FTX Cryptocurrency Collapse Under Scrutiny From Federal Authorities

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The swift collapse of cryptocurrency exchange FTX sent more shockwaves through the crypto world on Thursday, with authorities now investigating the firm for potential securities violations and analysts bracing for a further drop in crypto prices. .

FTX had this week agreed to sell to its biggest rival Binance after experiencing the cryptocurrency equivalent of a bank run. Clients left the exchange after worrying about whether FTX had enough capital.

A person familiar with the matter said the Justice Department and the Securities and Exchange Commission (SEC) were examining FTX to determine if any criminal activity or securities-related offenses were committed.

And on Thursday, Reuters reported that the Bahamian Securities Commission had frozen the assets of FTX Digital Markets, a subsidiary of the cryptocurrency exchange.

This week’s events marked a shocking turn for FTX CEO and founder Sam Bankman-Fried, who was hailed as a savior earlier this year when he helped prop up a number of cryptocurrency companies that ran into financial trouble.

The investigation into Bankman-Fried and FTX by the crypto world and securities regulators focuses on the possibility that the firm used customer deposits to fund bets in Bankman-Fried’s hedge fund, Alameda Research. In traditional markets, brokers are expected to separate client funds from other company assets. Violations can be sanctioned by regulators.

Meanwhile, investors in popular digital currencies got some relief from the latest crypto meltdown on Thursday after days of selling. Bitcoin rose to $17,691 after falling as low as $15,512 on Wednesday. Ethereum rose 12%. The gains came after a government report showing inflation had cooled somewhat last month gave riskier assets a boost.

The crypto world was hoping that Binance, the world’s largest cryptocurrency exchange, could bail out FTX and its depositors. However, after Binance had a chance to look at FTX’s books, it became clear that the smaller exchange’s problems were too big to solve. Binance announced his withdrawal from the deal on Wednesday.

A person familiar with the dealings between FTX and Binance described the books as a “black hole” where it was impossible to differentiate between the assets and liabilities of FTX and those of Alameda Research. This person spoke on condition of anonymity because she was not authorized to speak publicly on the matter.

This person said that Bankman-Fried had committed the “ultimate sin” by leveraging FTX’s custodial assets to fund Alameda Research.

In another illustration of FTX’s financial difficulties, Bankman-Fried asked its investors on Wednesday for $8 billion to cover withdrawal requests, according to the Wall Street Journal, citing unnamed sources.

In a series of tweets on Thursday, the FTX founder and CEO said he didn’t have enough liquidity to cover withdrawals and was more leveraged than he thought.

1) I’m sorry. That’s the biggest.

I screwed up, and I should have done better.

— SBF (@SBF_FTX) November 10, 2022

\n”,”url”:”https://twitter.com/SBF_FTX/status/1590709166515310593″,”id”:”1590709166515310593″,”hasMedia”:false,”role”:”inline”,”isThirdPartyTracking”: false,”source”:”Twitter”,”elementId”:”356d1f6f-5fbd-47de-96e9-6d9694ff9a8f”}}”>

1) I’m sorry. That’s the biggest.

I screwed up, and I should have done better.

— SBF (@SBF_FTX) November 10, 2022

The latest crisis in the crypto industry prompted renewed calls for tighter regulation. White House press secretary Karine Jean-Pierre said the FTX developments highlighted “why prudent regulation of cryptocurrencies is needed. The White House, along with relevant agencies, will continue to closely monitor the situation as it develops.”

The collapse of the third-largest cryptocurrency exchange is likely to cause more disruption to the crypto world, analysts say, meaning Thursday’s rally could be temporary.

The FTX reversal, as well as its impact on system confidence, will cause crypto prices to fall further, leading to “a new cascade of margin calls,” JP Morgan analysts said in a note to the investors. This would be similar to the sell-off that occurred after the collapse of the Terra stablecoin earlier this year, where prices continued to fall weeks after its failure.

“This deleveraging is likely to last at least a few weeks unless a bailout for Alameda Research and FTX is quickly agreed upon,” JP Morgan analysts wrote.

The crypto industry is waiting to see what other companies are affected by the collapse of FTX. Venture capital fund Sequoia Capital said on Thursday that it was paying off its nearly $215 million total investment in FTX.

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