Crypto exchange FTX teeters on verge of bankruptcy

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FTX
FTX Cryptocurrency Image Credit: twitter.com

Crypto exchange FTX teeters on verge of bankruptcy

New York:  A 30-year-old entrepreneur, once called a modern-day J.P. Morgan, saw his digital empire, which included billions of his fortune, disappear in less than a week. This death spiral has shaken the foundations and trillion-dollar crypto industry.

Sam Bankman-Fried apologized to customers and investors of FTX (the exchange platform he created in 2019) on Thursday.

Failures are common in the complex, unregulated crypto world. However, FTX isn’t your typical crypto startup. The industry has been given too much credit for its near collapse this week, according to many critics.

What happened to FTX and why is the crypto community so worried? Although there are many uncertainties.

Crypto exchange FTX teeters on verge of bankruptcy after being accused of faking trading volume and wash trading. The accusations come from a former employee, who claims that the exchange was faking as much as $6 billion in daily trading volume.

If true, this would mean that FTX was responsible for over 90% of all fake trading volume on cryptocurrency exchanges. FTX has denied the accusations, but the damage may already be done.

How fishy finances led to one company’s downfall

According to the report, Alameda’s business was on unstable financial footing. The report revealed that the majority of Alameda’s assets are held in FTT, a digital token created by FTX, Alameda’s sister company.

Investors should be concerned as both companies appeared to be separate on paper. Alameda’s large holdings of the token suggested that the two companies were more closely connected.

Binance’s CEO, FTX’s larger competitor, announced on Sunday that his company would be liquidating $580million worth of FTX assets. This set off a torrent of drawdowns that FTX did not have the cash to facilitate.

In today’s business world, companies are always looking for ways to cut costs and increase profits. Sometimes, this can lead to unethical practices, such as using false information to secure loans or investment funds.

This was the case with FTX Company, which falsified information in order to secure a loan from a bank. However, the company’s financial troubles did not stop there. The company also engaged in other questionable practices, such as using shell companies to hide assets.

Rival companies join forces to form a new partnership

FTX
FTX Image Credit: ftx.com

On Monday, the crypto market was abuzz with concerns over Alameda’s and FTX. Bankman Fried, however, was adamant and tweeted that FTX’s assets were “fine.” His tweet had fueled the run-up in FTX deposits.

The two had clearly been in conflict. This is why the pair announced a tentative agreement Tuesday for Binance to bail out FTX.

“This afternoon, FTX requested our help,” Zhao tweeted that afternoon. He noted that there was a “significant liquidity crisis” at the company and that Binance would need to do corporate due diligence before proceeding with any deal.

Binance started to backtrack almost immediately after taking a look under the hood.

During this time, Bankman-Fried also saw his personal fortune plummet. The Bloomberg Billionaire Index shows that Bankman-Fried’s net worth plunged 94% from over $15 billion to under $1 billion in one day.

This is the largest single-day loss recorded by the index. His wealth estimate was based on the assumption Binance would eventually bail out FTX. This is where most of Bankman-Fried’s personal assets are located. His net worth could be further reduced.

Flip-Flop making a comeback

As investor anxiety over the FTX bailout spread, cryptocurrencies continued their slide on Wednesday. The two most popular tokens, Bitcoin and Ethereum, have both fallen to their lowest levels in over two years.

After media reports revealed that Binance was considering walking away from the deal, the selloff grew. On Wednesday afternoon Zhao tweeted a harsh assessment of FTX’s issues:

In the beginning, we hoped to be able to support FTX’s customers to provide liquidity. But the issues are beyond our reach and ability to help.

He also mentioned allegations of “mishandled money” and US regulator investigations.

Binance was out. FTX lost its best chance at a lifeline.

What we know about FTX’s disaster control plan

Multiple reports claim that FTX is in serious financial trouble. However, the full extent of its financial woes is not yet known. Bankman-Fried, reportedly, told investors Thursday that the company was in danger of bankruptcy without a quick injection of equity.

Bankman-Fried has been trying to raise funds since the Binance deal collapsed. Twitter user Bankman-Fried stated that they were in talks with “a variety of players” on Thursday.

He wrote that he was spending the week raising liquidity and apologized. “Every penny” plus any collateral will be used to make users whole. Investors and employees will then follow.

How greed caused FTX’s downfall

Despite being a reliable, low-risk investment portal FTX appears to have been built around a complicated, highly risky type of leveraged trading.

Customers put their money in to trade cryptocurrencies. Customers deposited their money to engage in crypto trading.

Matt Levine, a Bloomberg columnist, put it another way. “FTX took customers’ money and traded them for a pile of magic beans. Now the beans are worthless.”

FTX was experiencing the crypto equivalent of a bank run at the end of the day. Customers wanted their money out and FTX couldn’t provide it.

The Federal Deposit Insurance Corporation insures deposits. Traditional finance protects customers’ funds. However, the FDIC doesn’t insure stocks and cryptocurrencies. This leaves FTX’s investors and customers in doubt.

The Ontario Teachers’ Pension plan was one of the investors. It said that it had invested $95million in both FTX International as well as its US entity to “gain small-scale exposure in an emerging area of the financial technology sector”. A statement Thursday stated that the plan would not suffer any losses on its investment since it makes up less than 0.05% of its total net assets.

What’s the future of the global economy?

Bankman-Fried announced Thursday that Alameda Research will cease trading, while FTX will focus on emergency fundraising.

FTX might have limited options after Binance, the largest exchange in the industry, refused to rescue its rival.

In a memo obtained from the New York Times, Bankman-Fried informed staff that FTX had met with Justin Sun, a crypto entrepreneur. Justin Sun tweeted that he was working to “find a solution” for FTX.

According to Bloomberg, US authorities are currently investigating FTX’s operations, at the US Justice Department Securities and Exchange Commission. On Thursday evening, BlockFi, a crypto lending platform, stated in a tweet, that it was “limiting platform activities, including pausing clients withdrawals as permitted under our Terms.”

While we intend to communicate as often as possible in the future, we anticipate communication will be less frequent than that which our clients and other stakeholders are used to.

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