The world of cryptocurrencies is waiting for change: the FTX exchange has gone bankrupt

Cryptocurrencies appeared no more than 20 years ago. There were ups and downs. The bitcoin rate has risen to cosmic heights. But 2022 has been a year of surprises. The FTX exchange, through which millions of transactions passed, declared its insolvency. The regulator has yet to complete its investigation, and thousands of investors are counting their losses. 

What happened? What's next for the world of cryptocurrencies? We look, we think, we hope. 

Background.

There are many, many cryptocurrency exchanges. Among them there are leaders and outsiders. FTX was considered the second in the world in terms of transaction volume. Only Binance was ahead of her. The interest of the press and the townsfolk is the personality of the founder - Sam Bankman-Fried. It took him less than a decade to join the ranks of multibillionaires. He was called the genius of his time.

The exchange offered customers its own FTT token. It could be used both as an internal means of payment and as an investment instrument. Even the employees of the exchange received their salaries in their own tokens. 

But on November 2, "thunder struck." An article appeared in a specialized edition of CoinDesk that shocked a significant part of cryptocurrency traders. As it turned out, the exchange (more precisely, its subsidiary Alameda Research) had no real property at all. As of June 30.06.2022, 14,6, she owned assets worth $XNUMX billion. And it also included FFT tokens, which, in fact, later turned out to be candy wrappers.

At the same time, it should be noted that investors were not only ordinary citizens, but also leading investment funds, for example, Tiger Global Management and Third Point Ventures, as well as Sino Global Capital. They invested real money, but received virtual obligations, not supported by anything.

The effect of Changpeng Zhao's announcement that Binance was selling its tokens was immediate and devastating. 23 million tokens entered the market at once. And investors have a new reason to panic. The price of the coin dropped by 24% over the next 12 hours. 

rapid fall of FTT tokena

Other investors took the signal. Applications for the withdrawal of funds literally rained down on the exchange. Between November 4 and 6, the total withdrawal of funds amounted to almost $6 billion. And already on November 07, the management of the exchange had to take extreme measures. Investors could no longer withdraw their funds. 

Sam Bankman-Fried, hoping to save his brainchild, even considered the option of merging with the larger and more stable Binance, but the deal did not take place. The management of the largest site did not want to spend their money on satisfying claims from FTX depositors. And no one was in a hurry to save Sam's reputation either. The collapse of the stock exchange was inevitable. 

And already November 11 The regulator has filed for bankruptcy. The largest investment funds were forced to record losses. Sequoia Capital and SoftBank wrote off almost $250 million in total. But not only large companies suffered, but also ordinary traders, including those who kept non-speculative coins on exchange accounts. 

But FTX management's problems were not limited to insolvency. The collapse was followed by a hacker attack (or its imitation), it is difficult to say for sure. Depositors and traders lost up to six hundred million dollars and access to their accounts. 

Curly - Sam Bankman-Fried: why is he so remarkable and why is he another Warren Buffet?

Sam Bankman-Fried was ranked 2022th on the Forbes lists back in early 60. He was considered not only by leading traders and brokers on various exchanges, but also by politicians. Even as early as the fall of 2022, Sam was running as the Democratic Party's congressional sponsor. The main support from Sam was used by candidates declaring the need to actively fight the coronavirus. In one form or another, Sam Bankman-Fried and his partners have spent more than $70 million directly to support the Democrats. 

Sam did not stay away from the presidential elections in 2020 either. The founder of the exchange transferred $5,2 million to Biden's accounts. Only Michael Bloomberg was a more active sponsor that year. He donated $56 million to Biden at once. 

Bankman-Fried's own initiatives include the following:

  1.  Cryptocurrencies should become a regulated asset. 
  2.  It is necessary to create and maintain a special database. It must include data on those who use cryptocurrencies not just for savings or an exchange instrument, but to finance dubious transactions. 
  3.  Regulators should receive additional powers, be able to control both exchanges and traders directly. 

Will these ideas be implemented? There is no definite answer, but after the scandalous failure, the industry has clearly lost a sponsor for these areas.

The collapse of the stock exchange practically ruined its owner. As of 07/11/22, Bloomberg estimated the entire capital of Bankman-Fried at $15,6 billion.. But, given that the main part of it was precisely the share in the authorized capital of the exchange, by 11/11/22 its capital had decreased by 5 times. Whether Sam owns anything by the end of November 2022 remains to be seen. It all depends on whether Bankman-Fried has any other assets besides the shares of his own exchange. And it is not known in what amounts his obligations are measured.

For Bankman-Fried, the bankruptcy of his offspring could end badly. He was at the company's headquarters in the Bahamas at the time of filing for bankruptcy.. And already on November 16, the press began to discuss the topic of when the United States would declare the need for his extradition. Questions to Bankman-Fried appeared at the regulator.

The FTX rules state that only clients of the exchange can manage their own money. If the regulator or investigators establish that the traders' funds were used to conduct any transactions, then Bankman-Fried will have to answer more serious questions. The problem is further complicated by the fact that the exchange has a significant number of subsidiaries. What these companies did, how their relationship with the parent organization was built, remains to be seen. And this can take months or years. 

