FTX’s desperate scramble for investors to repair its balance sheet has ended in bankruptcy.
With regulators around the world freezing the troubled exchange’s assets, it was only a matter of time.
Sam Bankman-Fried has resigned as CEO and is replaced by John J Ray III.
Ray said: “The immediate relief of Chapter 11 is appropriate to provide the FTX Group the opportunity to assess its situation and develop a process to maximise recoveries for stakeholders.”
Bloomberg TV reports that FTX liabilities are anywhere between $10 billion and $50 billion.
The stock price of FTX competitor exchange Coinbase is up 9% to $55.
FTX assets frozen around the world
The Securities Commission of Bahamas had already frozen the assets of FTX Digital Markets (FDM), which acts as the service provider for other FTX entities.
That was followed by Japan’s Kanto Local Finance Bureau – responsible for regulating crypto exchanges in the country – banning FTX from taking deposits from clients, although it is hard to imagine anyone entrusting their money with FTX at this juncture.
Australia’s financial regulator followed along, putting FTX Australia into administration, the Australian Financial Review reported.
The main exchange operation, that runs FTX International, is FTX Trading and it is headquartered in Antigua and Barbuda in the Caribbean.
Cryptonews has reached out to the Antigua and Barbuda Financial Services Regulatory Commission to see if it has plans to move against FTX Trading Ltd, but we had not received a reply before publication and the filing for bankruptcy by the FTX group.
With clients of the FTX exchange in the frame to suffer substantial losses and a possible total wipeout, regulators are attempting to try and secure the funds for those affected.
The Bahamas authority stated in its press release that FTX was now in provisional liquidation:
The Commission is aware of public statements suggesting that clients’ assets were mishandled, mismanaged and/or transferred to Alameda Research. Based on the Commission’s information, any such actions would have been contrary to normal governance, without client consent and potentially unlawful.
Since the unfolding of events involving FDM, the Commission has proactively dealt with the situation and continues to do so. The Commission determined that the prudent course of action was to put FDM into provisional liquidation to preserve assets and stabilize the company.
Although opaque relationships between the various FTX entities is complicating matters, it is thought that FTX Digital Markets lent billions to Alameda Research, the trading arm that is now in the process of being wound up, according to CEO Sam Bankman-Fried.
The amount that FTX needed to raise from investors to remain solvent was variously reported to be in the region of $4 to $8 billion.
Crypto prices crash – contagion and chaos is spreading
Crypto lender BlockFi has suspended withdrawals citing a “lack of clarity”. In a Twitter statement it added that it was “not able to operate business as usual”.
Back in June this year it was FTX that bailed out BlockFi, advancing a loan of $250 million to BlockFi.
Before that intervention, FTX lent $485 million in cash and bitcoin to crypto exchange Voyager Digital.
Both Voyager and BlockFi had at that time been laid low by the implosion of the TerraUSD stablecoin and Luna.
Market participants will be wondering if Voyager will be the next company to be caught up in the contagion from FTX’s collapse.
Also, the deal between BlockFi and FTX was a revolving credit facility, so that could be problematic for returning to normal operations going forward.
Crypto price bounce after CPI data weakens
Continuing fears on the extent of the contagion led to crypto prices dipping again after yesterday’s CPI inflation-induced mega rally in risk assets. Bitcoin fell back below $17,000 but was trading at $17,355 until news of the FTX bankruptcy broke. BTC is trading at $16,841.
BNB, the trading coin of the Binance exchange is down 5% at $284, while FTX Token (FTT) is down 22%% in the past 24 hours to $32.62, but is down 90% on a week view.
Alameda Research acted as a major market maker in many crypto markets, which means the counter-party risks could be immense.
Genesis Trading is one of the first to break cover on its FTX exposure, admitting that its derivatives business stood to lose $175 million, although it said its market making activities were not affected.
For more good measure Genesis added in another tweet: “Furthermore, our operating capital and net positions in FTX are not material to our business.”
U.S. SEC looks ready to come down hard on unregistered crypto firms
The FTX implosion looks like it could be the straw that has finally broken the camel’s back, as patience among US regulators snaps – although it could be argued that both the agencies and Congress had been too lackadaisical in bringing forward and implementing legislation.
But the U.S. authorities have been getting more active on the enforcement front and that looks like it will now move into overdrive, as SEC Chair Gary Gensler’s comments on CNBC’s Squawk Box on Thursday, suggest:
“When you mix together a bunch of customer money, non-disclosure and leverage – borrowing against it – inside these companies’ trading, investors get hurt…”
Gensler continued: “This is a very inter-connected world in crypto, with a few concentrated players at the middle – and one of the those concentrated players had the toxic combinations of lack of disclosure, customer money, a lot of leverage – meaning borrowing – and then trying to invest with that. And then when markets turned on them it appears that a lot of customers lost money.
Pushed on why the SEC had not moved more forcefully to protect investors, Gensler, in part, said:
“This is a field that is significantly non-compliant but it has got regulations and those regulations are often very clear and we have multiple paths.
“And one path is working with those crypto exchanges, crypto lending platforms and to get them properly registered. And why that matters is so that the public is protected. But we have another path is enforcement. We’ve brought… at least a 100 actions.
“We’ve been very clear in these various enforcement actions.”
“The laws are clear. Look the runway is running out. The American public and investors around the globe are getting hurt. So what I would say is come in and talk to us, the laws are clear.”
Better regulated exchanges and DEXs to be winners from FTX bankruptcy
Such is the blow to retail confidence in centralised exchanges, the most under-regulated ones are likely to suffer outflows of client funds in preference for more strongly regulated competitors such as Coinbase, Kraken and Bitstamp.
Although it has been a mantra of crypto not keep your funds on exchanges, except that needed for trading, on the basis that if it is “not your keys, it is not your crypto”, many retail investors have not heeded those warnings.
Decentralised exchanges (DEXs) such as Uniswap and Pancakeswap, as well as hardware wallet storage device vendors, are likely to be among the beneficiaries of the FTX failure.
Shelter from the storm and secure market-beating returns
Although confidence has been shaken in exchanges and other financial institutions such as lenders, the asset class itself remains as it always was. That means if you look in the right areas, this could be a good time to invest.
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