FTX Tokenized Gamestop, AMC Stock On The Day Of Their Short Squeeze

In the fourth week of January of 2021, the stocks for the video game reseller Gamestop (GME) and the movie theater chain AMC shot up to become the highest traded stocks on the Dow Jones for a time. The surprising and maybe nonsensical movement in otherwise forgotten companies was driven by online chatter in forums like Reddit’s WallStreetBets that referred to them as “memestocks.”

Gamestop’s stock price went from around $1 a share to over $300 at a time in January. The same time, AMC’s stock would go from $2 to $3 a share to almost $50 a share.

Hedge funds that had shorted those stocks—which were a lot as Gamestop was the most shorted stock in the market at the time—took a huge loss. By driving up the price for a fixed time, the memestock investors perpetrated a short squeeze—when a stock’s price rises enough that it triggers the short sellers to buy the stock at the current high value and take a large loss in the process.

The whole process didn’t make much sense. Neither company was expected to make any kind of turnaround in growth or profit. AMC’s stock price has since collapsed to what it was pre-short squeeze. Gamestop’s stock price has come down considerably, but still above what it was pre-short squeeze. Anybody who had bought up the stock during the squeeze and hadn’t sold would have taken a massive loss.

Prior holders of the stock who sold during the squeeze might have made out. Executives of AMC would sell a whopping $864 million worth of the stock following the price jump. In comparison, that’s over five times the value of stock sold by insiders in the prior five years.

Gamestop’s new CEO—Ryan Cohen, previously the CEO of online pet food retailer Chewy and a major investor in Gamestop—was ostensibly going to turn Gamestop into the Amazon of video game sales. But Cohen was only there a short time and left within a few months. He joined the company without taking any kind of compensation and put his own money into the stock. Prior to the short squeeze, he had about $19 million invested based on SEC filings through Insider Monkey, and he invested an additional $10 million following the short squeeze.

Tokenization During the Short Squeeze

On the same day of the largest price spike, January 27th, FTX would release their tokenized version of the GME and AMC stocks—crypto tokens based on the value of the stock as well as GameStop March 2021 Futures. A relatively new invention, tokenized stocks, sometimes called ‘stokens,’ don’t allow ownership of a stock; they simply track the price of the stock and can be exchanged for the stock at request. FTX partnered with a German broker-dealer, CM Equity, that would handle the stock ownership transactions.

But no total number of coins minted or total market cap is listed, and FTX does not appear to have a prospectus online that shows the number of coins available.

FTX is not registered with the SEC. It is registered with the German securities regulator, Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin), but no FTX securities appear in BaFin’s database.

Other crypto exchanges like Binance would enable tokenized stocks as well—usually for heavily traded tech companies, like Apple, Tesla, and Netflix—but FTX appears to be the only one that offered Gamestop and AMC stocks.

Tokenizing Gamestop might have been part of a business agreement between FTX and Gamestop. The two companies developed an FTX gift card connected to crypto that could be used on the Gamestop platform for video game related purchases. That venture has since been canceled with the collapse of FTX.

Trillions of Wrapped Tokens

At the same time as FTX’s stokens appeared on the market, two other coins connected to the memestocks, Wrapped Gamestop and Wrapped AMC, would appear on cryptocurrency markets. Wrapped tokens ostensibly track the price of a stock, but there is no guarantee that they do, and there is no direct way to exchange them for shares.

Over 8 trillion wrapped AMC tokens would be issued in total, and it was heavily traded according to crypto tracking site Etherscan. Compare that to the actual outstanding shares of AMC stock at the moment, 513 million—nowhere close to 8 trillion.

With so many AMC wrapped coins issued, there would be no way that it could track the actual value of the stock and most likely the stock price was consistently plummeting as more coins were minted. At current exchange rates, it is 4.8 trillion AMC wrapped tokens per dollar.

Anybody who would have paid the traded stock price, like $7.60, for an AMC wrapped token thinking it was connected to the AMC stock price in any way would have paid billions of times more than what it was actually worth.

Yet, there appears to be some kind of connection between the price of the tokenized stock and the wrapped token. For AMC, the tokenized stock traded far below the actual stock price until the day the wrapped token was issued in June of 2021. Then they tracked almost dollar for dollar for a time.

For Gamestop, the tokenized stock price would trade over a $100 above the actual stock price for months, only to suddenly collapse to the same value as the stock on July 24th.

FTX’s Wrapped Coin Holdings

Despite not being connected to the stock, FTX is the largest holder of the Gamestop Wrapped coin, with 6.5 million coins held out of 10 million issued. And Alameda Research, FTX’s hedge fund arm, bought at least 2.5 million of the AMC Wrapped tokens on the day of AMC’s big stock spike—about $2,100 worth at the time according to Etherscan data.

FTX did offer their own wrapped tokens for AMC and Gamestop, but they weren’t popular and trading volume was minimal. The largest holder of FTX’s AMC wrapped coin is FTX, which holds 25 percent of coins.

Regulations and Tokenized Stocks

While there were some restrictions on who could trade tokenized stocks with FTX—no U.S. citizens allowed unless they are investing millions, and customers had to adhere to “know your customer” banking rules that included providing proper identification—tokenization allowed a variation on 24-7, instant, programmatic stock trading like that of other cryptocurrencies without incurring brokerage fees.

It enabled easier access to stock markets for foreign investors and enabled fractional trading—trading in fractions of a share of a stock. FTX also allowed ownership of a tokenized stock to be used as collateral for other investments. But they offer no shareholder rights, fewer U.S. securities law protections, and prices on a tokenized stock can diverge substantially from the stock price.

By using a German broker-dealer, they are overseen by German securities regulators. In April of 2021 Binance was issued a warning by the German regulator Bafin for not publishing a financial prospectus for the coins it issued.

But according to SEC rules, tokenized stocks still need to be registered with the agency as securities, and FTX had yet to register with the SEC. They had been working on buying out another crypto company, BlockFi, to gain access to their SEC registration.

The trading platform used heavily during the Gamestop short squeeze, Robinhood, supported the use of tokenized stocks as they potentially would have helped the company avoid a temporary shutdown during the squeeze. Because of a two day delay in receiving funds from retailers, the platform could not cover all of its payments and had to pause transactions. According to a Robinhood representative at the time, that two day transaction limit would not exist with tokenized stocks.

But stock tokenization is a contentious topic. The SEC and CFTC both charged the crypto firm Abra for selling wrapped tokens—cryptos that would contractually mimic stock prices—under the reason that they were offering unregistered securities without enough effort to ensure their customers were not U.S. citizens. There were also warnings that insider trading laws could still apply to trades of tokenized stocks.

Exchanges Shut Down Stoken Trading

FTX’s competitor, Binance, shut down their tokenized stocks in July of 2021 after scrutiny from German regulators. Binance was also using the same German company, CM Equity, to clear trades. FTX has since removed their page on tokenized stocks.

Another crypto exchange, Bittrex, also shuttered their tokenized securities, which operated through an agreement with Alameda following the FTX fallout, and will refund all current holdings.