The Looming $62 Billion Crypto Contagion
Like stock certificates dusted with pixie dust, inflated exchange tokens were at the heart of FTX’s spectacular meltdown. They are still widely used in major cryptocurrency exchanges around the world. Will they be the loss of crypto?
By Nina Bambysheva, Javier Paz, Michael de Castillo and Steven Ehrlich
In In 2017, cryptocurrency exchange Binance created the first of a new type of digital asset created by blockchain: the BNB coin, designed to reward customer behavior, such as trading or referring friends to its own platform. “A blueprint for building a scalable and impactful cryptocurrency business,” CoinDesk editor Pete Rizzo announced in 2019 after Binance moved the coin to its own proprietary blockchain. “Incredible shine.”
Today, the incredible thing about all of the cryptographic inventions known as exchange tokens, like BNB, is that they have ballooned to tens of billions of dollars in value and are largely have become the foundation upon which the rapidly growing digital-asset markets rest.
The weakest link in former billionaire Sam Bankman-Fried’s crypto empire was FTX’s own exchange token, which traded under the symbol FTT. According to Reuters, Bankman-Fried had loaned his trading company, Alameda, billions of dollars in FTX client funds, collateralized by these FTT tokens, which were essentially invented to provide trade discounts and other benefits.
“The way FTT works,” Bankman-Fried said in an August 2022 interview with Forbes, “It’s not that you get free FTT to do things. The way to think about it is you get free shit for getting FTT. So there’s a bunch of doo-hickeys.
At the peak of 2021, FTT had a market value of $9.6 billion, but unlike a common stock, which represents legal ownership of a company’s assets, FTT does not represent any stake in the FTX company. If FTT had any intrinsic value, it was in the form of rebates that FTX clients using these tokens could trade on the exchange – up to 60% for active traders. You can think of these redemption tokens as akin to loyalty or reward points that you might earn as a frequent Starbucks or UnitedMiles customer while traveling on that airline. They are valuable, but a bank is unlikely to let you use them as collateral if you want to buy a house.
However, in the highly speculative and often bizarre world of digital assets, these loyalty tokens trade on many crypto exchanges, much like stocks on the New York Stock Exchange, and FTX founder Sam Bankman-Fried allegedly trades them. used as collateral for his company’s loans. made. Until a week ago, FTT traded at $26 and had a market capitalization of $3.5 billion. But after Bankman-Fried rival Changpeng Zhao, billionaire founder of Binance, took to Twitter to say he planned to sell over $500 million worth of FTT, it sparked the crypto equivalent of a bank run. Today, FTT is selling for $2.70, and given FTX’s recent bankruptcy filing, it’s likely heading towards zero.
But the story of exchange tokens in cryptoland is far from over. Forbes has over 16 global crypto and defi (decentralized finance) exchanges currently using these tokens for a combined market value of no less than $62 billion. [SEE TABLE BELOW]
In fact, so-called exchange tokens are an important foundation of the crypto exchange ecosystem, as they are effective in retaining customers, especially when token prices rise. Virtually all of these tokens offer exchange-specific benefits to holders, such as trading fee discounts, preferential margin lending terms, enhanced staking (lending) rewards, and exchange-branded Visa cashback cards. . Exchange tokens are also awarded to customers who refer new merchants to a platform, in a system similar to multi-level marketing organizations like Amway. Exchange tokens function as the fuel for crypto’s self-fulfilling bubbles.
Binance – the world’s largest crypto exchange – has its own token, BNB, which alone has a market capitalization of $45.9 billion, although it does not represent any stake in Changpeng Zhao’s company and that it has not been registered as a title in the United States. SECOND.
Anyone who opens an account on Binance and starts trading can buy or earn these BNB tokens, which offer 25% off spot and margin trading fees and 10% off futures. If you refer friends, you can get up to 40% commission every time they trade on Binance. Additionally, since Binance has created its own blockchain that mints BNB coins, you can use BNB to pay for goods and services, book plane tickets and hotels on sites like Travala for example, participate in exclusive sales tokens and even earn free tokens by completing surveys and tasks. You can also use BNB by staking, earn a flexible return percentage by depositing it on BNB chain-based projects, and apply for crypto loans. Notably, these digital assets are also essential for anyone who wants to use Binance’s decentralized exchange (DEX), which theoretically cannot be shut down by US regulators.
Unlike bitcoin, which is mined every ten minutes, all 350 million FTT tokens said to exist were created in what is known as a pre-mine. “There will never be minted again,” Bankman-Fried said recently. In fact, over a roughly three-month period beginning around June 2019, almost all of FTT’s premined tokens were sold before listing on crypto exchanges. “In fact, all FTT tokens were owned by a collection of people and entities,” Bankman-Fried said.
In order to create scarcity and essentially boost the value of its exchange tokens, FTX and Binance conduct what is known as token burns. Periodically, both exchanges send tokens to unrecoverable addresses, which reduces the float, similar to a stock buyback, and thus increases the value of the exchange tokens in circulation. Since 2019, FTX has burned 21 million FTT tokens. In total, Binance burned over 42 million BNB, which would amount to $11.6 billion at today’s prices. CZ said Binance does not borrow money and has never used BNB as collateral on loans. He recently started advocating that exchanges undergo “proof” of funds.
In terms of governance, exchange tokens, like loyalty programs, are entirely under the control of the entity issuing or redeeming them, even if they claim to stick to pre-established schedules of issuance or of engraving. DeFi tokens, on the other hand, claim to offer holders the ability to propose and vote on platform changes. But in reality, many large DeFi platforms concentrate governance in the hands of big investors and founding teams. Also, just as FTT has not given holders stakes in FTX, buying a DeFi token does not necessarily convey ownership rights to the underlying platform.
The table below offers details of some 16 different cryptocurrency exchange and DeFi platform tokens representing over $60 billion in market value. The absentees are Coinbase and Kraken, which are based in the United States and have avoided issuing exchange tokens, presumably because they would likely be considered securities by the SEC. All of the publicly traded tokens trade daily like stocks — most of them have fallen in value over the past year — but not a single one offers ownership in the companies they are affiliated with. Buyer beware.
The 16 crypto and challenge exchanges below have created exchange tokens to attract and retain customers. Although they trade like stocks and are worth $60 billion, none represent ownership of their affiliate platforms.