The rapid collapse of cryptocurrency exchange FTX sent several shockwaves through the crypto world on Thursday, with authorities now investigating the firm for potential securities violations and analysts bracing for a further drop in crypto prices.
FTX had earlier this week agreed to sell itself to larger rival Binance after experiencing the cryptocurrency equivalent of a bank run. Customers fled the exchange after becoming concerned about whether FTX had sufficient capital.
A person familiar with the matter said the Justice Department and the Securities and Exchange Commission (SEC) are investigating FTX to determine whether any criminal activity or securities violations were committed.
This week’s developments marked a shocking turnaround for FTX CEO and founder Sam Bankman-Fried, who earlier this year was hailed as something of a savior when he helped prop up a number of cryptocurrency companies that ran into financial trouble.
The investigation into Bankman-Fried and FTX by those in the crypto world as well as securities regulators centers on the possibility that the firm may have used customer deposits to fund bets at Bankman-Fried’s hedge fund, Alameda Research. In traditional markets, brokers are expected to segregate client funds from other corporate assets. Violations may be punished by supervisory authorities.
Meanwhile, investors in popular digital currencies got some relief from the latest crypto crisis on Thursday after days of selling. Bitcoin rose to $17,691 after falling as low as $15,512 on Wednesday. Ethereum rose 12 percent. The gains came after a government report showing inflation eased slightly last month gave a boost to riskier assets.
The crypto world had hoped that Binance, the world’s largest crypto exchange, might be able to save FTX and its depositors. But after Binance had a chance to look at FTX’s books, it became clear that the smaller exchange’s problems were too big to handle.
A person familiar with the trading between FTX and Binance described the ledgers as a “black hole” where it was impossible to distinguish between the assets and liabilities of the FTX exchange and those of Alameda Research. That person spoke on condition of anonymity because they were not authorized to speak publicly about the matter.
That person said Bankman-Fried committed “the ultimate sin” by tapping FTX’s custodial assets to fund Alameda Research.
In a further illustration of FTX’s financial difficulties, Bankman-Fried asked its investors on Wednesday for 8 billion. USD to cover withdrawal requests, according to The Wall Street Journal, citing unnamed sources.
In a series of tweets on Thursday, the FTX founder and CEO said he didn’t have enough cash to cover payouts and that he was more leveraged than he had thought.
The recent crisis in the crypto industry led to renewed calls for stricter regulation. White House press secretary Karine Jean-Pierre said the FTX development “highlights why prudent regulation of cryptocurrencies is indeed necessary. The White House, along with the relevant agencies, will again closely monitor the situation as it develops.”
The collapse of cryptocurrency’s third-largest exchange is likely to cause further disruption throughout the crypto world, analysts say, meaning Thursday’s rally may be temporary.
“The liquidation of FTX, as well as its shock of confidence in the system, will cause crypto prices to fall even further, leading to “a new cascade of margin calls”, analysts at JP Morgan said in a note to investors. This would correspond to the sell-off that followed the collapse of stablecoin Terra earlier this year, with prices continuing to fall weeks after its failure.
“This deleveraging is likely to last at least a few weeks unless a bailout for Alameda Research and FTX is quickly agreed upon,” JP Morgan analysts wrote.
The crypto industry is waiting to see what other companies are affected by the FTX collapse. Venture capital fund Sequoia Capital said Thursday it is writing down its total investment of nearly $215 million. in FTX.