The rapid collapse of cryptocurrency exchange FTX sent more shockwaves through the crypto world on Thursday, as authorities are now investigating the company for potential securities breaches and analysts prepare for a further slide in crypto prices.
This week FTX approved Selling itself to its biggest competitor, Binance After trying the cryptocurrency equivalent to run a bank. Clients fled the exchange after they became concerned about whether FTX had enough capital.
A person familiar with the matter said that the Department of Justice and the Securities and Exchange Commission (SEC) are examining FTX to determine whether any criminal activity or securities-related offenses have been committed.
On Thursday, Reuters reported that the Bahamas Securities Commission has frozen the assets of FTX Digital Markets, a subsidiary of the cryptocurrency exchange.
This week’s developments represented a shocking turn of events for FTX CEO and Founder Sam Bankman-Fried, who was hailed as a savior earlier this year when he helped prop up a number of crypto firms facing financial troubles.
An investigation into Bankman-Fried and FTX by those in the crypto world as well as securities regulators centers on the possibility that the company used customer deposits to fund bets in Bankman-Fried’s hedge fund, Alameda Research. In traditional markets, intermediaries are expected to separate client funds from other company assets. Regulators can punish violations.
Meanwhile, investors in the popular cryptocurrency got some respite from the recent crypto crisis on Thursday after days of selling. Bitcoin price rose to $17,691 after falling to $15,512 on Wednesday. Ethereum is up 12%. The gains came after a government report showing that inflation eased slightly last month gave a boost to riskier assets.
The cryptocurrency world had hoped that Binance, the world’s largest cryptocurrency exchange, would be able to rescue FTX and its depositors. However, after Binance got a chance to take a look at the FTX ledgers, it became clear that the problems of the smaller exchange were too big to be resolved. Binance announced its withdrawal from the deal on Wednesday.
A person familiar with the dealings between FTX and Binance described the books as a “black hole” where it was impossible to distinguish between the assets and liabilities of FTX and those of Alameda Research. This person spoke on condition of anonymity because he was not authorized to speak publicly about the matter.
This person said Bankman-Fried had committed an “absolute sin” by taking advantage of FTX trust assets to fund Alameda Research.
In another illustration of FTX’s financial squeeze, Bankman-Fried asked his investors Wednesday for $8 billion to cover withdrawal requests, according to the Wall Street Journal, citing unnamed sources.
In a series of tweets on Thursday, the founder and CEO of FTX said he did not have enough liquidity to cover withdrawals and that it was more efficient than he thought.
1) I’m sorry. This is the most important thing.
I had sex, and I should have been better.
– SBF (SBF_FTX) November 10, 2022
The recent crisis in the cryptocurrency industry has prompted renewed calls for tougher regulation. White House Press Secretary Karen-Jean-Pierre said the FTX developments highlighted “why prudent regulation of cryptocurrency is really needed. The White House, along with relevant agencies, will once again closely monitor the situation as it evolves.”
Analysts say the collapse of the third largest cryptocurrency exchange is likely to cause more turmoil across the crypto world, meaning Thursday’s rally could be temporary.
Analysts at JP Morgan said in a note to investors that the break-up of the FTX, in addition to shocking confidence in the system, would cause crypto prices to fall even further, leading to a “new string of margin calls.” This will be similar to the sell-off that occurred after the collapse of the stablecoin Terra earlier this year, as prices continued to decline after weeks of failure.
“This deleveraging is likely to continue for at least a few weeks unless a rescue of Alameda Research and FTX is agreed quickly,” JPMorgan analysts wrote.
The crypto industry is waiting to see what other companies have been affected by the FTX crash. Venture capital fund Sequoia Capital said Thursday that it has reduced its total investment by about $215 million in FTX.
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