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What Is a Crypto Exchange Token and How Did It Help Blow up FTX?

The FTT exchange token played a key role in the downfall of the crypto exchange FTX and affiliated trading firm Alameda Research. It was the use of FTT to inflate both entities’ balance sheets, reported by CoinDesk’s Ian Allison on Nov. 2, that raised the first doubts that sparked the collapse.

FTT may have been core to another aspect of the FTX fraud, serving as notional (but actually worthless) “collateral” for loans of customer funds made by FTX to bail out Alameda.

This article is excerpted from The Node, CoinDesk’s daily roundup of the most pivotal stories in blockchain and crypto news. You can subscribe to get the full newsletter here.

But what are exchange tokens? What role do they serve for the exchanges that issue them? How should they be treated under modern accounting standards? And how do they advance the crypto industry’s agenda of decentralization?

To answer the last question first: Exchange tokens are by and large not decentralized, and, if anything, their goal is the opposite of decentralization. They are, at bottom, an incentive to keep using the same centralized exchange. Holders can use them to get discounts on trading fees, rewards and early access to offerings. Despite chatter on Twitter, the FTT token did not distribute a share of FTX platform revenue or give holders any governance rights, and neither do most exchange tokens.

Technically, exchange tokens are nothing special. FTT was tracked as an ERC-20 token on Ethereum, a kind of token that pretty much anyone can create with limited technical skill. BNB, Binance’s exchange token, is tracked on its branded BNB Chain, a blockchain that began life as an Ethereum fork but has merged with a separate permissioned blockchain.

See also: Binance Seeks to Rev Up Its BNB Blockchain

That’s in contrast to one of the concepts that may have inspired the creation of exchange tokens. Starting roughly in 2016-2017, there was a lot of discussion in crypto of “utility tokens” that would be used to incentivize and pay nodes for decentralized computing services. Though the term seems to have…

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