Connect with us


What Is a Crypto Exchange Token and How Did It Help Blow up FTX?

News Agencies



The FTT exchange token played a key role in the downfall of the crypto exchange FTX and affiliated trading firm Alameda Research. It was the use of FTT to inflate both entities’ balance sheets, reported by CoinDesk’s Ian Allison on Nov. 2, that raised the first doubts that sparked the collapse.

FTT may have been core to another aspect of the FTX fraud, serving as notional (but actually worthless) “collateral” for loans of customer funds made by FTX to bail out Alameda.

This article is excerpted from The Node, CoinDesk’s daily roundup of the most pivotal stories in blockchain and crypto news. You can subscribe to get the full newsletter here.

But what are exchange tokens? What role do they serve for the exchanges that issue them? How should they be treated under modern accounting standards? And how do they advance the crypto industry’s agenda of decentralization?

To answer the last question first: Exchange tokens are by and large not decentralized, and, if anything, their goal is the opposite of decentralization. They are, at bottom, an incentive to keep using the same centralized exchange. Holders can use them to get discounts on trading fees, rewards and early access to offerings. Despite chatter on Twitter, the FTT token did not distribute a share of FTX platform revenue or give holders any governance rights, and neither do most exchange tokens.

Technically, exchange tokens are nothing special. FTT was tracked as an ERC-20 token on Ethereum, a kind of token that pretty much anyone can create with limited technical skill. BNB, Binance’s exchange token, is tracked on its branded BNB Chain, a blockchain that began life as an Ethereum fork but has merged with a separate permissioned blockchain.

See also: Binance Seeks to Rev Up Its BNB Blockchain

That’s in contrast to one of the concepts that may have inspired the creation of exchange tokens. Starting roughly in 2016-2017, there was a lot of discussion in crypto of “utility tokens” that would be used to incentivize and pay nodes for decentralized computing services. Though the term seems to have faded, current examples include the decentralized storage network Storj; the BitTorrent token now managed by Tron; and even Helium, the troubled Wi-Fi node project.

The appeal of utility tokens is you don’t need any legal regime to enforce property rights or claim a place in the “capital stack” – that is, the ordered list of obligations from an organization to counterparties including debtors and investors. That’s partly because there is no capital stack, but also because the value derives procedurally from demand for services that are, in effect, directly connected to the blockchain.

The value of exchange tokens, by contrast, is implied to rest on a regulatory or legal regime that in many cases doesn’t actually exist. Most if not all exchange tokens are issued by so-called “offshore” exchanges, like FTX and Binance, that are registered in light-touch regulatory havens such as, in FTX’s case, the Bahamas. U.S.-registered exchanges Kraken and Coinbase, by contrast, do not have their own tokens because they have access to standard equity markets (and the associated regulatory restraints). Exchange tokens represent a way for offshore exchanges to raise money without that access.

“Binance was the first to launch, and it was really successful. And when you’re successful, you get copycats,” Katie Talati, co-founder and director of research at the crypto asset manager Arca, said. “Huobi, OKX, they all launched their own token and, going forward, it has been standard. FTX didn’t launch until the second half of 2019, and at the same time they launched their token.”

But just because exchange tokens can raise money like equity doesn’t mean that’s what they are. “Currently, these aren’t part of the capital stack and you can’t claim anything in a bankruptcy, for instance,” Talati said. “There’s no governance, you can’t say you want the exchange to do X,Y and Z.”

But in a strange sort of ontological mystery that is fairly common in crypto, these tokens, issued by entities without strong regulators or even necessarily well-enforced property rights, trade a lot like equity. Talati said that a discounted cash flow model is one useful way to think about their value, “but there are a lot of inputs that we can’t model.”

This semi-fungibility with an equity model may have eased the way to Sam Bankman-Fried’s fraudulent finances. One element of the grift was that FTT was what’s known as a “low-flow, high-fully diluted value” token. Only a very small portion traded publicly, but the public price for that fraction was assumed to apply to hundreds of millions of dollars of the token owned by FTX itself. This makes a rough sort of sense if you think in terms of the “equity value” that a startup founder, for instance, hangs on to after venture capital investors get their slice.

But the handling of the FTT tokens on FTX and Alameda’s balance sheets didn’t track either to standard equity accounting practices or, more importantly, to reality. When accounting for its own equity, or handling stock it has bought back from public markets, companies do not add them to their valuation estimate or liquid assets, instead usually tallying them separately as “treasury stock.”

That’s because a company’s equity isn’t part of its total value, it is a reflection of that value. Adding your own stock to your bottom line would be a bit like a snake eating its own tail.

This basic accounting deception became a time bomb when Bankman-Fried seemingly began using FTT as collateral for loans between FTX and Alameda, as well as other related entities. As I wrote last week, these shenanigans resemble nothing so much as Enron’s use of related entities and paper shuffling to hide debt and pump its own valuation.

