The FTX Collapse: Everything You Need to Know About the Platform’s Financial Crisis
Digital currencies took a hit this week after the world’s largest cryptocurrency platform Binance agreed to buy rival FTX.com, before closing a day later.
The saga, which focuses on FTX’s lack of liquidity, is being reviewed throughout the cryptocurrency landscape, as market players are also reacting to the response of financial regulators.
How did FTX fall?
FTX was in turmoil this month in a dramatic reversal of fortune for its founder and one-time cryptocurrency wunderkind Sam Bankman-Fried, better known by his initials SBF.
Doubts were growing about FTX’s financial stability despite Bankman-Fried’s good standing in Washington as the public face of crypto investing.
Attention is focused on the relationship between FTX and Alameda Research, a brokerage also owned by Bankman-Fried that was released online Wednesday, reports said.
Media site CoinDesk reported that 40 percent of Alameda’s balance sheet consists of FTT FTX tokens. That raised eyebrows among crypto experts.
“FTT is a token printed out of thin air and SBF ran both companies. Talk about a conflict of interest,” noted data analyst Dan Ashmore at investment advisors Invezz.
FTX now needs to raise about $8 billion (roughly Rs. 64,580 crore) to plug the huge hole in its finances and escape bankruptcy, reports said.
That’s a tough task as investors are deeply distrustful, with Sequoia Capital writing down its $213-million (roughly Rs. 1,720 crore) investment citing FTX’s “taxation risk”.
Bankman-Fried issued a “sincere” apology on Thursday, adding FTX will do “everything we can to raise money”.
Did Binance sink a bigger competitor?
The CEO of Binance, Changpeng Zhao, known as CZ, revealed on Sunday that his group is shutting down the FTT token of FTX amid concerns about FTX’s liquidity.
The news sent FTT tokens tumbling as traders worried about the outlook for Binance’s biggest rival.
“It’s a masterstroke – or maybe it wasn’t intended – from CZ,” said analyst Charlie Erith at research firm ByteTree.
Two days later, on Tuesday, Binance agreed to buy FTX – only to withdraw the deal late on Wednesday.
Zhao defended himself against accusations of a Machiavellian conspiracy.
“FTX decline is not good for anyone in the industry. Don’t look at it as a win for us. User confidence is seriously shaken,” he tweeted.
However, that did not convince Bankman-Fried who wrote on twitter: “You played well; you won” in a message addressed to a “non-exclusive partner”.
What is the impact of FTX crash on crypto?
Bitcoin, the world’s most popular digital currency, is down about 20 percent since Sunday and hit a two-year low on Thursday.
Traders fear that FTX, which holds significant assets in a list of crypto projects, could be forced to sell assets to survive.
The industry is still licking its wounds since the so-called stablecoin TerraUSD and its linked token, Luna, collapsed in May this year, knocking tens of billions off the crypto market.
“FTX and Alameda Research have emerged last May/June as leading entities with strong balance sheets” to rescue weaker rivals, noted JP Morgan analyst Nikolaos Panigirtzoglou.
Their rapid fall from grace “creates a crisis of confidence and reduces the appetite of other crypto companies to help”, he added, predicting that bitcoin may go further.
What about the law?
Binance released its agreement late Wednesday and cited recent media reports about the misuse of customer funds — and an investigation by U.S. regulators.
This move “suggests, at least, a lack of disclosure and transparency on the part of FTX or worse, putting customers’ deposits at risk of business bets that FTX was making”, said the analyst of ETC Group c.
“Even some of the biggest crypto companies are failing to hedge and protect customer assets.”
Binance vowed to publish information on cryptocurrency reserves and asked for transparency in other markets.
Bankman-Fried’s downfall raises questions about who will replace him as the industry’s liaison to regulators and politicians alike.
