After competitor Binance decided to withdraw its offer to save the exchange from an estimated $8 billion funding shortfall, FTX now faces the possibility of bankruptcy. Binance claimed on Twitter that the transaction was unfeasible due to “corporate due diligence” findings and recently revealed federal inquiries into the business, which had been valued at $32 billion earlier this year.
Investors in FTX lost faith in the exchange earlier this week after Changpeng Zhao, CEO of Binance, expressed doubt about FTX’s financial soundness and withdrew $500 million worth of capital. Following a bank run, FTX was left with a severe cash shortfall and was unable to pay all of the customers who were attempting to withdraw their whole balance at once. So they requested assistance from Binance, the largest centralized crypto exchange, which agreed to bail them out on Tuesday.
The agreement, however, collapsed on Wednesday. Many pessimistic crypto experts are already worried about the beginning of a terrible downward spiral in the value of crypto assets that will hurt individual investors and the entire industry for years to come.
Many people already compare the FTX crash with the Lehman Brothers one in 2008, which contributed to the onset of the world financial crisis. In fact, as the plan to preserve FTX started to fall apart on Wednesday, Bitcoin dropped below $16,000 for the first time since November 2020, while Ethereum lost about a third of its value from the previous day.
According to John Lo, managing partner of digital assets at the financial services company Recharge Capital, he thinks it’ll be really bad: This is contagion to the fullest. He’ll witness well-known cryptocurrency brands, lenders, and funds entirely collapse. It will become messy and drawn out.
The downfall of FTX
Sam Bankman-Fried, who founded the platform in 2019, oversaw FTX’s meteoric rise and catastrophic collapse. With daily crypto trading volume in the billions of dollars within three years, it became one of the currency exchanges with the quickest growth rates in the world. FTX’s sister organization, Alameda Research, kept a significant portion of its reserves in the crypto token FTT, which FTX had developed. If the value of FTT falls, so will the value of Alameda, a trading and investing behemoth.
FTX was unable to allay investor concerns about the report, and on November 6, Binance revealed its intention to sell $500 million in FTT. This caused a bank run, with FTX customers scrambling to withdraw their funds from the site. Because of the frenzied strain, FTX was unable to meet all of its withdrawals.
On Tuesday, FTX agreed to be purchased by Binance in order to repay their clients. (On the surface, the transaction appears to replicate Bank of America’s takeover of Merrill Lynch during the 2008 financial crisis, which essentially saved it from bankruptcy.) Bankman-Fried assured consumers that their sums will be repaid in full.
However, following the announcement of the agreement, several rumors about serious problems with FTX’s business practices started to surface. Analysts argued that FTX misrepresented its reserve holdings and mixed customer assets with those of Alameda Research, an extremely risky practice considering that the exchange is obligated to protect its customers’ cash at all times.
Regulators took notice right away. The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have started looking into whether FTX had improperly handled customer funds. The majority of FTX’s legal and compliance employees left the company Tuesday evening, according to Semafor, as tensions within the company reached a breaking point.
Binance terminated the agreement on Wednesday afternoon, 29 hours after Changpeng Zhao, the CEO of Binance, made the announcement. According to a tweet from Binance’s account, their intention was to be able to support FTX’s customers to provide liquidity, however the challenges are beyond their control or capacity to help.
Contagion
The cryptocurrency markets fell once more after falling on Tuesday in anticipation of the Binance-FTX deal. Users of FTX, who had placed their trust in a business that was allegedly one of the most reputable elements of the cryptocurrency ecosystem, were the first to fall, victim. When FTX stopped allowing users to withdraw both fiat money and cryptocurrency from the exchange, many users of the platform began to doubt whether they would ever get their money back. The head of institutional sales at FTX, Zane Tackett, liked a tweet on Tuesday that claimed the business “gambled with customer cash and lost… Expect to receive pennies on the dollar in bankruptcy court if you haven’t received your money yet.
FTX is presently in desperate need of money. Bankman-Fried advised investors that if the company did not receive a capital injection, it would likely file for bankruptcy.
FTX and Alameda were significant investors in the broader crypto industry at the same time. For instance, they contributed significantly to last year’s $300 million Solana blockchain ICO (initial coin offering). As many facets of its ecosystem collapsed on Wednesday, Solana plummeted by 50%. The objective of many of its users, to dethrone Ethereum as the most popular blockchain, now appears to be far away.
Several entities close to the crypto space have experienced spillover effects. Given that Bankman-Fried controls more than 7% of the company, shares of trading app provider Robinhood fell 13% on Wednesday. Additionally, the cryptocurrency banking provider Silvergate Capital’s bank stock experienced a significant decline.
According to many analysts, these losses will accumulate, and efforts to integrate cryptocurrency into mainstream culture and business will significantly slow down. One user tweeted, The long term validity of crypto as an industry is in serious risk for the first time.
Along with plummeting crypto values, the collapse of FTX and Bankman-Fried is expected to have long-lasting effects. Bankman-Fried presented himself as the likable, morally upright leader of the neighborhood. He frequently socialized with lawmakers and authorities in an effort to persuade them of the advantages of cryptocurrency. Now, a bipartisan initiative that would subject digital exchanges and brokerages to light regulation by the Commodity Futures Trading Commission may be jeopardized as a result of Bankman- Fried’s support for the measure.
According to Lo of Recharge Capital, regulators are now much more likely to impose considerably tougher sanctions. According to him, this really truly winds back a lot of the goodwill that was built up in the last two to three years from a regulatory viewpoint. It demonstrates the need for some regulation of centralized money and cryptocurrencies.
