After a failed takeover attempt, the crypto exchange FTX was on the brink. And now it’s one step further: bankruptcy has been filed in the USA
The bad news about the ailing crypto exchange FTX does not stop. The Bahamian securities regulator announced on Thursday (local time) that it had frozen the assets of FTX Digital Markets. Next, an insolvency administrator could take over the settlement. The supervisory authority has already submitted a corresponding court application.
According to reports, the US financial supervisory authorities SEC and CTFC as well as the US Department of Justice have now started investigations into the matter. The imbalance of the large trading platform for digital currencies such as Bitcoin has kept the crypto market in suspense for days. Many customers fear for their money.
Binance backs out
FTX Digital Markets is a Bahamas-based company from US entrepreneur Sam Bankman-Fried’s crypto empire and operates the struggling crypto exchange FTX.com. According to the Bahamian securities regulator, the company is suspected of embezzling customer funds, among other things. FTX.com had run into liquidity problems after enormous withdrawals of funds. On Wednesday it initially looked as if the competitor Binance would take over the company. But this plan failed, and Binance withdrew from the deal. Without a huge injection of cash, FTX.com now faces bankruptcy.
The crypto platform ran into payment difficulties this week after doubts about capital reserves led to customer flight and billions of dollars in withdrawals. Meanwhile, FTX users in the US are also getting more and more nervous. In fact, FTX’s international and US operations are separate. Bankman-Fried took to Twitter on Thursday to try to calm the situation, claiming that FTX.US is “100 percent liquid”. At the same time, the platform announced that it might suspend trading for a few days. US media also reported that employees in the US were trying to sell parts of the company in a kind of distress sale.
SBF@SBF_FTX19) A few other assorted comments: This was about FTX International. FTX US, the US-based exchange that accepts Americans, was not financially impacted by this shitshow. It’s 100% liquid. Every user could fully withdraw (modulo gas fees etc). Updates on its future coming. via Twitter powered by
The situation is becoming increasingly critical for customers and investors. Unless Bankman-Fried surprisingly finds a few billion dollars somewhere, at least FTX.com should be beyond rescue. The 30-year-old crypto entrepreneur had assured on Monday that all deposits were protected and would be paid out in full. He dismissed rumors of a shortage of money as false. These tweets have since been deleted.
From child prodigy to pariah
Bankman-Fried founded FTX in 2018. The exchange specifically focused on trading cryptocurrency derivatives. One of the early investors was the Binance exchange, which also played a role in the FTX crash. The crypto hype of 2020/21 gave FTX and the network of companies around it a huge boost and made Bankman-Fried a multi-billionaire. FTX had one million customers at one point, attracted big-name investors like Softbank and Seqioa Capital, and was still valued at $32 billion as of January this year.
And Bankman-Fried was considered the child prodigy of the crypto industry, always in dialogue with politicians for crypto regulation. When he stepped in for troubled crypto lending platforms over the summer, the English-language financial press was already drawing parallels with legendary US banker John Pierpont Morgan. Comparisons that no one would draw at the moment.
How the Binance boss summoned a storm
The flawless picture suffered major cracks in early November when a report by the specialist service Coindesk highlighted Bankman-Fried’s separately managed investment firm Alameda Research. Citing internal documents, Coindesk wrote that a significant portion of Alameda Research’s $14.6 billion asset balance sheet consists of FTX tokens, which Bankman-Fried’s own exchange issues.
The report was likely referenced by Binance exchange CEO Changpeng Zhao when he announced last Sunday that he was divesting a large number of the same FTX tokens in light of recent revelations. With further tweets, in which he drew parallels to the stablecoin disaster, Terra, he should have fueled the doubts about FTX considerably. Market panic, mass withdrawals, and repeated freezes on withdrawals ensued, leaving FTX a wreck.
Zhao emphasized that he was not interested in a public fight at all. It cannot be ruled out that in a more strictly regulated market with such behavior he would have a procedure for market manipulation on his neck. In the wild west of the crypto business, no consequences are to be expected for the time being.
Where is the liquidity problem?
It is still unclear at the moment how exactly a liquidity crunch could have come about. Pure stock exchange business should actually have no problems servicing all customer withdrawal requests – all deposits should be present in user accounts one-to-one.
The Wall Street Journal, citing insiders, writes that FTX customer funds went to Bankman-Fried’s investment company Alameda Research as a loan. A total of probably $10 billion, more than half of the $16 billion in customer deposits. Bankman-Fried later called it a bad decision, writes the Wall Street Journal. Alameda used the money for risky trading strategies. As recently as Thursday, Bankman-Fried had declared that it wanted to close Alameda.
It is not yet possible to say which transactions were still being conducted in Bankman-Fried’s company conglomerate. Should bankruptcy proceedings arise, it will then be up to the administrators to trace all transfers and connections of this crypto empire. The Financial Times has already published a report on its attempts to process the complex network. In comparison, the company network of the bankrupt Lehmann Brothers was a model of simplicity, writes the Wirtschaftsblatt. At that time, the insolvency administrators would have needed 18 months until they had fully developed it.
No chain reaction for now
Apart from a violent price tremor, which eased somewhat on Friday, the FTX crash does not appear to be dragging any other large companies into the abyss for the time being. Only the interest rate platform Blockfi, rescued by FTX, stopped making withdrawals again. Numerous institutions in the crypto industry such as Tether, Coinbase, or Kraken have already spoken out and stated that they were not affected at all or only minimally, reports the specialist service The Block. The investment company Sequoia Capital has already stated that it will write off its shares in FTX completely and post a loss of 213.5 million US dollars.
Some cryptocurrency exchanges are already secretly insolvent, Sam Bankman-Fried told Forbes magazine in June. He spoke of third-rate stock exchanges, but in today’s light, it seems like a self-statement. Now he confessed on Thursday: “I screwed it up.” And to an unnamed “sparring partner” thought to be Binance CEO Zhao, he said, “Played well; you won.”SBF@SBF_FTX
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 via Twitter