The crypto market continues to be in a fever amid news of the likely bankruptcy of FTX. How should the actions of the regulator in relation to the exchange be assessed and what does this mean for the industry as a whole?
Binance and FTX: Crypto wars we don't know about
As you probably already know, the FTX crypto exchange, one of the most famous in its industry, is trying to raise billions of funds to prevent the collapse, while its executive director Sam Bankman-Fried is subject to increased control by law enforcement.
The long history that began with the foray into FTX, one of the world's largest cryptocurrency exchanges, and the rejection of a takeover deal by competitor Binance, has hit the already stranded bitcoin and other tokens. As investors reflect on how much regulators want to tighten the screws for cryptocurrencies.
On Wednesday, bitcoin fell to a two-year low of $15,632. It last traded at $17,450 at 13:20 GMT on Friday, being picked up by a rally between assets following US inflation data.
The FTX FTT token fell 5.7% to $3.5 on Friday, losing 85% over the week. Trading volumes of bitcoin futures and exchange-traded funds have risen sharply.
But don't jump to conclusions. As always, the war against FTX is not what it seems at first glance.
What's on the surface?
FTX is struggling to raise about $9.4 billion from investors and competitors as the exchange seeks to save itself after customer withdrawals.
At the same time, regulators froze some FTX assets, and industry colleagues sought to limit losses on Friday amid worsening problems with the firm's solvency and increased attention to its executive director Sam Bankman-Fried.
Some investors, including Sequoia and SoftBank, are trying to reduce their investments in crypto companies to zero. The total investment volume of SoftBank Group Corp's Vision Fund in the United States and FTX's international operations with their participation is less than $100 million. Sequoia reported that its Global Growth Fund III fund invested $150 million in FTX.com and FTX US, which is less than 3% of the fund's allocated capital, while the Sequoia Capital Global fund Equities invested $63.5 million.
SkyBridge Capital is working on buying out its stake in FTX, Anthony Scaramucci said in an interview. The CEO of fintech company Circle, Jeremy Allaire, tweeted on Wednesday that "Circle is a tiny FTX shareholder and FTX is a tiny Circle shareholder.
The Ontario Teachers' Pension Plan (OTPP) said on Thursday it had invested a total of $95 million in FTX. According to OTTP, any financial losses from the impact will have a limited impact on the pension plan.
And Singapore's state investor Temasek Holdings said by email that they are aware of the relationship between FTX and Binance and are attracting FTX as a shareholder.
Other crypto companies have taken steps to protect themselves: crypto lender BlockFi has stated that it is suspending withdrawals by customers until there is clarity regarding FTX. While the broker Genesis Trading reported that its derivatives business has about $175 million of blocked funds on FTX.
Estimates of the industry as a whole vary greatly. Some crypto investors talk about a particular case, others, such as Anton Ruddenklau, are pushing for a liquidity crisis around the world.
Now regulatory authorities have intervened, which has multiplied the problems for FTX companies around the world: Cyprus plans to suspend the license of the European division of the exchange. FTX Australia called in administrators on Friday, the Australian Financial Review reports, citing the company's statement. And the Securities Commission of the Bahamas has frozen the assets of FTX Digital Markets, a subsidiary of FTX.
The Cyprus Securities and Exchange Commission did not immediately respond to a request for comment, and Bankman-Fried has not contacted the publications for comment.
It is obvious that the US securities regulatory authority is investigating the actions of FTX.com with regard to customer funds and lending activities in cryptocurrency, and this is a large-scale offensive, and it is caused not by the legitimacy of the exchange, but by the actions of the founder.
Who Framed Roger Rabbit?
FTX's predicament marks a rapid turnaround for Bankman-Fried, a 30-year-old crypto executive whose fortune Forbes estimated at about $17 billion just two months ago.
The founder of the exchange himself is under investigation by the U.S. Securities and Exchange Commission in connection with possible violations of the Securities Act.
So, a few months ago, Bankman-Fried intervened to save other crypto firms affected by market turmoil.
For example, in July, FTX agreed to provide crypto lender BlockFi with a $400 million revolving credit line and had the opportunity to buy a lender that was facing a surge in withdrawals.
In addition, FTX transferred at least $4 billion to Alameda to support a company engaged in cryptocurrency trading - after a series of losses of the latter.
According to three people familiar with the company's activities, some of these transactions involving Bankman-Fried's trading firm, Alameda Research, resulted in a number of losses that ultimately led to his demise.
However, industry experts say that the confrontation between the two billionaire founders of Binance and FTX led to today's situation.
