The Looming $62 Billion Crypto Contagion

Forbes
Published 2 months ago
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Like stock certificates sprinkled with pixie dust, inflated exchange tokens were at the core of FTX’s spectacular collapse. They are still in widespread use at major cryptocurrency exchanges around the world. Will they be crypto’s undoing?

In2017, cryptocurrency exchange Binance created the first of a new kind of blockchain-minted digital asset: BNB coin, designed to reward customer behavior such as trading or referring friends to its own platform. “A model for building a scalable, and impactful cryptocurrency business,” heralded CoinDesk editor Pete Rizzo in 2019, after Binance moved the coin to its own proprietary blockchain. “Unbelievable brilliance.”

Today, the only unbelievable thing about the whole cloth of crypto inventions known as exchange tokens, like BNB, is that they have inflated to tens of billions of dollars in value and in large part have become the foundation upon which the fast-growing digital-assets 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 lent his trading company, Alameda, billions of dollars in FTX customer funds, collateralized by these FTT tokens, which were essentially invented as a way to offer trading discounts and other perks.

“The way that FTT works,” said Bankman-Fried in an August 2022 interview with Forbes, “It is not that you get free FTT for doing things. The way to think about it is that you get free shit for having FTT. So, there’s a bunch of doo-hickeys.”

At the peak in 2021 FTT had a market value of $9.6 billion, but unlike a common stock, which represents legal ownership in the assets of a corporation, FTT does not represent any equity ownership in the FTX company. If FTT had any intrinsic value, it was in the form of discounts that FTX customers using these tokens could get trading on the exchange–as much as 60% for active traders. You can think of these exchange tokens as being akin to loyalty or reward points you might get as a frequent customer of Starbucks or the UnitedMiles by flying on that airline. They have value, but it’s unlikely that a bank would allow you to use them as collateral if you wanted to purchase a home. 

However, in the highly speculative and often bizarre world of digital assets, these loyalty tokens trade on numerous crypto exchanges just as stocks do on the New York Stock Exchange, and FTX founder Sam Bankman-Fried reportedly used them as collateral for the loans his company made. Up until a week ago FTT traded at $26 and had a market capitalization of $3.5 billion. But after Bankman-Fried’s rival Changpeng Zhao, Binance’s billionaire founder, went on Twitter to say he was planning to sell over $500 million of FTT, it sparked the crypto equivalent of a bank run. Today FTT sells for $2.70, and given FTX’s recent bankruptcy filing, it is likely headed to zero.

But the story of exchange tokens in cryptoland is far from over. Forbes counts more than 16 global crypto and DeFi (decentralized finance) exchanges currently using these tokens for a combined market value of no less than $62 billion. 

In fact, so-called exchange tokens are an important underpinning to the crypto exchange ecosystem because they are effective in creating customer loyalty–especially when token prices are rising. Virtually all such tokens offer holders exchange-specific perks such as trading fee discounts, preferential margin loan terms, enhanced rewards for staking (lending) and exchange-branded cashback Visa cards. Exchange tokens are also awarded to customers that refer new traders 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 largest crypto exchange in the world–has its own token, BNB, which by itself has a market capitalization of $45.9 billion, though it does not represent any equity in Changpeng Zhao’s company nor has it been registered as a security with the U.S. SEC. 

Anyone who opens an account on Binance and starts trading can buy or earn these BNB tokens, which offer 25% discounts on spot and margin transaction fees and 10% on futures. If you refer friends, you can get up to 40% commission every time they make a trade on Binance. Also, because Binance has created its own blockchain that mints BNB coins, you can use BNB to pay for goods and services, book airfare and hotels on sites like Travala for instance, participate in exclusive token sales and even earn free tokens by completing surveys and tasks. You can also put BNB to use by staking, earn a flexible percentage yield by depositing it on BNB Chain-based projects and apply for crypto loans. Notably, these digital assets are also essential for anyone who want to use Binance’s decentralized exchange (DEX), which theoretically can’t be shut down by U.S. regulators.

Unlike bitcoin, which is mined every ten minutes, all of the 350 million FTT tokens that would ever exist were created in what is known as a pre-mine. “There will never be any more minted,” said Bankman-Fried recently. In fact, over a period of about three months starting around June of 2019 almost all of FTT’s premined tokens were sold prior to getting listed on crypto exchanges. “Effectively, all of the FTT tokens were owned by a collection of people and entities,” said Bankman-Fried.

