° Сrypto experienced one of its worst days on Wednesday in the wake of the stunning collapse of the FTX exchange, a platform once hailed as one of crypto’s biggest success stories.
FTX is facing potential bankruptcy after its rival Binance reversed its decision to save the exchange from a reported cash crunch 8 billion dollars. Binance wrote on Twitter that the discoveries made during the “corporate due diligence,” coupled with newly announced federal investigations into the company — which was valued earlier this year at $32 billion — made the deal too risky.
Earlier this week, FTX investors lost confidence in the exchange after Binance CEO Changpeng Zhao expressed skepticism about FTX’s financial stability and pulled $500 million worth of investments. A bank run ensued and FTX found itself facing a major cash shortage with no way to pay all the users trying to withdraw all their money at once. So they sought help from Binance – the largest centralized crypto exchange – which agreed on Tuesday to bail them out.
But on Wednesday, the deal fell apart. Now, many pessimistic crypto insiders fear the beginning of a vicious downward spiral in crypto asset values that will harm individual investors and the entire industry for years to come.
a lot are already comparing FTX’s collapse to that of Lehman Brothers in 2008, which helped precipitate a global financial crisis. Indeed, on Wednesday, as the FTX rescue deal appeared to fall apart, Bitcoin fell below $16,000 for the first time since November 2020, while Ethereum lost almost a third of its value since Monday.
“I think it’s going to be very bad: it’s as contagious as possible,” said John Law, managing partner of digital assets at investment firm Recharge Capital. “We will see crypto household names, lenders and funds go down completely. It’s going to get messy and long.”
The fall of FTX
The rapid rise and catastrophic collapse of FTX occurred under the leadership of Sam Bankman-Fried, who created the platform in 2019. Within three years, it was one of the fastest growing currency exchanges in the world, with billions of dollars of crypto traded on the exchange daily. But earlier this month, the news center CoinDesk reported that FTX’s subsidiary, Alameda Research, held a large portion of its reserves in a crypto token created by FTX itself, FTT. If the DFT falls, then the value of Alameda, a commercial and investment juggernaut, will also fall.
FTX failed to calm concerns about the report, and on November 6, Binance announced its intention to offload $500 million worth of FTT. This triggered a bank run where FTX users who traded cryptocurrency on the platform struggled to withdraw their funds. Due to this frenzied pressure, FTX found itself unable to fulfill all of its withdrawals.
To repay its customers, FTX agreed to be bought by Binance on Tuesday. (At first glance, the deal is mirrored Bank of America buys Merrill Lynch during the 2008 financial crisis that effectively saved it from bankruptcy.) Bankman-Fried promised that customers would be able to rebuild their balances in full.
But after the settlement was announced, more and more reports began to circulate of major problems with FTX’s business dealings. Analysts alleged that FTX held far less funds in reserve than it claimed and that it had commingled client funds with Alameda Research’s – an extremely risky practice given that the exchange must constantly protect its clients’ funds .
Regulators immediately noticed. Both the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have opened investigations into whether FTX mismanaged client funds, Bloomberg reported. Meanwhile, turmoil is brewing at the company, with most of FTX’s legal and compliance staff leaving on Tuesday night. Semaphore announced.
On Wednesday afternoon, 29 hours after Binance CEO Changpeng Zhao announced the deal, Binance pulled the plug. “Our hope was to be able to support FTX customers to provide liquidity, but the issues are beyond our control or ability to help,” the Binance account tweeted.
Crypto markets, which fell on Tuesday in anticipation of the Binance-FTX deal, sank again. The first victims were FTX users who trusted a company that was considered one of the most trusted parts of the crypto ecosystem. FTX stopped withdrawals of both crypto and fiat currencies from the exchange, and many of the platform’s users began to doubt that they would ever get their funds back. On Tuesday, Zane Tackett, head of institutional sales at FTX, liked a tweet claiming the company “was gambling with customer funds and lost… If you haven’t gotten your funds yet, expect pennies on the dollar in bankruptcy court.”
FTX is now struggling for funds. Wednesday afternoon, Wall Street Journal reported a deficit on the stock exchange to be $8 billion. According to Bloomberg NewsBankman-Fried told investors that if the company doesn’t get a cash injection, it will likely file for bankruptcy.
And experts fear that if FTX is not supported, the entire crypto decline will become even sharper. FTX sits at the center of the crypto world, with many major venture capital funds – including BlackRock, Sequoia and Temasek – heavily invested in its success. (Celebrities like Stephen Curry and Tom Brady have also invested in FTX.) These entities can now take big losses, which could affect funding throughout the crypto ecosystem. Several crypto companies have already declared bankruptcy this year, which in turn has left individual investors waiting to recover their funds.
At the same time, FTX and Alameda were key investors in the larger crypto ecosystem. For example, they provided significant support for the Solana blockchain’s $300 million ICO (initial coin offering) last year. On Wednesday, Solana fell 50%, with different parts of its ecosystem collapsing. It now seems very far from the goal of many of its users to displace Ethereum as the most used blockchain.
Meanwhile, several crypto-adjacent entities also felt side effects. Shares of trading app maker Robinhood fell 13% on Wednesday, as Bankman-Fried owns more than 7% share in the company. And the bank Silvergate Capital, which offers crypto banking, saw it too availability i fall deep
Many experts believe that these types of losses will compound themselves and efforts to integrate crypto with mainstream finance and culture will be slowed dramatically. “The long-term legitimacy of crypto as an industry is in real danger for the first time,” it said one Twitter user.
And the fall of FTX and Bankman-Fried will likely cause lasting damage far beyond falling crypto values. Bankman-Fried had positioned himself as an affable community leader with a strict moral code. He regularly communicated with regulators and politicians in an attempt to convince them of the benefits of crypto. Now, a bipartisan bill that would put digital exchanges and brokerages under light oversight by the Commodity Futures Trading Commission may be endangered because of Bankman-Fried’s vehement advocacy of the measure.
Lo, of Recharge Capital, says regulators are now much more willing to take much tougher measures. “From a regulatory point of view, it really undoes a lot of the goodwill that has built up over the last two or three years,” he says. “This shows that centralized finance and cryptocurrency definitely need to be regulated to some extent.”
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