Were El Salvador’s Bitcoin involved in the FTX crash?

Rumors have circulated in recent days that El Salvador may have been involved with the FTX collapse because of Bitcoin deposited on the exchange. 

In particular, the speculation that has been circulating on social media is that the Salvadoran state may have had some of its Bitcoin funds in storage at the exchange. 

The denial of this speculation came from Binance CEO Changpeng CZ Zhao. 

Indeed, CZ reported that he had exchanged some messages directly with the President of El Salvador, Nayib Bukele, who reportedly confirmed to him that they do not have any Bitcoin on deposit at FTX, and have never had anything to do with them. 

Man, the amount of misinformation is insane.

I exchanged messages with President Nayib a few moments ago. He said "we don’t have any Bitcoin in FTX and we never had any business with them. Thank God!" https://t.co/CrM5wd24Ha

— CZ 🔶 BNB (@cz_binance) November 10, 2022

El Salvador and the connections between their Bitcoin and FTX

The Central American country over time has purchased more than 2,000 BTC, and all of its purchases have been at a higher price than they are now. So for now they are totally at a loss, even though this investment of theirs was not intended to produce gains in the short or medium term. 

Right now the value of the BTC held by El Salvador is just over $40 million, which is far less than the country’s $58 billion annual GDP. 

Even compared to the total public debt of just over $20 billion, the amount held in BTC is insignificant, so the impact of these potential losses may not be particularly large. 

In addition, the indirect spillovers of the so-called Bitcoin Law have been positive for the Central American country, particularly the surge in tourism, which has certainly brought in gains far outweighing the potential losses generated so far by investing in BTC. 

However, it is worth noting that the Bitcoin Law did not require El Salvador to proceed with investments of several tens of millions of dollars in Bitcoin at all, so it could have generated even more benefits had such investments not been made. 

One curious thing in this matter is that China recently offered to buy the country’s heavily distressed foreign debt. This means that El Salvador’s current financial policy is weakening the country, threatening to somehow force it to “sell itself” to foreign powers. 

The FTX exchange

FTX was one of the largest crypto exchanges in the world. 

There were actually two separate exchanges. 

One, FTX.US, was dedicated solely and exclusively to the US market, and apparently had no major problems. Indeed, it appears to continue to function as before. 

The problematic one, on the other hand, was the global one, ftx.com, intended for customers around the world. At some point, the management of FTX’s global exchange entered a heavy liquidity crisis that forced first a slowdown and then a suspension of withdrawals. 

News had circulated yesterday that they had reactivated withdrawals, but even today an obvious notice appears on their website informing that they are suspended indefinitely. 

It is possible that they have begun to clear the queue of outstanding withdrawals that were requested prior to the permanent suspension, but have not yet initiated the ability to request new ones. 

Yesterday the exchange officially announced that it had reached an agreement with Tron to reactivate withdrawals in TRX, BTT, JST, SUN and HT. 

FTX Announcement Regarding the Tron Credit Facility:

We are pleased to announce that we have reached an agreement with Tron to establish a special facility to allow holders of TRX, BTT, JST, SUN, and HT to swap assets from FTX 1:1 to external wallets.

— FTX (@FTX_Official) November 10, 2022

Then they had to specify that under the laws of the Bahamas where the company is based, they had to start by facilitating withdrawals of Bahamian customers’ funds. 

1) Per our Bahamian HQ's regulation and regulators, we have begun to facilitate withdrawals of Bahamian funds. As such, you may have seen some withdrawals processed by FTX recently as we complied with the regulators.

— FTX (@FTX_Official) November 10, 2022

They later admitted that they had to block the Japanese version of the website at the explicit request to do so from the authorities in Japan. 

We are following the guidance of the JFSA and will be putting https://t.co/XblZK9n7s1 into close-only mode @FTX_JP is a separate entity that strictly follows the Japanese regulation on asset segregation https://t.co/q3bYGEuNIw

— FTX (@FTX_Official) November 10, 2022

So withdrawals have been enabled in some cases, but apparently not yet across the board. 

Has El Salvador ever deposited Bitcoin on FTX?

If the state of El Salvador did not have its own funds deposited with FTX, this obviously cannot be said of other entities. 

There are slowly emerging several situations of funds currently locked up in FTX accounts, in some cases as much as several million dollars. 

Then again, not only was FTX one of the largest crypto exchanges in the world, but it also turned out to be fully regulated. While US customers were using the US version that was still operational, everyone else was using the international version on which deposits are still largely blocked. 

According to Reuters reports, about $9.4 billion would be required to resolve the liquidity crisis. 

The CEO of FTX, Sam Bankman-Fried (SBF), is apparently trying to solicit funds from many crypto entities, but for now he does not seem close to getting to $9.4 billion. It is possible that if it could not find those funds the exchange would not be able to return to all of its customers all of the funds it still has on deposit with them. 

For now, the only deal that seems to have gone through is the one with Tron, and according to some rumors it would be a deal in an amount close to $1 billion. 

SBF itself has stated that the future of the company depends on what happens next week, so we will presumably have to wait several more days to see how this situation is really unfolding. 

14) So, what does this mean going forward?

I'm not sure–that depends on what happens over the next week.

But here are some things I know.

— SBF (@SBF_FTX) November 10, 2022

Has Binance taken advantage of FTX’s predicament?

According to SBF, although Binance had apparently offered to save the exchange by taking it over, in reality they never really intended to go through with it. 

Indeed, he said that in the future perhaps they would reveal some new details about it, commenting with a “well played; you won.” 

20) At some point I might have more to say about a particular sparring partner, so to speak.

But you know, glass houses. So for now, all I'll say is:

well played; you won.

— SBF (@SBF_FTX) November 10, 2022

Truth be told, now that the numbers of FTX’s collapse are emerging it seems quite clear that, even if they had really wanted to, Binance probably would not have been able to save FTX without self-procuring serious damage. 

Indeed, a Binance spokesperson stated that FTX’s problems were beyond their ability to help. It is no coincidence that SBF is now seeking funds from different players, because there is probably no single investor who can undertake such a commitment. Binance does not seem to be interested in participating in a bailout, but would have liked to take over the entire exchange by keeping it for itself. 

The CEO of Binance, Changpeng CZ Zhao, then also stated that he had not pre-planned this situation, and that the collapse of FTX is not good for anyone in the crypto sector. He also denied that this is a victory for Binance. 

In the spirit of transparency, might as well share the actual note, sent to all Binance team globally a few hours ago.https://t.co/IUNkPcLC8T pic.twitter.com/XGlIJB7EV5

— CZ 🔶 BNB (@cz_binance) November 9, 2022

The impact on the crypto sector

According to a recent analysis by Kaiko, before the collapse, FTX.com had a 7% market share that will simply be replaced. However, now rebuilding the lost trust will be the most difficult challenge for the entire crypto sector. 

It is possible that the industry will recover sooner or later because it has already proven itself resilient many times over, but the collapse of FTX was really a blow. 

The problem is that it was thought to be a reliable exchange, but instead, it was found to be using customer funds for risky and sometimes unproductive ventures. 

Although in theory FTX may still have a future, the crypto market will never forget what happened. Trust in centralized exchanges has been seriously questioned, so much so that now many other exchanges, starting with Binance itself, have decided to provide more transparent information about how their customers’ funds are used or stored.