In order to create scarcity and essentially bolster the value of its exchange tokens, FTX and Binance conduct what are known as token burns. Periodically both exchanges send tokens to irretrievable addresses reducing the float, similarly to a share buyback, and thus increasing the value of the exchange tokens outstanding. Since 2019 FTX has burned 21 million FTT tokens. In total, Binance has burned more than 42 million BNB, which would be worth $11.6 billion at today’s prices. CZ has said Binance doesn’t borrow money and has never used BNB as collateral on loans. He recently began advocating that exchanges undergo a “proof” of funds. 

In terms of governance, exchange tokens, like loyalty reward programs, are completely under the control of the entity that issues or redeems them, even if they profess to stick to pre-arranged schedules for issuance or burning. DeFi tokens, by contrast, 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. Additionally, just as FTT did not give holders stakes in FTX, purchasing a DeFi token does not necessarily convey ownership rights into the underlying platform. 

The table below offers details on some 16 different cryptocurrency and DeFi-platform exchange tokens representing more than $60 billion in market value. Conspicuously absent are Coinbase and Kraken, which are U.S.-based and have avoided issuing exchange tokens, presumably because they would likely be deemed securities by the SEC. All of the tokens listed trade on exchanges daily like stocks–most of them have plummeted in value in the last year—but not a single one offers any ownership in the companies that they are affiliated with. Buyer beware.

TOKEN VALUES

The 16 crypto and DeFi exchanges below created exchange tokens to attract and retain customers. Though they trade like stocks and have a value of over $60 billion, none represent ownership in their affiliated platforms.

Exchange Token SymbolHeadquartersMARKET CAPITALIZATION ($ million)12-MONTH PRICE CHANGE

TOKEN UTILITY AND PERKS

BinanceBNBnone, “remote first”
$45,977
-55%

Trading discounts, access to earning higher rewards and token sales, VISA card rewards from VISA merchant network, better loan terms

OKXOKOSeychelles$4,651
-31%

Trading discoounts, access to token sales, payment from crypto to network of merchants

Uniswap **UNINew York$4,188
-78%

UNI tokens govern a platform that rewards members through revenue sharing of fees earned.

Crypto.com
CROSingapore$2,024
-78%

Trading discounts, Crypto.com VISA rewards on purchases, higher yield on staking, revenue sharing, access to buy rare collectible NFTs

Tokenize XchangeTKXSingapore$803
-16%

Trading discounts and possibly free trading when combined with VIP program, double earning program access, zero fee withdrawals

HuobiHTSeychelles$699
-47%

Trading discounts of up to 65% when combined with VIP program, HT staking yield of 2.5%, network revenue sharing

KucoinKCSSeychelles$693
-68%

Trading discounts, KuCoin VISA rewards on purchases, higher yield on staking, earn KCS based on network activity

WhitebitWBTLithuana$682
na
Trading discounts up to zero cost trading with higher WBT balances

PancakeSwap **CAKEJapan$590
-78%

Earn CAKE for free with high interest rates, stake CAKE and earn free tokens, access to win collectible NFTs

BTSEBTSEBritish Virgin Islands$562
-41%

Trading discounts, referral bonus boost, chances to earn bonuses, access to select asset management offers

Gate.ioGTnone, 100% remote$538
-52%

Zero trading fee, access to exclusive offers, voting activities, liquidity mining benefits

Synthetix Network **SNXAustralia$392
-83%

SNX staking generates rewards through the network’s “inflationary monetary policy” and through transactions in staked US dollars (sUSD).

FTXFTTBahamas$262
-97%

Trading discounts, staking benefits include higher referral rates and revenue sharing, earn and burn FTT weekly

MEXC GlobalMXSeychelles$87
-69%

Trading discount, MX burn program participation, referral rewards, access to M-Day events and new MEXC launchpad projects.

BidgetBGBSingapore$27
na
Trading discount, earn KOL partnership rewards

BitMartBMXGrand Cayman$16-76%
Trading discount, deflationary token
*A decentralized exchange.
Source: Coinmarketcap, CoinGecko, Forbes, exchange sites.

By Nina Bambysheva, Javier Paz, Michael del Castillo and Steven Ehrlich, Forbes Staff