The centrality of FTT to the worst crypto blowup of all time has pushed crypto leaders to clarify their stance on accounting for exchange tokens and similar in-house assets. Changpeng Zhao, CEO of Binance, took pains last week to clarify that Binance has “never used BNB as collateral.” In a Twitter Space last week, Ripple CEO Brad Garlinghouse similarly clarified that his company does not count its vast trove of XRP on its balance sheet.

See also: Binance Launches Native Oracle Network, Starting With BNB

This relatively unspoken norm helps explain why CoinDesk’s reporting about flows of FTT was so explosive. It’s not the sort of asset that should be used in the way it seemingly was, and no truly independent entity would have accepted it as loan collateral, or even considered it an “asset.”

Experienced crypto investors are in a position to be the bulwark enforcing that norm – and to lose their shirts when they don’t. Talati is unambiguous on Arca’s stance.

“When we look at [projects], a lot of them will have their own token on their balance sheet,” she said. “And we just cross that out.”

Continue Reading

Breaking News

World7 mins ago

Shanghai hit by COVID protests as anger spreads across China

By Brenda Goh SHANGHAI (Reuters) – Protests simmered in Shanghai early on Sunday, as residents in several Chinese cities, many...

World17 mins ago

Details: 47,028 new confirmed cases of new crown in South Korea totaled 26,937,516 cases 888,011,000,110,888 Yonhap News Agency, Seoul, November 27. According to a report from the South Korean Central Anti-epidemic Countermeasures Headquarters on the 27th, as of 0:00 on the same day, South Korea had 47,028 new confirmed cases of infection with the new coronavirus (COVID-19) compared with 0:00 the previous day, and a total of 26,937,516 confirmed cases . The number of new cases in a single day decreased by 5,760 from the previous day, increased by 1,030 from a week ago (20th), and decreased by 1,414 from two weeks ago (13th). The average number of new confirmed cases per day for the past week since the 21st was 54,119. Among the new cases, there were 46,958 cases of community infection and 70 cases imported from abroad. There were 39 new deaths, a decrease of 13 cases from the previous day, and a total of 30,369 deaths, with an average fatality rate of 0.11%. There are currently 481 critically ill patients, an increase of 3 cases from the previous day. (Finish) [Copyright belongs to Yonhap News Agency, unauthorized reproduction is strictly prohibited]

Yonhap News Agency, Seoul, November 27th. According to the South Korean Central Anti-epidemic Countermeasures Headquarters on the 27th, as of...

World17 mins ago

Guoxiang men's world team competition Chinese team won the championship

Xinhua News Agency, Jerusalem, November 25 (Reporter Lu Yingxu and Wang Zhuolun) The Chinese team defeated the Uzbekistan team in...

Sports17 mins ago

‘A disgrace to football’: Carlos Queiroz demands Jurgen Klinsmann resign from Fifa after Iran comments

Klinsmann made negative comments about Iranian players’ behaviour towards the referee during their 2-0 win over Wales

World36 mins ago

One person killed in shooting in Cornelius, police say

One person has been killed in a shooting, according to the Cornelius Police Department. Police said they received a call...


Editor Pick’s

Latest Entertainment

Entertainment8 hours ago

Dua Lipa shares recording studio photos with Rolling Stones frontman Mick Jagger

Dua Lipa shares recording studio photos with Mick Jagger. (Photo: Michael Tullberg/Getty Images) Is there a Dua Lipa and Rolling...

Entertainment8 hours ago

Dwayne Johnson Says He’s Grateful for Thanksgiving with Family: ‘We Count Our Blessings’

LOS ANGELES, CALIFORNIA – NOVEMBER 03: (L-R) Ata Johnson and Dwayne Johnson attend the World Premiere of Netflix’s “Red Notice”...

Entertainment9 hours ago

Queen Elizabeth Knew Her Time Was Running Short, ‘Had No Regrets’ Before Her Death, Book Says

FEBRUARY 02: Queen Elizabeth II is photographed at Sandringham House to commemorate Accession Day, marking the start of Her Majesty’s...

Entertainment9 hours ago

Pregnant Chrissy Teigen and John Legend Celebrate Thanksgiving with Luna & Miles Ahead of Next Baby

chrissy teigen, john legend Chrissy Teigen/Instagram Chrissy Teigen and John Legend have lots to be thankful for this Thanksgiving. The...

Entertainment10 hours ago

Irene Cara, Oscar-winning ‘Flashdance’ singer and Fame star, dies at 63

Irene Cara, the Oscar-winning singer best known for performing the theme songs to the legendary films Flashdance and Fame, has...

