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Global investigators pounce as crypto FTX collapse leaves potentially one million creditors

By News Desk
November 16, 2022

Collapsed-crypto exchange FTX outlined a "severe liquidity crisis" in U.S. bankruptcy filings, which said the group could have more than 1 million creditors, as regulators opened investigations and lawmakers called for clearer rules on how the industry operates, Reuters reported.

FTX's filing to a U.S. bankruptcy court, published late on Monday in the United States, said it was in contact with financial regulators and had appointed five new independent directors at each of its main companies, including its sibling trading firm Alameda Research.

The exchange, which had been among the world's largest, filed for bankruptcy protection on Friday in one of the highest-profile crypto blowups after panicked traders withdrew $6 billion from the platform in just 72 hours and rival exchange Binance abandoned a rescue deal.

"FTX faced a severe liquidity crisis that necessitated the filing of these cases on an emergency basis last Friday," the court filing stated.

"Questions arose about Mr. Bankman-Fried's leadership and the handling of FTX's complex array of assets and businesses under his direction."

FTX founder and former chief executive Sam Bankman-Fried said he expanded his business too fast and failed to notice signs of trouble at the exchange, the New York Times reported late on Monday.

Bankman-Fried over the weekend also tried to raise cash from investors to repay FTX traders and institutional clients even after the company had sought bankruptcy protection and he had stepped down as CEO, the Wall Street Journal reported on Tuesday.

FTX's bankruptcy case includes more than one hundred thousand creditors, and this number could surpass one million, the filings said. The numbers were disclosed as FTX requested that multiple FTX group companies file one consolidated list of major creditors, rather than separate ones.

The filings also confirmed that FTX had responded to a cyber attack on Nov. 11, after saying on Saturday it had seen "unauthorized transactions" on its platform.

FTX has engaged Alvarez & Marsal as financial advisor, and the firm said it has been in contact with the U.S. Attorney's Office, SEC, CFTC, and dozens of federal, state and international regulatory agencies over the past 72 hours.

Canadian crypto exchange Bitvo said on Tuesday it had terminated its deal to be bought by FTX, a deal that had been due to close in the third quarter of this year.

The sudden collapse of Bahamas-headquartered FTX, once a rising star of the crypto industry with a $32 billion valuation as of January, has sparked investigations by financial regulators and other supervisory bodies around the world.

The Securities Commission of The Bahamas, in a statement dated Monday, said two PwC partners had been approved by the Supreme Court as joint provisional liquidators for FTX.

The Commission said it had moved to use its regulatory powers to protect the interests of clients and creditors of FTX Digital Markets (a local unit of the exchange) "given the magnitude, urgency, and international implications of the unfolding events".

Several global regulators have removed licences form local FTX units, and are looking into the company, and investigations by the U.S. Justice Department, the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) are also underway, a source with knowledge of the investigations told Reuters.

Crypto industry peers and partners have been quick to distance themselves from FTX and demonstrate their sound financials, though some, including U.S. cryptocurrency broker Genesis Trading have disclosed they are exposed to FTX, either having held tokens on the exchange or by owning FTX's native token FTT.

"One has to ask why prices are not already lower than they are. The answer may simply be that the scale of this collapse is such that credit concerns now trump every other risk, and participants are focusing on moving assets off exchanges, at the short-term expense of price risk management," said crypto liquidity provider B2C2 in a note to customers.

The fallout has so far been limited to crypto exchanges and traders, but is featuring in mainstream policy discussions too.

French central bank governor Francois Villeroy de Galhau in a speech in Tokyo called for a global regulatory response to financial uncertainty caused by the crypto market.

"Let me stress that this uncertainty is why we need to regulate strongly and quickly crypto assets internationally," he said.

On Monday, officials from the U.S. Federal Reserve and legislature called for crypto finance to come under greater regulatory scrutiny.

However, some argue regulators should have taken action earlier.

Ken Griffin, founder and CEO of hedge fund Citadel, told the Bloomberg New Economy Forum in Singapore: "FTX is one of these absolute travesties in the history of financial markets. People will lose billions of dollars collectively and that undermines trust in all financial markets."

He said the scale of American investors' losses, "really strikes the entire core essence of what investor protection's all about."