Last week, California billionaire Sam Bankman-Fried was touted as a key figure in crypto, even a savior. Today, in the midst of a series of apology tweets, he said “I’m screwed” after his cryptocurrency exchange bled billions of dollars.
His FTX exchange is now struggling to raise $9.4 billion from investors and rivals alike, as customers rush to withdraw their funds.
A lot of people trusted FTX as a place to buy tokens or cryptocurrencies, like bitcoin.
Now, industry watchers say its spectacular crash may be the catalyst that forces governments, including Canada’s, to crack down on cryptocurrencies.
The issue was sparked when the rival owner of the world’s largest exchange, Binance, questioned the stability of FTX on Twitter. That sparked a three-day panic that cost FTX an estimated $6 billion.
Binance chief Changpeng Zhao on Wednesday backed down on a proposed purchase of his second-ranked rival, citing regulatory concerns, according to the New York Times.
That sent FTX into a tailspin.
Bankman-Fried has said she is in talks with others about another bailout deal, but made no promises.
“I’m sorry. That’s the most important thing. I screwed up and I should have done better.” he wrote on Twitter.
What exact errors were made remain unclear.
But crypto experts say investor money that should be “liquid” is not.
FTX was facing growing legal and regulatory threats before withdrawals were frozen, according to Samson Mow, CEO of Pixelmatic and JAN3, a bitcoin technology startup.
Mow says the FTX explosion has a familiar feel, although digital assets like bitcoin and ethereum weren’t the problem.
He says the exchange created tokens called FTTs that were used to hold value. FTT was the backbone of FTX, so when its value dropped, users were quick to get out.
Mow says the US Securities and Exchange Commission is investigating and it appears that customer money may have been improperly used to help dig FTX affiliate Alameda Research out of a $0 hole. 10 billion.
People who bought bitcoins or other currencies through the exchange are now unable to withdraw them.
Mow says bitcoin is trustworthy, but exchanges that rely on tokens like FTT as collateral rely on a financial card house.
He said users are aware of the risk of being “lazy” and leaving unclaimed assets on a currency exchange.
“You gambled at a casino that went bankrupt and now you’ve lost your money,” Mow said.
He says that people who didn’t withdraw their digital assets and kept them in their own wallet can’t access them now, because FTX used FTT as collateral and those tokens are now worthless, he says.
“There’s an old saying: not your keys, not your coins. It’s not a new lesson. People just aren’t learning. They’re gambling, and they got what they deserved.”
The implosion of FTX, which was valued at $32 billion USD not too long ago, is just the latest bad news for digital asset investors. Bitcoin prices are less than a third of what they were at their 2021 peak, before a big drop last fall.
But Bankman-Fried was seen as an influential player, someone who “was working closely with regulators” to try to regulate the space, said Ashley Stanhope of Ether Capital Corp., an ethereum-focused public company, and a founding member of the Canadian Web3 Council, a group that collaborates with governments to create better protections for investors.
He had also spent millions helping other companies, claiming he was an advocate of effective altruism, a movement that advocates charitable donations to safeguard the future of humanity.
His interpretation of his apology is that he made “real missteps. It doesn’t sound like he was trying to rip off investors or hurt them,” he said.
Stanhope says that this situation damages the credibility of the industry and that he fears that regulators are now “painting all cryptocurrencies with the same brush”.
Among the investors in FTX is the Ontario Teachers Pension Plan (OTPP), which invested more than $126 million in the exchange between October 2021 and January 2022.
In a statement, the OTPP said on Thursday that the “uncertainty” in FTX will have a “limited impact” on the pension plan, as the investment was less than 0.05 percent of its total net assets.
As for the FTX losses and how they will affect the industry, Stanhope admits that it is challenging and that the Bankman-Fried crash will likely change the crypto landscape.
“FTX’s implosion will likely change investors’ focus,” he said.
“We will likely see more users moving their assets off centralized exchanges and relying on self-hosted wallets” until exchanges become more secure and transparent, he said.
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