The cryptocurrency markets are still reeling in the wake of FTX's bankruptcy as the financial impact spreads deeper into the industry. Additional exchanges and lenders that dealt with FTX continue to report new liquidity issues. Meanwhile, the full extent of the massive crypto exchange's mishandling of funds, at a minimum, or alleged fraud, are just being revealed.
New FTX CEO Slams SBF
John J. Ray III, FTX's new CEO to oversee the Chapter 11 proceedings, ripped founder Sam Bankman-Fried in the firm's first-day bankruptcy filings on Thursday. "Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information," Ray wrote.
Ray oversaw Enron's massive bankruptcy and liquidation two decades ago.
Also on Thursday, FTX distanced itself from Bankman-Fried's recently-released Twitter messages regarding the exchange's financial situation. The founder and former CEO has "no ongoing role at FTX, FTX US or Alameda Research, and does not speak on their behalf," Ray said in a statement.
In direct messages to Vox reporters, Bankman-Fried said FTX never intended to gamble away customer money. They just loaned it to Alameda because SBF thought Alameda had "enough collateral to reasonably cover it." He didn't realize what was going on until it was too late because "sometimes life creeps up on you."
That's a reasonable excuse for forgetting an oil change or maxing out a credit card. But not for running a multibillion dollar business with a million users' funds at risk.
"This apparent fraud was well concealed," said Ric Edelman, founder of the Digital Assets Council of Financial Professionals. "Unlike Bernie Madoff, who gave off nearly a dozen warning signs — which many warned about for years — SBF seems to have offered no such red flags, other than perhaps exaggerated spending and marketing."
Bankruptcy Impact Spreads
Genesis Global Trading halted withdrawals for its $2.8 billion crypto lending unit on Wednesday after confirming liquidity issues following FTX's bankruptcy. And the Gemini exchange paused withdrawals on interest-bearing earn accounts as a result of the changes, as Genesis is the lending partner for the program.
Meanwhile, crypto lender BlockFi started preparing for bankruptcy on Tuesday. The company is "not able to operate business as usual" after receiving a $400 million bailout from FTX earlier this year. And bankrupt crypto lender Voyager Digital has been forced to reopen the bidding process for its distressed assets with FTX unable to follow through with its planned $1.4 billion buyout.
"There is no doubt that we will be hearing of other firms impacted by FTX's collapse," Edelman said. "FTX was the 2nd largest crypto exchange in the world (by valuation), and many thousands of firms had accounts there, along with hundreds of thousands, perhaps millions, of individual investors."
In an updated bankruptcy filing on Nov. 14, FTX said it had more than 100,000 creditors with claims in the case. But it "could be more than 1 million." FTX had more than 1 million users at its peak in 2021 when it was valued at $32 billion.
Hedge funds that had assets with FTX may be unable to retrieve their client's funds and lose all their money, Edelman said. However, the damages should only be limited to FTX, its account holders and their respective investors and clients. "It is not expected at this time to spread beyond this chain. The rest of crypto is not marred — and will even be beneficiaries, as former customers of FTX seek a new vendor to replace it," he said.
Unfortunately, FTX Group's chain is massive as it invested in a number of crypto startups and listed its 130+ affiliated companies in its bankruptcy filings. In a worst-case scenario, all the major crypto dominoes would fall and Bitcoin would go to zero. But Edelman says no one he's spoken with expects that to occur.
FTX Collapse Explained
The FTX exchange threw crypto markets into turmoil the past two weeks, eventually filing for Chapter 11 bankruptcy on Nov. 11. CEO Bankman-Fried resigned and was replaced by Ray. The fourth-largest crypto exchange by volume faced a massive liquidity crunch after revelations that its native FTT token made up a majority of sister trading firm Alameda Research's balance sheet. Crypto exchange Binance announced it would liquidate its FTT holdings on Nov. 6, sparking more than $6 billion in withdrawals from FTX within 72 hours.
Unknown publicly at the time, Alameda Research owed FTX about $10 billion in loans made up of customer deposits. Meanwhile, FTX invested user funds in various crypto projects and lesser known tokens — some of which were Bankman-Fried's own initiatives, exacerbating the liquidity issues.
As FTX crashed, Bitcoin fell near $15,800 from above $21,200 within four days, dragging cryptocurrency prices with it. Investors transferred more than $3 billion in Bitcoin from exchanges to personal wallets in the week of FTX's bankruptcy, Glassnode data compiled by CoinTelegraph shows. Bitcoin recovered near $16,500 as of Nov. 17. But major cryptocurrency prices are still down 20% or more since FTX's liquidity issues started on Nov. 5.
You can follow Harrison Miller for more stock news and updates on Twitter @IBD_Harrison
