The digital assets market has been rocked by the liquidity crisis hitting of one of the world’s biggest cryptocurrency exchanges, FTX. Reported concerns about FTX’s financial health reportedly triggered $6bn (£5.2bn) of withdrawals in just three days.
FTX apparently struck a non-binding Letter of Intent for a bail-out by rival Binance, pending due diligence after a surge in withdrawals caused a “significant liquidity crunch”. However Binance, the world’s biggest cryptocurrency exchange, walked away from a bailout deal of its smaller rival FTX after citing reports of “mishandled customer funds and alleged US agency investigations” had swayed its decision.
The Reuters news agency reported that the US Securities and Exchange Commission (SEC) was investigating FTX’s handling of customer funds and its crypto-lending activities. The SEC (the USA’s markets regulator) was examining whether the platform had followed securities laws about keeping customer assets segregated and whether it had traded against its own customers.
FTX’s founder Sam Bankman-Fried and Binance’s chief executive Changpeng “CZ” Zhao are two of the most influential and probably best known people in the cryptocurrency market and very high-profile rivals.
The pressure on FTX originally came in part from Mr Zhao, who had apparently tweeted that Binance would sell its holdings of FTX’s digital token, known as FTT. The FTT token has lost around 90% of its value surrounding the controversy.
On Twitter Mr Bankman-Fried said: “Our teams are working on clearing out the withdraw backlog as is. This will clear out liquidity; all assets will be covered 1:1” and “The important thing is that customers are protected… We are in the best of hands,” it has been reported.
The turmoil at FTX is yet ore of the latest signs of trouble in the fast-moving world of cryptocurrencies. Crypto prices have slumped so far this year as a broader downturn in financial markets prompted investors to ditch riskier assets. After rapid growth in 2020 and 2021, Bitcoin is down around 60% in 2022 .
Bitcoin dropped below $16,000 after Binance pulled out of the deal before regaining some ground, while shares in cryptocurrency exchange Coinbase fell by more than 9.5%.
Meanwhile, venture capital firm Sequoia Capital said it will completely write off its more than $210m investment in FTX, as the cryptocurrency exchange is at risk of bankruptcy. “Based on our current understanding, we are marking our investment down to $0,” the company said in a statement posted on Twitter.
Indeed, it has transpired that FTX has filed for bankruptcy in the US, seeking court protection as it looks for a way to return money to creditors, while its former boss Sam Bankman-Fried has also stepped down as chief executive. By filing for Chapter 11 bankruptcy, the company can continue operating, while restructuring its debts under court supervision. In the filing, FTX estimated that it had between $10bn and $50bn in assets and liabilities and more than 100,000 creditors.
“This is a black swan event that adds more fears in the crypto space. This cold winter for crypto now takes on more fear,” Dan Ives, senior equity analyst at Wedbush Securities and perhaps reminiscent of a “Lehman moment”, referring to the 2008 collapse of the US Investment bank that caused a Global liquidity crunch and massive Government bailouts.
This may be somewhat overstated and could be more comparable to the 2001 Dotcom Bubble in the USA that saw a shake out of the then fast-growing internet sector also comes to mind. And, as we saw what the technology and the internet sector has done since the bursting of the bubble in 2001 and who knows, perhaps the Crypto market will take lessons from that experience. Will it lead to the re-emergence of a Crypto market even stronger and more than successful than before? – Place your bets, anyone!
(Sources: BBC, Reuters & Twitter)