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See what’s happening with FTX.
Oscar Wong
Crypto exchange FTX filed for voluntary Chapter 11 bankruptcy last week.
Prior to the filing, Binance liquidated its FTT investment, users withdrew billions from the platform, and Binance called off the acquisition due to concerns with the FTX’s finances.
If you stored crypto through FTX, you’ll only receive a payout after it has settled debts and legal fees.
Global cryptocurrency exchange FTX has filed for voluntary Chapter 11 bankruptcy after both losing billions from client investments and an acquisition deal with Binance fell through. Reuters reports also revealed that the company lost up to $2 billion in user funds following a transfer to its sister company, Alameda Research.
To add to the chaos, the company is currently under investigation as authorities work to explore whether any criminal misconduct has taken place. Here’s exactly what happened, as well as what it means for crypto and investors.
What’s going on with FTX?
FTX is an international cryptocurrency exchange, but it also serves US customers through FTX.US. Alameda Research, a quantitative crypto trading firm, also makes up FTX Group, and FTX offers its own token (FTT).
The crypto exchange was an American exchange and the fourth-largest crypto platform in the world, but it essentially lied about the debt it had in its balance sheet, said Brock Pierce, chairman of the Bitcoin Foundation and venture capitalist.
Reports of its financial standing led Binance.US chief executive officer Changpeng Zhao to tweet that it would liquidate its FTT shares because of “recent revelations that have came to light.”
“And people started to withdraw after the news kind of came out that that liquidity was coming to a crunch,” Pierce told Insider. FTX, he added, was using its native token, FTT, to leverage against their other investments.
“They were investing and using this token as collateral to invest into different projects like BlockFi and investment funds,” he said. What happened is that when people started to withdraw, and the token started to tank, the collateral basically collapsed.”
Pierce said this caused a domino effect, impacting all of the companies involved with FTX as well as nearly every single exchange.
Though traders withdrew billions from FTX, Binance later struck a deal to acquire the exchange. However, Binance announced on November 9 that it was backing out of the deal because of corporate due diligence and the “latest news reports regarding mishandled customer funds and alleged US agency investigations.”
Following users’ withdrawals and the acquisition failure, the company filed for Chapter 11 bankruptcy and enlisted a new chief executive officer, John Jay, III. Its former CEO, Sam Bankman-Fried, transferred billions of user funds to its sister company, Alameda Research (a company Bankman-Fried also founded), but between $1 and $2 billion of those funds disappeared, according to Reuters reports.
FTX executives have attributed the loss to “unauthorized access” and are currently working to resolve the issue.
Who was affected by the crash?
FTX, West Realm Shires Services Inc., Alameda Research Ltd., and roughly 130 other affiliated companies have filed for Chapter 11 bankruptcy, according to a press release posted on the official FTX Twitter account. All of its companies make up what’s known as FTX Group.
It also said the following subsidiaries weren’t included in the bankruptcy proceedings: LedgerX LLC, FTX Digital Markets Ltd., FTX Australia Pty Ltd., and FTX Express Pay Ltd.
However, Sequoia Capital, a venture capital firm, made an investment of roughly $213.5 million in FTX.com and FTX US. But the firm has since announced in a note to its limited partners that it’s marking its investment down to $0. Sequoia said its exposure to the FTX crash is limited. The company owns both FTX.com and FTX US in a private fund (Global Growth Fund III).
It added that FTX isn’t a top 10 position in the fund, and its $150 million cost basis represented less than 3% of the committed capital of the fund.
But the FTX crash also impacted BlockFi. On November 10, the crypto exchange released a statement on Twitter, saying it wasn’t “able to operate business as usual” due to the lack of clarity regarding the FTX/Alameda crisis. The platform added that it would limit platform activity and pause withdrawals, and it released a November 14 update, saying it’ll continue to pause withdrawals as it explores next steps.
Crypto.com was also among those impacted. Its CEO, Kris Marzalek, said in a live Youtube interview that the exchange recovered $990 million from FTX. Given the exchange had roughly $1 billion on FTX, this leaves it with a $10 million loss. He added that Crypto.com is conducting business as usual.
