111362. Registration does not imply a level of skill or knowledge. Past performance is no guarantee of future results. The digital asset class is speculative and has unique risks compared to traditional assets. See our regulatory disclosures or contact us for more information.

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