A big cryptocurrency investment by the Ontario Teachers’ Pension Plan is in jeopardy amid the latest market turmoil for the sector.
Teachers, which is Canada’s third-largest pension fund, invested in trading platform FTX Ltd. a year ago at an announced US$25-billion valuation. Teachers watched Tuesday as FTX sold itself to rival Binance Holdings Ltd. after facing what Binance called a “liquidity crunch” for FTX.
Tokens such as bitcoin plunged to multiyear lows as investors rushed to exit the digital asset market upon Tuesday’s news from FTX.
The situation marks the second such stumble for a major Canadian pension plan in the world of crypto. In August, the Caisse de dépôt et placement du Québec completely wrote off its US$150-million investment in crypto platform Celsius Network Ltd., which filed for bankruptcy protection in July.
Bahamas-based FTX is the second-largest crypto-exchange in the world, with Binance in first place, according to industry data from CoinMarketCap, the leading price-tracking website for cryptocurrencies. Binance, which was initially based in China but now claims no official headquarters, acquired CoinMarketCap in 2020.
Changpeng Zhao, chief executive of Binance, tweeted on Tuesday that FTX had asked his company for help that afternoon. “There is a significant liquidity crunch. To protect users, we signed a non-binding LOI intending to fully acquire FTX.com and help cover the liquidity crunch,” he wrote, referring to a letter of intent.
FTX’s chief executive Sam Bankman-Fried confirmed the agreement, tweeting that only the non-U.S. businesses of FTX and Binance will be affected by Tuesday’s deal. He said the U.S. operations for both companies are separate and will be unaffected, noting that the deal has not closed and the companies have more due diligence to do.
Terms of the deal were not known, but the assertion of a “liquidity crunch” suggests the value of Teachers’ equity in FTX is at risk.
“Given the fluid nature of the situation we have no comment right now,” Teachers’ spokesperson Dan Madge said Tuesday. He declined to say how large the investment was but noted that FTX was not included in the pension plan’s list of investments of more than $200-million in its 2021 annual report.
The situation also calls into question FTX’s plans to officially launch its business in Canada by acquiring Bitvo Inc., a Calgary-based crypto-exchange that is regulated by all 13 provincial and territorial securities commissions across this country. That deal, for which neither FTX nor Bitvo would reveal the exact terms or valuation, was expected to close in the third quarter this year, pending regulatory approval.
Reached by phone Tuesday, Bitvo chief executive Pamela Draper declined to comment about the FTX situation or how it would affect her deal with that company.
A spokesperson for FTX declined to comment on Tuesday. Binance did not respond to requests for comment from The Globe and Mail.
On Tuesday, bitcoin fell sharply, trading at around US$18,000, the lowest level for that token since 2020. It is a far cry from the price of bitcoin last year, which in November, 2021, traded at US$68,000. Other cryptocurrencies also plunged Tuesday, with ether dropping to around US$1,300, which is 16-per-cent lower than the day before. The largest declines were posted by FTX’s own token, FTT, which fell more than 75 per cent, trading at around US$5.27 on Tuesday.
The Caisse bought in to Celsius as part of a US$400-million funding round that valued the company at about US$3-billion in late 2021.
“In this case, we came in too early,” Charles Emond, chief executive of the Caisse, said in August. “I’d say maybe there was too much focus on the company’s potential than on the real state of affairs,” he said, when Caisse announced the writedown.
Teachers first bought its FTX stake in October, 2021, as part of a US$420-million funding round. It was one of 69 investors, but FTX listed it first in its announcement of the financing. Teachers has never disclosed exactly how much it invested.
The pension plan housed the investment in its Teachers’ Innovation Platform, a portion of the portfolio dedicated to high-growth, yet high-risk, investments. As of June 30, the $8.2-billion portfolio represented just 3 per cent of Teachers’ $242.5-billion in assets.
Teachers, which manages the pensions of Ontario’s 333,000 active and retired teachers, reported a 1.2-per-cent return for the six months ended June 30. By way of comparison, Royal Bank of Canada’s RBC I&TS All Plan Universe saw defined benefit pension plan assets – as measured by a typical mix of publicly held stocks and bonds – shrink 14.7 per cent over that period.
Teachers chief executive Jo Taylor told Reuters in mid-September that the FTX investment was, “In terms of the risk profile, probably the lowest risk profile you can have in that it’s everybody else is trading on your platform.”
He said the investment was part of Teachers’ strategy to learn about the crypto business and whether it gives the right balance of risks and returns. “I don’t think we have the answer to that question yet,” Mr. Taylor said.