Looming FTX collapse deepens crypto winter

The fourth-largest crypto exchange, FTX.com, is on the brink of collapse, as its head Sam Bankman-Fried announced Wednesday the firm could face bankruptcy if it does not secure funding to cover a shortfall of as much as US$8 billion.

FTX faced a run on the exchange by depositors and suspended withdrawals on Tuesday. What was first assumed to be a liquidity crunch has turned into a serious solvency risk for the exchange.

In an update to users, Bankman-Fried said on Thursday FTX International had enough assets to cover client deposits but some of them were very illiquid. FTX US, a separate exchange which accepts American depositors is unaffected, he added.

FTX is still looking for debt or equity backers to plug the gap, but such a deal is increasingly unlikely.

Binance, the world’s largest crypto exchange and a main competitor, walked away from a potential rescue on Wednesday after the financial hole at FTX turned out to be bigger than expected.

In addition, reports emerged that both the US Securities and Exchange Commission and the US Commodity Futures Trading Commission are investigating whether FTX handled customer funds properly.

According to Bloomberg, FTX’s relationship with other parts of Bankman-Fried’s crypto empire, including his trading house Alameda Research, is also under scrutiny.

“Our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help,” Binance said in a statement.

Liquidity crunch

FTX’s liquidity crunch started, at least in part, when Changpeng Zhao, the founder of Binance, announced last weekend that his company would sell about $530 million of FTX’s utility token FTT, which Binance retained after it exited a 2019 investment in the company.

Zhao tweeted on 6 Nov. that liquidating FTT was “just post-exit risk management”, and “learning from LUNA”, the sister coin to algorithmic stablecoin TerraUSD that collapsed in May of this year.

“We gave support before, but we won’t pretend to make love after divorce. We are not against anyone. But we won’t support people who lobby against other industry players behind their backs,” Zhao added.

Crypto-focused news site CoinDesk reported last week that Bankman-Fried’s trading firm, Alameda Research, held much of its balance sheet assets in FTT.

The report suggested that based on a leaked $14.6 billion balance sheet, Alameda’s single biggest net equity asset was a centrally controlled token issued by a related company.

Concern around FTX deepened as Binance started to sell FTT and the value of the token dropped 15%. On Wednesday it had dropped to about $2.41, a fall of more than 95% from the peak it reached earlier this month.

Citing internal FTX messages, Reuters reported that by Tuesday, the exchange had seen net withdrawals of $6 billion in the previous 72 hours.

On Thursday, Bankman-Fried announced he was shutting down Alameda.

As recently as January this year, FTX was valued at $28 billion in a funding round.

FTX is backed is backed by prominent investor heavyweights, including BlackRock, SoftBank, Canada’s Ontario Teachers’ Pension Plan and hedge fund billionaires Paul Tudor Jones and Izzy Englander.

Venture Capital firm Sequoia Capital announced it would mark down its $214 million investment in FTX to zero.

Crypto fortune turned fast

It is quite a turn of events for the 30-year-old Bankman-Fried, whose personal wealth was once estimated at $16 billion.

Only a few months ago he was celebrated as the potential hero, coming to the rescue of several crypto firms caught out by the collapse of Terra/Luna and a wider sell-off in the digital asset markets.

While not quite a white knight, Bankman-Fried’s FTX bailed out digital asset lender BlockFi with $240 million, bid for distressed assets at Voyager Digital and considered buying failed crypto lender Celsius.

FTX’s troubles are now heaping more pressure on the digital asset markets which have suffered a precipitous decline over the past year. Bitcoin, the bellwether of the industry, on Wednesday dropped below $16,000 for the first time in two years, compared to an almost $70,000 high in November 2021.

“Given the size and interlinkages of both FTX and Alameda Research with other entities of the crypto ecosystem, including DeFi platforms, it looks likely that a new cascade of margin calls, deleveraging and crypto company/platform failures is starting – similar to what we saw last May/June following the collapse of Terra,” JPMorgan said in a research note on Thursday.

The founder of FTX had long styled himself as a proponent of the pro-regulation, reliable side of the crypto market. A political donor to both the Democratic and the Republican party, he was regarded by some as one of the industry’s main lobbyists for sensible regulation.

FTX commercials ran during the Super Bowl and the company logo adorns the shirts of US MLB baseball umpires as well as the FTX arena of NBA basketball team Miami Heat.

Crypto chill arrives in the Bahamas

In the Bahamas, where FTX relocated to from Hong Kong, the crypto exchange was planning a $60 million development for a new headquarter, able to house 700 staff. Many of those employees were promised to be hired locally.

The digital asset exchange also sponsors Crypto Bahamas, an annual invite-only conference, where Bankman-Fried this year in April shared the stage with former US President Bill Clinton and former UK Prime Minister Tony Blair in a panel discussion.

The company is believed to currently employ 50 to 60 staff in the country.