Crypto’s “catastrophic” fall
The crypto industry faces growing turmoil after Binance, the world’s biggest crypto exchange, walked away on Wednesday from its deal to rescue its struggling rival, FTX. The prices of major tokens like Bitcoin and Ether have fallen sharply in the past 24 hours. And FTX now faces ruin as it grapples with a funding shortfall of perhaps $8 billion.
FTX’s implosion raises a host of questions: How did it lose billions? Did it break the law? How did sophisticated investors like the venture firm Sequoia Capital miss red flags? Meanwhile, FTX’s founder, Sam Bankman-Fried — who is known as S.B.F. and was once described as a millennial J.P. Morgan — seems likely to face a legal reckoning.
Binance didn’t like what it saw when it peered into FTX’s books, the company tweeted yesterday, referring to “news reports regarding mishandled customer funds” and federal inquiries. (Reuters reports that S.B.F. tried to prop up Alameda Research, an FTX trading affiliate, with billions in funds from the exchange, including customer assets.)
FTX itself is now in chaos. Much of its legal staff — including its general counsel, Can Sun — has quit, while Alameda has taken down its website. Meanwhile, S.B.F. is in search of billions in emergency funding. “I’m deeply sorry that we got into this place, and for my role in it,” he told employees yesterday.
Crypto executives fear a loss of confidence in their industry. “This will be catastrophic for the ecosystem in the short term,” Jay Jog, the co-founder of the blockchain company Sei Network, told CoinDesk.
Even elite investors have lost money on FTX. Sequoia, the venture firm known for hugely profitable bets on Google, WhatsApp and others, publicly admitted yesterday that it had written off its investment in the exchange. Others that had backed the firm include BlackRock, SoftBank and Third Point, as well as celebrity endorsers like Tom Brady and Gisele Bündchen.
Pundits questioned how sophisticated investors could have poured money into FTX, which was valued at $32 billion early this year, despite red flags like murky finances — and even the lack of a C.F.O. (Sequoia insisted it performed “rigorous due diligence.”)
The courts and regulatory investigations await. Unless S.B.F. miraculously finds a lifeline, FTX is likely to seek bankruptcy, leaving creditors, customers, investors and business partners to duke it out for what they’re owed. It’s unclear where FTX would file for insolvency: While it has a U.S. affiliate, the company is incorporated in Antigua and Barbuda, and headquartered in the Bahamas.
Meanwhile, the S.E.C. and the Justice Department are said to be investigating FTX for potential securities violations. Gary Gensler, the S.E.C.’s chair, alluded to FTX in a speech yesterday: “We will continue to do our job as a cop on the beat,” he said. State securities regulators are also circling. Whether S.B.F. or others associated with FTX also face civil or criminal action — and where such legal fights would take place — remains unclear.
A crackdown on crypto is seemingly inevitable. “Regulators will scrutinize exchanges even more,” Changpeng Zhao, Binance’s founder, told employees yesterday. (His firm already faces inquiries into potential money laundering and sanctions violations.) Operating licenses will be harder to get, while companies will be under pressure to be more transparent and demonstrate proof of reserves, insurance funds and more, he added.
HERE’S WHAT’S HAPPENING
Vladimir Putin will no longer travel to next week’s G20 meeting in Bali. The news that the Russian president will skip the meeting comes a day after the country’s military announced an embarrassing retreat from the strategically important Ukrainian city of Kherson.
Global leaders extend a push to help poorer countries cope with climate change. At the COP27 conference, Africa-based insurers pledged to create a $14 billion financial program to cover the costs of disasters such as droughts and floods. Leaders also called for an overhaul of the I.M.F. and the World Bank to transfer more climate funding to developing countries.
Nicole slams Florida, packing drenching rains and high winds. Now a tropical storm, it made landfall overnight near Vero Beach, Fla.
On Musk, innovation and doing “dumb things”
Since taking over Twitter, Elon Musk has appeared to be flying by the seat of his pants. (He conceded this yesterday, tweeting, “Twitter will do lots of dumb things in coming months.”) But on a live audio event with wary advertisers on Wednesday, the billionaire unexpectedly revealed what he has in mind for his newest company.
Twitter will be more than a social network, he said. Musk thinks the company can process payments and increasingly compete with TikTok in online video and OnlyFans in subscription-based content. “If nothing else, I am a technologist and I can make technology go fast,” he said.
