Cryptocurrency exchange FTX run by Sam Bankman-Fried saw significant withdrawals over the weekend. Bankman-Fried acknowledged the activity on Twitter yesterday. The main trigger was probably a series of tweets from Binance CEO Changpeng Zhao (CZ). Not only did he say that he planned to sell Binance’s FTT token (the FTX token) holdings, but that it was “post-exit risk management, learning from LUNA.” The mere mention of Terra’s LUNA coin, the one that caused the cryptocurrency crash in May, seems to have exacerbated the matter.

What happened?

Acknowledging withdrawals, yesterday Bankman-Fried wrote on Twitter, “We already processed billions of dollars in deposits/withdrawals today; we will move on… We are reaching node rate capacity, we will move on.”

He continued: “We are grateful to those who remain; and when this is over, we will welcome everyone else.”

Last week, Coindesk published some excerpts from the balance sheet of Alameda Research, the crypto market creation firm that also controls Bankman-Fried. He showed that Alameda had $14.6 billion in assets at the end of June, but a significant proportion was related to FTX’s token, FTT, including $3.66 billion in unlocked FTT and $2.16 billion in FTT warranty.

The news initially didn’t have much of an impact, with the price of the FTT token falling just over 5%, but by Saturday it was almost back to where it started.

Yesterday, Binance’s CZ tweeted that it was selling your FTT holdings that Binance acquired when it converted its equity stake in FTX to $2.1 billion in stablecoins and FTTs. She said she expected the settlement to take a few months, and Alameda Research CEO Caroline Ellison responded on Twitter that Alameda buy the lot of him for $22, a price below the value at the time.

As part of his announcement, CZ tweeted “Binance always encourages collaboration between industry players. Regarding any speculation as to whether this is a move against a competitor, it is not. Our industry is in its infancy and every time a project publicly fails, it hurts all users and all platforms.”

However, after using the word ‘glitch’ above, a tweet a few hours later made reference to LUNA, the coin of the failed Terra Stablecoin project. “Liquidating our FTT is just post-exit risk management, learning from LUNA. We gave support before, but we will not pretend to make love after the divorce. We are not against anyone. But we will not support people who lobby other industry players behind their backs. Going forward,” CZ tweeted.

Food to go

• executions can be exacerbated by users observing activity in real time
• the real question should be about the balance of FTX
• if exchanges were more regulated, would this all have been on twitter?
• it is not the first mini race activated by social networks
• Is there a Musk effect here?

Blockchain-enabled transparency has advantages and disadvantages. An analytics firm, Cryptoquant, tweeted charts showing FTX stablecoin reserves shrinking and Ethereum withdrawal volumes rising yesterday. This is prima facie evidence that a mini-race is occurring and is the kind of thing that can cause a stampede.

One of the challenges is that some less informed retail investors misread the data. So yes, yesterday people were heading to the FTX outlets. But the level of your stablecoin reserves is not important if FTX has a lot of capital. Stablecoin reserves can be quickly (and were) replenished by selling other cryptocurrencies to buy more stablecoins which in turn finance swaps.

That leads to the real questions that need to be asked. Alameda’s health will have a greater impact on the broader crypto community because it uses leverage. Although the CEO of Alameda says that his leverage is considerably lower because the appetite for credit has decreased after the cryptocurrency crash.

If run with CZ’s LUNA statement for a moment, what’s the worst that can happen and what would be the impact? For starters, the FTT token is down to $22, a 15% drop and the same price level as it was two weeks ago, before the recent storm. The price drop so far is not dramatic.

So how else are Alameda and FTX intertwined besides the token? What are the intercompany balances between them? Or, put another way, does Alameda owe FTX money?

And looking at FTX, the real question is how much FTT do you have in your balance. And does your capital base exceed the value of your own ITF holdings? If FTX has enough capital, even if the value of the FTT token went to zero, which currently seems unlikely, FTX would be fine.

More conclusions on regulation

Despite Bankman-Fried’s proclamation that “although we are sometimes slowed down by the product, we are highly regulated,” most highly regulated financial institutions would disagree and repeatedly demand a level playing field with crypto exchanges. On the one hand, highly regulated companies have prescribed capital buffers, going back to the point that FTX capital must be greater than the value of (their own) FTT holdings.

And if cryptocurrency exchanges were more regulated, one or two of these tweets might not have been made due to concerns about being censored by the regulator. To be clear, an objective statement from Binance that it is selling its FTT holdings is fine.

FTX is not the first to experience a mini-career as a result of social media. Just over a month ago, Credit Suisse suffered something similar. The difference, however, was that Credit Suisse’s trigger was mostly retail speculation. Here could have been CZ’s late-night follow-up tweet referencing LUNA.

And one has to wonder about the Musk effect. Musk is comfortable running certain aspects of his business in a very public way. But it is another story if the company’s sector is financial.