Entertainment11 hours ago

Bob Dylan Says He ‘Regrets’ an ‘Error in Judgment’ in Selling Machine-Signed Art and Books: ‘I Want to Rectify It Immediately’

Bob Dylan issued a rare public statement Friday night to admit that he “regrets” having made “an error in judgment”...

Entertainment12 hours ago

Kimberly Stewart Shares Sweet Thanksgiving Photo of Her and Benicio Del Toro’s Daughter: ‘Thankful’ Kimberly Stewart/Instagram Kimberly Stewart/Instagram Kimberly Stewart celebrated Thanksgiving with her mini-me by her side. The actress, 43, spent the...

Entertainment18 hours ago

Madonna Shares Rare Snap With All Six Of Her Children As They Celebrate Thanksgiving Together

Madonna has revealed she had a lot to be grateful for this Thanksgiving after spending the day with all six...

Latest Sports

Sports37 mins ago

23-year-old Kylian Mbappé could overtake these Pelé, Ronaldo and Messi World Cup records

The France forward is in legendary company.

Sports57 mins ago

Mike Sainristil on flag planting: ‘I was thinking about that since January’

It's seen as a sign of disrespect to the opposing program but Mike Sainristil's decision to plant the Michigan flag...

Sports1 hour ago

Why Alabama football coach Nick Saban has a cut on his face during Iron Bowl

CBS cameras caught Alabama football coach Nick Saban walking around with a sizeable cut on his left cheek during the...

Sports2 hours ago

How can USA qualify for the World Cup last 16?

How can the USA qualify for the last 16 of the World Cup and what do they need against Iran...

Sports2 hours ago

College football scores: USC hosts Notre Dame

USC still has College Football Playoff aspirations, but they have to get past No. 15 Notre Dame in order to...

Sports3 hours ago

Nebraska signs Matt Rhule to 8-year deal as football coach

After six straight losing seasons and more than 20 years removed from its 1990s heyday, Nebraska is turning to Matt...

Sports3 hours ago

Jim Harbaugh discusses the origins of the trick play against Ohio State

Neither were the coaching staff, as head coach Jim Harbaugh told reporters after the game that the Wolverines had "emptied...

Sports3 hours ago

Ja Morant tweets about quiet Klay Thompson critics with Warriors’ star shining

Ja Morant doesn't usually side with the Warriors, but on Friday night, that changed.

Technology Hot News

Is Elon Musk Really Going to Buy Twitter? Is Elon Musk Really Going to Buy Twitter?
Technology1 month ago

Is Elon Musk Really Going to Buy Twitter?

Elon Musk, the owner of the electric car company Tesla, CEO of SpaceX, and the richest man in the world,...

WhatsApp services were affected across Pakistan, restored after 2 hours WhatsApp services were affected across Pakistan, restored after 2 hours
Technology1 month ago

WhatsApp services were affected across Pakistan, restored after 2 hours

WhatsApp services were affected in various countries of the world, including Pakistan, and India due to this users were facing...

Bitcoin vs Litecoin: A guide to understanding cryptocurrencies Bitcoin vs Litecoin: A guide to understanding cryptocurrencies
Technology1 month ago

Bitcoin vs Litecoin: A guide to understanding cryptocurrencies

Cryptocurrencies currently occupy an odd place in society. They are no longer the super niche bizarre currency beloved by tech...

Personal data of people is selling on Google Play and Google Ads Personal data of people is selling on Google Play and Google Ads
Editor Picks2 months ago

Personal data of people are sold on Google Play and Google Ads

It’s been two to three years since Google has been unknowingly hosting multiple apps from malicious actors who sell personal...

Protonmail is down a second time in the past 24 hours Protonmail is down a second time in the past 24 hours
Technology5 months ago

Protonmail is down a second time in the past 24 hours

An end-to-end encrypted email service Protonmail is down a second time in the past 24 hours, netizens reported on social...

What's better for the student: a tablet or a laptop What's better for the student: a tablet or a laptop
Technology6 months ago

What’s better for the student: a tablet or a laptop

Some analysts argue that computers have outlived their usefulness. There is some truth in this: PC and laptop sales are...

Tesla founder Elon Musk holds the Twitter deal temporary Tesla founder Elon Musk holds the Twitter deal temporary
Technology7 months ago

Tesla founder Elon Musk holds the Twitter deal temporary

USA: Elon Musk, the founder of companies like Tesla and SpaceX, can actually buy anything in the world. Last month,...

How Zafar Supari is utilizing his ability on Snapchat? How Zafar Supari is utilizing his ability on Snapchat?
Technology7 months ago

How Zafar Supari is utilizing his ability on Snapchat?

Pakistan: Zafar Supari a public figure, businessman, and social media sensation has crossed one hundred thirty-three thousand 133k subscribers on...