Plus, crypto exchange Gemini has been impacted by the FTX crash. Gemini Earn, a feature that offers interest rewards in different cryptocurrencies, relies on Genesis Global Trading, but Genesis recently announced it is suspending redemptions and new loan originations.
Genesis tweeted that “FTX has created unprecedented market turmoil, resulting in abnormal withdrawal requests which have exceeded our current liquidity.” In response, Gemini has paused withdrawals on its Gemini Earn account.
Other companies — including BlackRock, Insight Partners, Tiger Global, and Paradigm — also had exposure to FTX through investments.
What will happen to investors’ crypto?
If you’ve stored a portion, or all, of your crypto assets through FTX, you’ll generally only receive payment after the crypto exchange has settled legal fees and debts to creditors. But users aren’t guaranteed to receive payouts; that is, you’ll only get a cut if the company has anything left to give. And this can vary based off a platform’s specific financial standing.
While insurance can function as a lifeline for those with custodially held accounts, FTX doesn’t offer these protections for deposited funds. The company has currently paused crypto withdrawals and limited user activity as it works to secure its platform.
Is FTX Under investigation?
The recent sequence of events surrounding the Bahamas-headquartered crypto exchange has additionally led Bahamas authorities to issue an investigation. The Royal Bahamas Police Force announced that the Financial Crimes Investigation Branch and Bahamas Security Commission are working together to investigate whether any criminal misconduct occurred.
The US Department of Justice and Securities and Exchange Commission were also investigating FTX before the collapse occurred, according to an anonymous source that spoke with The Associated Press.
How has this impacted the crypto market?
Bitcoin’s price fell 15% from more than $18,500 to $15,625 on Wednesday, November 9, after Binance pulled out of the acquisition. Its share price crept back up to more than $17,500 the next day, but it plummeted back into the $16,000 range on November 11, following the FTX bankruptcy announcement.
Ethereum also also saw losses on the day of the Binance split, tanking 15% and trading around more than $1,090 per share. Solana’s price has also suffered a 42.5% loss over the past seven days, while FTX Token’s price has dropped by 70.5% over the past week, according to data from CoinGecko.
“Ultimately, the FTX collapse will not have a negative impact on the blockchain sector in the long term, despite any short-term disruptions it is currently causing across the sector,” says Pierce. “This crisis is an instance of the market correcting itself.”
In the unfolding of the FTX crisis, he added, “the sector is effectively safeguarding itself against high-risk, unstable practices and companies that engage in this behavior.”
How can investors store their crypto safely?
The FTX debacle has left many investors wondering both how they can securely store their crypto assets and whether self-custody is better than using an exchange’s wallet. Multiple crypto exchanges — including Mt. Gox, Voyager, and Celsius — have filed for bankruptcy, leaving many investors in unsettling positions.
Users with funds held specifically through FTX are being hit the hardest since the exchange essentially controls the keys to their wallets. However, there are storage alternatives for those who want more control over their investments.
Quick tip: A couple of options are to utilize decentralized custody or decentralized (DeFi) wallets. With decentralized custody, you can either set up “hot wallets” (i.e., online software wallets), or utilize “cold wallets” through hardware or offline devices. Both options give you complete control over your funds.
“A hardware wallet that is [one that is] stored offline, and you are the only one that owns the keys,” says Pierce. “The company doesn’t have the keys.”
DeFi wallets resemble custodial services, but the companies don’t have access to your keys. In other words, you still have control over your crypto. Finally, you can also open non-custodial wallets in addition to a custodial crypto wallet your exchange offers, but this isn’t a good idea if you want sole control over the private keys to your assets.
Bottom line
The FTX crash has not only led to a bankruptcy filing, but the disappearance of billions of funds and ongoing investigations. As the company sorts through bankruptcy proceedings and what it’s deemed as unauthorized access, users with FTX-held assets will likely be the last in line to receive payouts.