Confusing FTX Ownership Structure

It took Bankman-Fried a few days to realize the seriousness of the situation. He has already managed to enlist the support of one of the best lawyers of our time - Martin Flumenbaum and slack off to Argentina, but this seems to be the case, just in case.

Client money: will they lose or not?

How many clients the exchange has is still unknown. The initial filing for bankruptcy listed a fairly wide range of debt - from 10 to 50 billion US dollars. The number of clients is over 100 thousand people. But clarification quickly followed. Lawyers reported that over a million individuals and legal entities were listed as clients of the exchange. 

Regardless of the number of victims, they need to compensate for the losses. And this can be problematic. FTX's liquid assets are valued at $900 million.  There are also assets with less liquidity. At the beginning of the month they were worth almost $9 billion. But, according to experts, it will not be possible to sell them now for this amount. 

Attention deserves the message of Kunal Goel, representing Messari, done 16/11/22. He believes that traders could claim a return on part of their investment. Goel believes FTX has an estimated net worth of $4 billion.

Kunal Goel's tweet

So far, no payments have been made. On 14/11/22, the already appointed management of the exchange filed a first complaint with the court. Jonm Ray III announced that work is underway to protect the company's assets. It is planned that in the near future auditors will check the data of balances and accounting of all structures of the exchange. 

There are a number of important points to note here:

  1. The USA has a special Bankruptcy Code. In accordance with chapter 11 of this regulation, employees and major corporate clients have priority for damages. In second place are individuals who have become customers of the company. 
  2. The court can appoint and postpone meetings for years. In practice, this means that there is no need to wait for payments in the near future. For example, in 2014, the Mt.Gox exchange was declared bankrupt. And only in 2022, the victims began to accept applications for payments. Experts are sure that this time the situation will develop according to the same scenario.  
  3. Since the FTX bankruptcy case is being considered in the jurisdiction of the United States, creditors must file an application with the court in order to return at least part of their funds. In practice, this means that it will be quite difficult for foreign investors.  

Will FTX's bankruptcy affect customers in Europe?

It is believed that residents of the United States and Taiwan suffered the most from the ruin of FTX. Lawyers in this case draw parallels with the collapse of Lehman Brothers. Then millions of people suffered, and the financial crisis broke out all over the world. Now, the Miami court has already accepted a class action lawsuit, according to which the founder of the exchange must directly pay the victims more than $11 billion. How this will affect those who are in Europe or in other countries is difficult to say. In any case, all this will now take place in the course of legal proceedings, and clients themselves will need to check the status and follow the developments so as not to oversleep the application for payment.

How will the bankruptcy of FTX affect the rates of other cryptocurrencies?

Experts note that the crisis has affected all the coins remaining on the market. For example, Bitcoin has been growing in price almost all autumn. And then one message was enough for it to fall in price by 11,6% at once - to 18,2 thousand US dollars. After November 10, the coin rate does not rise above 16-17 thousand dollars.

It should be noted that not only the FTT cryptocurrency is directly connected with FTX. Investors also opted to get rid of coins like Solana (SOL) and Serum (SRM). At the beginning of the month, FTT was worth $22, but after the bankruptcy was declared, the price dropped to $1,5. 

The USDD coin, created as part of the TRON project, entered the period of instability. Its price fluctuated between 0,973-1,04 dollars, then froze at around 0,98 dollars. It should be noted here that stablecoins are linked to fiat money and other stock assets. 

Some experts do not expect further turmoil in the cryptocurrency market for the following reasons:

  • the first shock after the bankruptcy of the exchange has already passed. Investors no longer withdraw their funds, coin rates have stabilized; 
  • there are no factors capable of destabilizing the situation on the market. Those who were afraid of development according to a negative scenario have long chosen instruments and assets with minimal risk.  

But there is a point that should not be forgotten. For example, clients are beginning to withdraw their capital from centralized platforms. And the exchanges immediately record a decrease in liquidity and a decrease in activity during the trading sessions. As a result, cryptocurrencies are sold at lower prices. For example, in JP Morgan believe that bitcoin will fall in price to 13 thousand dollars. 

How will the entire industry develop?

The ruin of FTX can create a "domino effect". And on other exchanges, clients began to actively withdraw their capital. 

The cost of FTX was measured in billions of dollars. Millions of people and legal entities invested their real money in tokens. And it turned out that exchange tokens are a very volatile asset. One news in the media was enough for a catastrophic drop in their prices. It should be noted that almost every centralized and decentralized platform issues its own tokens, including other large exchanges.

Following our ward, BlockFi (crypto lending platform), Salt (crypto operator), Gemini, AAX, Liquid Global crypto exchanges announced that they had questions. Customers are increasingly opting for cold wallets and their tokens. For example, owners of such wallets as Trust Wallet can purchase tokens of this system. And the demand for this asset is already growing. 

And it is quite possible that significant upheavals await the entire cryptocurrency industry. Against this background, Changpeng Zhao, who heads the Binance exchange, put forward a proposal on the need to form a special insurance fund. But to save the entire industry, very large sums of money, in the billions and trillions of dollars, are needed. 

And again, the question of the need to regulate the market is on the agenda. Many people choose cryptocurrencies precisely because of the convenience of working with them. For example, paying for some purchases in USDT is easier than using traditional payment systems.