The Foresight Saga: The crypto wars we don't know about
Binance CEO Changpeng Zhao and Bankman-Fried's relationship began in 2019. Six months after the FTX launch, Zhao bought 20% of the exchange for about $100 million, according to a person with direct knowledge of the deal. At the time, Binance stated that the investment was "aimed at the joint development of the crypto economy."
However, within 18 months, their relationship soured.
According to former Binance employees, FTX was growing rapidly, and now Zhao viewed it as a real competitor with global aspirations.
When FTX applied for a license in Gibraltar for a subsidiary in May 2021, it was supposed to provide information about its major shareholders, but Binance blocked FTX's requests for help, according to correspondence between exchanges.
As the reports show, between May and July, FTX lawyers and consultants wrote to Binance at least 20 times to find out details about the sources of Zhao's wealth, banking relationships and Binance ownership.
However, in June 2021, an FTX lawyer told Binance's CFO that Binance was "not interacting with us properly" and risked "seriously disrupting an important project for us." A Binance legal officer responded to FTX saying she had tried to get a response from Zhao's personal assistant, but the information requested was "too general" and they may not provide everything.
By July of the same year, Bankman-Fried was tired of waiting. He bought Zhao's stake in FTX for about $2 billion. Two months later, when Binance was no longer involved, the Gibraltar regulator granted FTX a license.
This amount was paid to Binance, in part, in FTX's own coin, FTT, Zhao said last Sunday — a holding he later ordered Binance to sell, precipitating the FTX crisis.
In May and June, Bankman-Fried's trading firm, Alameda Research, suffered a number of losses as a result of transactions. In an effort to support Alameda, which had assets of almost $15 billion, Bankman-Field transferred at least $4 billion to FTX funds backed by assets, including FTT and shares of the trading platform Robinhood Markets Inc. At the same time, he did not inform other FTX executives of his intention to support Alameda, adding that he was afraid of information leaks.
However, on November 2, the news agency CoinDesk published a report on the balance sheet leak, which allegedly showed that most of Alameda's assets worth $14.6 billion are in FTT. Alameda CEO Caroline Ellison tweeted that the balance sheet was compiled only for a "subset of our legal entities" that does not reflect assets worth more than $10 billion.
The Alameda crisis forced Zhao from Binance to act.
So, Zhao said that Binance will sell its entire stake in the FTT token for at least $580 million "due to the recent revelations that have become known." The price of the token collapsed by 80% over the next two days, and the flow of funds withdrawn from the exchange is only increasing.
After Zhao's tweet that Binance would sell its FTT stake, Bankman-Fried expressed confidence that FTX would withstand the attacks of its competitor. He told Slack employees that the withdrawals were "not shocking, but too big," but they were able to process the requests.
But by Monday, the situation had become terrible. Unable to quickly find a backer or urgently sell other illiquid assets, Bankman-Fried contacted Zhao.
Bankman-Fried has signed a non-binding letter of intent from Binance to buy FTX assets outside the US. This greatly lowered the value of the exchange, but the situation would have been saved.
The exchange employees were not aware of the whole situation. Even the executives were unaware of Alameda's deficit and takeover plan until Bankman-Fried informed them about it.
And then on Wednesday, Binance announced the rejection of the takeover. "The problems are beyond our control or ability to help," the Binance office said. Zhao tweeted: "A sad day. I tried," with a crying smiley face.
Experts say that Binance lawyers analyzed the transaction and realized that they would have to undergo a financial check in connection with the merger. Amid news about Binance and Iran's ties, such a check may not be out of hand. But it also has a whiff of revenge, if you know what I mean.
It is obvious that the market is dealing with one single unsuccessful management of the company's finances. This is the common cause of all Wall Street crashes, but it does not mean that the crypto industry is faced with low liquidity. Yes, FTX's frozen assets put the exchange and its clients in a difficult position. But this is a common situation in the market, and this applies little to the industry as a whole.
And while investors are selling bitcoin in a panic, Justin Sun, the founder of the Tron cryptocurrency token, said that he is ready to actively and financially support the company. Justin hinted that he is currently studying the documentation.
Sun himself considers this investment as a strategic investment in the industry as a whole.
The exchange also expects to attract another $1 billion from the competing OKX exchange and the Tether stablecoin platform, although FTX itself has not yet responded to a request to comment on the offer.
There is no doubt that with the growth of the bearish trend, some crypto players will be put out of action, ruining their depositors. I can also assure you that for this reason bitcoin and other tokens will fall... but not to zero. Personally, I consider the level of 10,000 dollars as almost a must-have in 2023 for bitcoin.
However, later, with the recovery of the economy, tokens will also regain their positions. And then it will be too late to buy them.
