The bankruptcy of crypto exchange FTX took another turn for the worse this weekend when more than US$600 million mysteriously disappeared from both FTX’s international and US exchanges, amid a halt to withdrawals and asset freezes.
Blockchain forensic analysis firm Elliptic said at least US$477 million appeared to have been stolen in illicit transactions.
FTX said it was investigating “abnormal transactions” after a potential hack.
The Bahamian police and the Bahamas Securities Commission are investigating whether there was any criminal misconduct in the collapse of FTX. Founder Sam Bankman-Fried, who resigned as CEO last week, was questioned by police in the Bahamas, where the international exchange is headquartered.
The Bahamas Security Commission on Friday froze the assets of FTX Group’s Bahamas subsidiary and moved to have a liquidator appointed by the Supreme Court.
FTX Group subsequently filed for bankruptcy protection in the United States.
It is the world’s largest bankruptcy this year involving 134 entities, including one fund in the Cayman Islands that is part of Ledger Holdings.
The international exchange alone was valued at US$32 billion earlier this year. In its bankruptcy filing the group said its assets and liabilities were somewhere between US$10 billion and US$50 billion.
Because the collapse of FTX occurred in just a few days, the bankruptcy filing had very little of the typical information about the state of the business. This is expected to be filed in the coming days.
No preferential treatment
On Saturday, the Commission contradicted statements it said were made by FTX representatives that, “Per Bahamian HQ’s regulation and regulators, we have begun to facilitate the withdrawals of Bahamian funds.
“As such you may have seen some withdrawals processed by FTX recently as we complied with the regulators.”
The Commission said that it had not directed, authorised or suggested to FTX Digital Markets Ltd to prioritise withdrawals for Bahamian clients.
The Commission said under insolvency rules, those transactions could be characterised as preferential payments that would be voided and clawed back.
“In any event, the Commission does not condone the preferential treatment of any investor or client of FTX Digital Markets Ltd or otherwise,” the statement added.
Most senior employees who worked at FTX in the Bahamas have left.
“Secret” customer funds transfer alleged
Reuters reported that Bankman-Fried had previously “secretly” transferred US$10 billion of customer funds from FTX to his trading company Alameda Research.
Of that sum, between US$1 billion and US$2 billion have disappeared, according to records Bankman-Fried shared with other senior executives last Sunday, the news agency said citing the two sources.
In text messages to Reuters, Bankman-Fried said he “disagreed with the characterization” of the US$10 billion transfer, stating that it was “misread” amid “confusing internal labeling”.
Reuters further reported, citing the same sources, the US$10 billion transfer did not raise any red flags because FTX’s bespoke book-keeping system included “a backdoor” that allowed Bankman-Fried to execute commands that could alter financial records without alerting internal auditors and others.
In his text message to Reuters, Bankman-Fried denied implementing a “backdoor”.
The Wall Street Journal reported on Saturday that Alameda’s chief executive officer, 28-year old Caroline Ellison, and other senior FTX officials knew that the crypto exchange had lent Alameda customer funds to help meet liabilities.
Ellison told employees in a video meeting last week that she, Bankman-Fried, and two other executives were aware of the decision to move customer funds to Alameda.
Weak balance sheet
The Financial Times reported FTX International held just US$900 million in liquid assets against US$9 billion in liabilities the day before it collapsed. Many of the less liquid assets are in crypto tokens, like Serum, that are not widely traded and have since declined in value.
The balance sheet shared with prospective investors referenced a negative US$8 billion entry described as a “hidden, poorly internally labled ‘fiat@’ account”.
Bankman-Fried told the Financial Times the US$8bn related to funds “accidentally” extended to Alameda.
Both the potential hack and the company’s weak balance sheet hint at the bleak prospects for the recovery of customers funds in a bankruptcy process that is likely to take years.
The US Securities and Exchange commission, the Commodity Futures Trading Commission and the Department of Justice are investigating how FTX handled customer funds and its crypto-lending activity.
The sudden collapse of FTX has further shattered the confidence of consumers and regulators and represents an existential threat to the crypto industry.
In response, market leader Binance and smaller exchange’s like Cayman-registered Crypto.com, OKX in the Seychelles or Deribit in Panama have plans to publish proof that their liabilities to customers are matched by sufficient reserves.
Binance Chief Executive Officer Changpeng Zhao further suggested launching a crypto recovery fund to help industry players that are facing a liquidity crunch.
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