FTX, the second largest cryptocurrency exchange in the world, is in crisis and has sent the digital asset market into another crash.
Here we take a look at what happened to FTX, why, and what it means for the wider market.
What is FTX
Officially based in the Bahamas, FTX is managed from the United States, with its largest offices in Chicago and Miami.
It is a cryptocurrency exchange, helping people buy and sell crypto assets. Cryptocurrencies are all based on the same basic structure as their flagship asset, bitcoin: a publicly available “blockchain” that registers ownership without having the control of any central authority. FTX is big and important because, along with its rival, Binance, it handles the majority of cryptocurrency transactions globally.
FTX and Binance are “international” exchanges, the cryptocurrency equivalent of an offshore casino. Each also operates a regulated independent outlet in the United States, which closely follows the little regulation of the United States government, but most of the money that circulates on their books is in fact not constrained by regulatory requirements. .
What happened to FTX this week?
On Wednesday last week, an article appeared in CoinDesk, a crypto industry news service, that sparked a crisis. He claimed that the balance sheet of Alameda, a crypto hedge fund owned by FTX founder Sam Bankman-Fried, held billions of dollars of FTX’s own cryptocurrency, FTT, and used it as collateral in various other loans. If so, a decline in the value of FTT could harm both companies, given their shared ownership. But FTT itself had no value beyond FTX’s long-standing promise to buy tokens at $22, raising fears that the whole institution was a castle built on sand.
The slow-burn crisis has been shifted into high gear on Sunday when Binance CEO Changpeng Zhao tweeted that his company was selling its FTT holdings, worth around $500 million, due to “recent revelations that have come to light.”
Things snowballed from there. The value of FTT plummeted and FTX customers began withdrawing funds in a bank-like exodus. In a message to staff this week, quoted by Reuters, Bankman-Fried said the firm had suffered a “massive increase in withdrawals” as users rushed to withdraw $6bn (£5.1bn sterling) of crypto tokens from FTX over a three-day period. Daily withdrawals normally amounted to tens of millions of dollars, Bankman-Fried told his employees.
Zhao then stepped in to save FTX, agreeing on Tuesday to buy the company but then announcing on Wednesday that he was pulling out of the deal. “The issues are beyond our control or our ability to help,” Binance said, citing findings in the due diligence process and the launch of regulatory investigations in the United States.
What future for FTX?
The company must either find billions of dollars to meet customer withdrawal requests or stem the exodus by finding a way to reassure them that their money is safe. It’s never easy when so many customers are rushing to the door. Bloomberg reported Thursday that Bankman-Fried said the company needed $4 billion to remain solvent, with a funding shortfall of $8 billion.
There are also deeper questions for the exchange. Just a day before the company agreed to sell to Binance, Bankman-Fried tweeted that FTX was “fine” and not trading with client assets at all. But a message to investors from Sequoia Capital, a venture capital firm that invested $150 million in FTX, said the company was facing not only a cash crunch but also solvency issues, which means she owed more money than she actually had.
The day after the failed sale, “SBF” resurfaced, and apologized for his failures. “I screwed up twice,” he wrote, launching a series of tweets in which he apologized for the miscommunications and said he had mistakenly assumed the stock market couldn’t cope. to a liquidity crisis, but argued that it was not actually insolvent.
However, Bankman-Fried’s apology only went so far and users still had questions, especially given other claims he was making at the same time. The The Wall Street Journal reported that FTX had loaned $10 billion in customer funds to Alameda to play with, a substantial proportion of the exchange’s $16 billion in assets.
Could there be a spillover into the rest of the crypto?
There are already some. Since the crisis began at FTX, bitcoin has fallen from $20,000 to $16.5,000, its lowest value since 2020. The broader sector has fallen almost 5% in the past 24 hours. , according to CoinMarketCap, and large companies and protocols exposed to FTX must prove their own liquidity. A popular token on the Solana protocol, for example, which allows users of this blockchain to exchange bitcoins, relies on FTX for its value: if the exchange fails, it is not clear if any of the bitcoins on this protocol would be recoverable, wiping millions of dollars from existence overnight.
And, as with every crypto crash, all eyes are on Tether, the $70 billion “stablecoin” that underpins much of the sector’s economy. On Thursday morning, the token slipped from its “peg”, trading at $0.98 per dollar. The chief technology officer (CTO) of the company that issues Tether, Paolo Ardoino, tweeted to reassure investors, noting that the company had processed around $700 million in withdrawals in the past 24 hours. “No problem,” he said, “we’re moving on.”
What about larger markets?
The resilience of the financial system to swings in the crypto market has already been tested over the past 12 months with the onset of a new “crypto winter”. The value of the entire crypto market peaked at $3 billion last November, but then crashed this year due to a mix of crypto-specific events and broader macro issues. and currently hovers around $800 billion. During this period, global financial markets also suffered, but this was due to much larger issues, such as the Russian invasion of Ukraine and rising interest rates.
Carol Alexander, professor of finance at the University of Sussex, adds that the further blow to industry credibility from the latest swing will prolong the cooling. “This crypto winter is going to last much longer because of this.”
She added that contagion from the crypto industry to traditional financial markets was still unlikely as institutional investors, always looking for high returns from their investments, now found it easier to earn conventional assets in a trading environment. high interest rates. “The fact is that traditional investments, like bonds, are becoming more attractive. This means crypto is less of a systemic threat.