After experiencing the crypto equivalent of a bank run, the imploding cryptocurrency trading firm FTX is now tight by billions of dollars.
The exchange, which was once one of the largest in the world, filed for bankruptcy during the first week of November 2022, and its CEO and founder resigned. The trading firm later stated that there had been "unauthorised access" and that funds had vanished. According to analysts, hundreds of millions of dollars may have gone missing.
The demise of the once-dominant exchange has sent shockwaves through the industry.
What Happened to FTX?
Customers fled the exchange due to concerns about FTX's capital, and it agreed to sell itself to rival crypto exchange Binance. However, the transaction fell through due to Binance's due diligence on FTX's balance sheet.
According to its bankruptcy filing, FTX valued its assets between $10 billion and $50 billion and listed more than 130 affiliated companies around the world.
The bankruptcy petition was filed in Delaware by FTX and dozens of affiliated companies, including CEO Sam Bankman Fried's hedge fund, Alameda Research, during the first week of November 2022.
Companies that backed FTX wrote down their investments, and bitcoin and other digital currency prices fell. Politicians and regulators are calling for tighter regulation of the complex industry following this collapse that affected the entire industry. FTX announced that it was transferring as many digital assets as it could identify to a new "cold wallet custodian," which is essentially a method of storing assets offline without allowing remote control.
FTX had also entered into a number of sports-related agreements, some of which have since fallen through. The Miami Heat and Miami-Dade County announced that they will end their relationship with FTX and rename the team's arena. Mercedes announced that it would immediately remove FTX logos from its Formula One cars.
Binance Comments on FTX Collapse
Changpeng Zhao (CZ), the CEO of cryptocurrency exchange Binance, spoke at a conference in Indonesia about the potential impact of FTX's demise on the crypto industry. FTX filed for Chapter 11 bankruptcy, and Sam Bankman-Fried resigned as CEO shortly afterwards.
When the conference moderator compared the FTX debacle to the 2008 financial crisis, Zhao said, "I think that's probably an accurate analogy." Binance's CEO went on to say: “With this type of event happening, it’s devastating for the industry. A lot of consumer confidence is shaken, and I think basically it sets us back a few years.”
Furthermore, CZ stated, "With FTX down, we will see cascading effects." They will be harmed, particularly those close to the FTX ecosystem."
Zhao anticipates that the crypto industry will face increased regulatory scrutiny, focusing on capital requirements and deposit handling. However, he said it is "probably a good thing, to be honest."
Following FTX's demise, the White House and several US lawmakers have called for proper cryptocurrency regulation. Senator Elizabeth Warren (D-MA), for example, has stated that cryptocurrency requires "more aggressive enforcement," and she will continue to press the Securities and Exchange Commission (SEC (News - Alert)) to "enforce the law."
Binance was thinking about buying FTX and providing liquidity. Following due diligence, the crypto exchange decided not to pursue the acquisition, stating, "As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of http://FTX.com."
The CEO of Binance believes that the crypto industry will eventually recover, saying at a conference in Indonesia, "The market will heal itself."
Binance’s Role in the FTX Collapse
Binance, the world's largest cryptocurrency exchange, has been dithering in its attempts to bail out rival FTX, resulting in a crypto market bloodbath. While Bitcoin fell to a two-year low of around $17,500, a slew of other cryptocurrencies did the same. The global crypto market cap has dropped 11% to $906 billion.
The second week in November 2022 was a rollercoaster for cryptocurrency investors. The market initially decried the news of FTX's liquidity crisis. Then, market participants hoped that Binance-FTX would propel the market higher, but the opposite has occurred. It is unclear whether the deal will eventually go through, but given FTX's poor financial performance, Binance is less likely to buy it. As a result, the FTT token has suffered. As FTX filed for bankruptcy, this further pushed Binance’s thoughts of buying FTX to the wayside and ultimately save them.
Binance quoted, “As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of FTX.com,” on Twitter (News - Alert) in November 2022.
An expert in the matter Bitcode Method official was sceptical that Binance buying FTX would resolve any of the existing issues it had. Perhaps, bankruptcy is what was needed to strengthen the crypto industry once again.
Despite the fall of FTX, significant developments are already in motion. Binance urges major exchanges to make proof of reserves a standard industry practice. Some have already begun to publish it. Newcomers to the space are learning the value of having self-custody of their assets, and investors are discovering the benefits of working with adequately regulated entities the hard way. These are the growing pains of a fledgling industry, but cryptocurrency will emerge more substantially and resilient than ever.
