Crypto exchange giant FTX collapses, files for bankruptcy
NEW YORK (AP) — It took less than a week for FTX to go from the third-largest cryptocurrency exchange in the world to bankruptcy court.
The embattled cryptocurrency exchange, shorting billions of dollars, sought bankruptcy protection after the exchange experienced the crypto equivalent of a bank run. FTX, hedge fund Alameda Research, and dozens of other related companies filed for bankruptcy in Delaware on Friday morning. FTX US, which was not originally expected to be included in any financial rescue, was also part of the company’s bankruptcy filing.
CEO and founder Sam Bankman-Fried has resigned, the company said. Bankman-Fried was recently estimated to be worth $23 billion and has been a prominent political donor to Democrats. His net worth has all but disappeared, according to Forbes and Bloomberg, which closely track the net worth of the world’s richest people.
“I was shocked to see things unravel the way they did earlier this week,” Bankman-Fried wrote in a series of posts on Twitter.
FTX’s dissolution causes ripple effects. Already companies that supported FTX are writing down their investments. Politicians and regulators are increasing demands for stricter oversight of the crypto industry. And this latest crisis has put pressure on the prices of bitcoin and other digital currencies. The total market capitalization of all digital currencies fell by about $150 billion in the past week, according to CoinMarketCap.com.
FTX’s failure goes beyond economics. The company also had major sports sponsorships, including Formula 1 racing, a sponsorship deal with Major League Baseball as well as a sports arena in Miami. Mercedes said it would remove FTX from its race cars starting this weekend.
FTX and Bankman-Fried, as well as his brother, were also early investors in Semafor, the high-profile news startup run by former BuzzFeed editor-in-chief and New York Times columnist Ben Smith.
Bankman-Fried also has other problems. On Thursday, a person familiar with the matter said the Justice Department and the Securities and Exchange Commission were investigating FTX to determine whether criminal activity or securities violations were committed. The person could not discuss details of the investigations publicly and spoke to The Associated Press on condition of anonymity.
The investigation is centered on the possibility that FTX may have used customer deposits to fund games at Alameda Research. In traditional markets, brokers are expected to separate client funds from other company assets. Violations can be punished by regulators. In fact, financial company MF Global failed for a similar practice about a decade ago when it mixed client funds with its own games.
In its bankruptcy filing, FTX listed more than 130 affiliated companies around the world. The company valued its assets between $10 billion to $50 billion, with a similar estimate for its liabilities. The company named as its new CEO John Ray III, a longtime bankruptcy attorney best known for having to clean up the mess made after the collapse of Enron.
FTX’s bankruptcy is certainly one of the most complicated bankruptcy cases in many years. The company listed more than 100,000 creditors on its filing, and with all of the customers actually creditors because they deposited their money with FTX, it will take months to figure out who owes what, bankruptcy attorneys said. Cryptocurrencies have no protection under the law, and politicians on both sides of the aisle issued statements opposing any Lehman Brothers-style bailout for crypto investors.
“Unlike a case where there is (securities insurance in the failure of a brokerage) or where the FDIC steps in with a bank failure, these clients are totally exposed,” said Daniel Besikof, a partner at Loeb & Loeb LLP who specializes in bankruptcy law.
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.
The crypto world had hoped that Binance, the world’s largest crypto exchange, might be able to save FTX and its depositors. However, after Binance took a look at FTX’s books, it concluded that the smaller exchange’s problems were too big to solve and pulled out of the deal.
FTX is the latest in a series of disasters that have rocked the crypto sector, now under intense pressure from collapsing prices and circling financial regulators. Its failure is already being felt throughout the crypto universe.
On Thursday, venture capital fund Sequoia Capital said Thursday it is writing down its total investment of nearly $215 million in FTX.
Cryptocurrency lender BlockFi announced on Twitter late Thursday that it is “unable to conduct business as usual” and halt client withdrawals as a result of FTX’s implosion.
In a letter posted to its Twitter account late Thursday, BlockFi — which was bailed out by Bankman-Fried’s FTX early last summer — said it was “shocked and dismayed by the news about FTX and Alameda.”
The company concluded by saying that any future communications about the status “will be less frequent than what our customers and other stakeholders are used to.”
Bitcoin fell immediately after the letter was posted and is trading below $17,000. The original cryptocurrency, bitcoin, had been hovering around $20,000 for months before FTX’s problems became public this week, sending it down to around $15,500.
Shares of publicly traded cryptocurrency exchange Coinbase and online trading platform Robinhood each rose nearly 12%.
