The rapid collapse of cryptocurrency exchange FTX sent more shockwaves across the crypto world on Thursday, with authorities now investigating the company for potential securities breaches and analysts bracing. to a further drop in crypto prices.
FTX earlier this week agreed to sell out 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) are reviewing FTX to determine whether criminal activity or securities offenses have occurred.
This week’s developments marked a shocking turn of events for FTX CEO and founder Sam Bankman-Fried, who was hailed as a bit of a savior earlier this year when he helped shore up a number of companies. cryptocurrency companies that have encountered financial problems.
The investigation of Bankman-Fried and FTX by those in the crypto world as well as securities regulators focuses on the possibility that the firm used customer deposits to fund bets at Bankman-Fried’s hedge fund, AlamedaResearch. In traditional markets, brokers are expected to separate client funds from other company assets. Violations can be punished by regulators.
Meanwhile, investors in popular digital currencies were relieved from the latest crypto crisis on Thursday after days of selling. Bitcoin rose to $17,691 after falling to $15,512 on Wednesday. Ethereum is up 12%. The gains came after a government report showing inflation cooled somewhat last month gave riskier assets a boost.
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 had a chance to review the books of FTX, it became clear that the smaller exchange’s problems were too big to solve.
A person familiar with the relationship between FTX and Binance described the books as a “black hole” where it was impossible to tell the difference between the assets and liabilities of FTX the exchange and those of Alameda Research. This person spoke on condition of anonymity because he was not authorized to speak publicly on the issue.
This person said that Bankman-Fried had committed the “ultimate sin” of tapping into FTX’s custodial assets to fund Alameda Research.
In another illustration of FTX’s financial woes, Bankman-Fried on Wednesday asked its investors for $8 billion to cover withdrawal requests, according to The Wall Street Journal, citing unnamed sources.
In a series of Tweets on Thursday, the founder and CEO of FTX said he didn’t have enough cash to cover withdrawals and was more in debt than he thought.
The latest crisis in the crypto industry has prompted renewed calls for stricter regulation. White House Press Secretary Karine Jean-Pierre said FTX’s developments “show why careful regulation of cryptocurrencies is indeed necessary. The White House, along with relevant agencies, will follow up again closely the situation as it develops.
The collapse of the third-largest cryptocurrency exchange is likely to cause further disruption across the crypto world, analysts say, meaning Thursday’s rally could be temporary.
“FTX’s unwinding, along with its shock to confidence in the system, will drive crypto prices even further down leading to “a new cascade of margin calls,” JP Morgan analysts said in a note to the media. This would be similar to the selloff that occurred after the Terra stablecoin crashed earlier this year, where prices continued to fall weeks after it failed.
“This deleveraging is expected to last at least a few weeks unless a bailout of Alameda Research and FTX is quickly agreed,” JP Morgan analysts wrote.
The crypto industry is waiting to see what other companies are affected by FTX’s collapse. Venture capital fund Sequoia Capital announced on Thursday that it was writing down its nearly $215 million total investment in FTX.