The whiplash around verification shows the risks of moving fast. On Wednesday, Twitter finally unveiled blue icons for subscribers who pay $8 a month for Twitter Blue. The platform also introduced gray badges for big corporate, government and media users, meant to ensure those organizations aren’t easily impersonated … except they soon disappeared, and Musk tweeted that he had “killed” the feature.
While Musk said that Twitter would crack down on impersonators, the consequences of opening up verification to paying users are emerging. Sports fans are complaining that Twitter Blue subscribers are impersonating pro athletes and trusted sports journalists and spreading fake trade news. But it’s not hard to see subscribers trying to impersonate companies or financial journalists and tweeting fake corporate news as a way to manipulate markets.
Also worth watching: President Biden said that Musk’s relationships with foreign governments are “worthy of being looked at,” after lawmakers questioned the role of Saudi investors and others in financing his Twitter takeover.
A little more clarity emerges on the midterms
It could be days until we know which party controls the House, and a month before we know the same for the Senate. Here’s the latest:
The House: Republicans are still expected to win control (as of this morning, they’re 11 seats shy of a majority), but several races haven’t been called. One that was: Representative Sean Patrick Maloney of New York, the chair of the Democratic Congressional Campaign Committee, conceded to his Republican opponent, Mike Lawler.
Republicans take aim at Donald Trump: With candidates backed by the former president largely underperforming, some in the party suggested a break from Trump: “I strongly believe he should no longer be the face of the Republican Party,” said former Representative Peter King of New York, a longtime Trump supporter.
Exclusive: The Wire Digital raises funds to expand
The Wire Digital, a China-focused news and data company, has raised $14 million from investors led by the Silicon Valley venture capital firm Sequoia Capital, DealBook is first to report. The funding round taps into the growing demand for information on Chinese companies as rising geopolitical tensions between Beijing and the West.
The Wire was founded by David Barboza, a two-time Pulitzer Prize winner who reported from China for The New York Times, and Lynn Zhang, a former private equity executive.
The platform is largely a resource for executives and regulators, who use it for everything from due diligence to searching for potential company ties to the use of forced labor in Xinjiang, a region where millions of ethnic Uyghurs are interned. “We’re trying to transform this dark area of global finance,” Barboza said.
Michael Moritz, a partner at Sequoia, said he did not think the deal would be hampered by political pressure to decouple the Chinese economy from the West. “The idea that China turns inward and doesn’t trade with its neighbors or cousins across the world, that isn’t going to happen, any more than the U.S. is suddenly going to stop wanting to purchase from China or sell in China,” he said.
The Wire will use the deal proceeds to invest in its technology and its editorial operation, and is looking to expand into countries like India and Vietnam.
A.D.L. goes E.S.G.
The Anti-Defamation League, the Jewish advocacy group that combats antisemitism and other forms of discrimination, is looking to capitalize on one of the hottest and most controversial trends on Wall Street. The group is acquiring JLens, an E.S.G. — environment, social and governance — investor that specializes in Jewish-values investing, and manages about $200 million for other Jewish nonprofits.
The A.D.L. believes it’s now the first anti-hate group to run an E.S.G. fund. JLens, like other E.S.G. funds, buys stakes in companies and then uses its influence to push for improved corporate policies related to the environment and other social issues. “Business is the next frontier in the fight against hate,” says Jonathan Greenblatt, C.E.O. of A.D.L., pointing to the recent example of companies that cut business ties with Kanye West after the rapper’s antisemitic comments.
The A.D.L. has shown some skepticism of E.S.G. Last year, it joined with other Jewish groups in denouncing a division of the mutual fund giant Morningstar over concerns of anti-Israel bias in its E.S.G. research. “Right now, E.S.G. needs a rigor that the field currently lacks,” Greenblatt told DealBook. “The A.D.L. hasn’t had a way to engage companies in this way, and we are excited to have a seat at the table.”
THE SPEED READ
President Biden said he planned to meet with President Xi Jinping of China during his forthcoming Asia trip to discuss ways to ease tensions between their countries. (WSJ)
Hackers are exploiting a years-old vulnerability in Microsoft SharePoint to infiltrate government systems worldwide. (Rest of World)
Best of the rest
Thanks for reading! We’ll see you tomorrow.
We’d like your feedback! Please email thoughts and suggestions to [email protected]