The rapid collapse of cryptocurrency exchange FTX sent more shockwaves through the crypto world on Thursday, with authorities now investigating the company for possible securities violations and analysts bracing for another drop in prices cryptocurrencies.
FTX had this week agreed to sell itself to its biggest rival, Binance, after experiencing the cryptocurrency equivalent of a bank run. Customers fled the exchange after worrying about whether FTX had enough capital.
A person familiar with the matter said the Department of Justice and the Securities and Exchange Commission (SEC) were examining FTX to determine whether any criminal activity or securities crimes were committed.
And on Thursday, Reuters reported that the Securities Commission of the Bahamas had frozen the assets of FTX Digital Markets, a subsidiary of the cryptocurrency exchange.
This week’s developments marked 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 shore up several cryptocurrency companies that were have financial problems.
The investigation into Bankman-Fried and FTX by those in the crypto world and securities regulators centers on the possibility that the firm used customer deposits to fund bets at Bankman-Fried’s hedge fund, Alameda Research. In traditional markets, brokers are expected to separate clients’ funds from the assets of other companies. Violations may be sanctioned by regulators.
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 dropping as low as $15,512 on Wednesday. Ethereum rose 12%. The gains came after a government report showing inflation had cooled somewhat last month gave riskier assets a boost.
The crypto world was hoping that Binance, the world’s largest crypto exchange, could rescue FTX and its depositors. However, after Binance had a chance to look at FTX’s books, it became clear that the smaller exchange’s problems were too big to solve. Binance announced its withdrawal from the deal on Wednesday.
A person familiar with the relationship between FTX and Binance described the ledgers as a “black hole” where it was impossible to differentiate between the assets and liabilities of FTX and those of Alameda Research. This person spoke on condition of anonymity because they were not authorized to speak publicly about the matter.
This person said Bankman-Fried had committed the “ultimate sin” by leveraging FTX’s custody assets to finance Alameda Research.
In another illustration of FTX’s financial difficulties, Bankman-Fried asked its investors on 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 FTX founder and CEO said he didn’t have enough liquidity to cover withdrawals and was more leveraged than he had thought.
1) I’m sorry. This is the biggest one.
I screwed up, and I should have done better.
— SBF (@SBF_FTX) November 10, 2022
The latest crisis in the crypto industry sparked new calls for tighter regulation. White House press secretary Karine Jean-Pierre said FTX’s developments highlighted “why prudent regulation of cryptocurrencies is necessary. The White House, along with relevant agencies, will again be closely monitoring the situation as it develops.”
The collapse of the third-largest cryptocurrency exchange is likely to cause more disruption in the cryptocurrency world, meaning Thursday’s rally could be temporary, analysts say.
FTX’s deactivation, as well as its shock to confidence in the system, will push crypto prices further down, leading to “a new cascade of margin calls,” JP Morgan analysts said in a note to investors This would be similar to the sell-off that occurred after the collapse of the Terra stablecoin earlier this year, when prices continued 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 agreed upon quickly,” 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 was marking down its total investment of nearly $215 million in FTX.