The rapid collapse of cryptocurrency exchange FTX sent more shockwaves through the crypto world on Thursday, with authorities now investigating the company for potential securities violations and analysts bracing for continued declines in crypto prices.
Earlier this week, FTX had agreed to sell itself to larger rival Binance after experiencing a run on the cryptocurrency equivalent of the bank. Customers fled the stock exchange after worrying about whether FTX had enough capital.
A person familiar with the matter said the Department of Justice and the Securities and Exchange Commission (SEC) are investigating FTX to determine whether criminal activity or securities crimes have been committed.
This week’s events marked a shocking turnaround for FTX CEO and founder Sam Bankman-Fried, who was seen as somewhat of a savior earlier this year when he helped prop up several cryptocurrency companies that ran into financial trouble.
An investigation into Bankman-Fried and FTX by crypto-world entities and securities regulators focuses on the possibility that the firm may have used customer deposits to finance bets at Bankman-Fried’s hedge fund, Alameda Research. In traditional markets, brokers are expected to separate clients’ assets from other company assets. The authorities can punish violations.
Meanwhile, investors in popular digital currencies got relief from the latest crypto crisis on Thursday after days of selling. Bitcoin rose to $17,691 after dropping to $15,512 on Wednesday. Ethereum rose 12 percent. The gains came after a government report showing inflation had cooled slightly last month lifted riskier assets.
The crypto world had hoped that Binance, the world’s largest crypto exchange, could save FTX and its depositors. However, when Binance got a look at FTX’s books, it became clear that the smaller exchange’s problems were too big to handle.
A person familiar with the affairs between FTX and Binance described the books as a “black hole” where it was impossible to separate the assets and liabilities of the FTX exchange and Alameda Research. This person spoke on condition of anonymity because he was not authorized to speak publicly.
That person said Bankman-Fried committed the “ultimate sin” of using FTX’s assets to fund Alameda Research.
In another example of FTX’s financial woes, Bankman-Fried on Wednesday asked its investors for $8 billion to cover withdrawal requests, The Wall Street Journal reported, citing unnamed sources.
FTX’s founder and CEO said Thursday in a series of tweets that he didn’t have enough liquidity to cover withdrawals and that he was more leveraged than he thought.
The latest crisis in the crypto industry created new demands for stricter regulation. White House press secretary Karine Jean-Pierre said the FTX development “highlights why thoughtful regulation of cryptocurrencies is truly needed. The White House, along with relevant agencies, will again be closely monitoring the situation as it develops.”
The collapse of the cryptocurrency’s third-largest exchange is likely to cause more disruption across the crypto world, analysts say, meaning Thursday’s rally could be temporary.
“The dismantling of FTX, along with the shock to confidence in its system, will cause crypto prices to fall further, leading to a ‘new round of margin calls,'” JP Morgan analysts said in a note to investors. This would be similar to the sell-off that followed the collapse of stablecoin Terra earlier this year, where prices continued to fall for weeks after its failure.
“This deleveraging is likely to last at least a few weeks unless a quick deal is reached to bail out Alameda Research and FTX,” JP Morgan analysts wrote.
The crypto industry is waiting to see what other companies will be affected by the FTX collapse. Venture capital fund Sequoia Capital announced Thursday that it will write down its nearly $215 million total investment in FTX.
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