FTX, a major cryptocurrency exchange, is on the verge of collapse this week amid liquidity concerns and allegations of misappropriation of funds, which has led to massive withdrawals from investors. The value of FTX’s native token, FTT, fell, taking with it other coins including Ethereum and Bitcoin, which hit a two-year low as of Wednesday afternoon.
The impact of the FTX crash could have wide-ranging effects across the crypto market as cryptocurrencies and exchanges exposed to FTT or FTX could face price drops and financial troubles.
What this week’s events mean for major exchanges, US investors and future crypto regulations.
Here are the key points:
FTX is a cryptocurrency exchange founded in 2019 by CEO Sam Bankman-Fried. The exchange issues its own token, the FTT, and as of Tuesday was the fourth largest crypto exchange by volume.
Bankman-Fried also founded a crypto trading firm called Alameda Research; CoinDesk reported on Alameda’s troubled balance sheet on November 2. According to the report, its biggest asset is FTT worth billions of dollars.
Changpeng Zhao, CEO of rival exchange Binance, tweeted on Sunday that he was planning to sell FTT’s stockpile of Binance due to “recently revealed disclosures,” according to a November 2 CoinDesk report from FTX and Alameda’s Blur Fund. Referring to. He compared the condition of FTX to the crash of TeraUSD and Luna this year, which affected the crypto market and cost investors billions of dollars. But usually, such moves are not publicly announced.
Zhao’s announcement led to a sharp drop in the value of FTT the next day as suspicions grew that FTX did not have the necessary liquidity to back the transaction and stay away. Other coins, including BTC and ETH, also declined in value, with bitcoin hitting a two-year low. Bankman-Fried said in a tweet on Thursday that the platform saw withdrawals of $5 billion on Sunday.
Zhao and Bankman-Fried struck a deal for Binance to acquire the non-US branch of FTX. The exchange’s CEO signed a non-binding letter on Tuesday, essentially promising to bail out the failing exchange to prevent a major market crash.
Binance withdrew from the deal. Within a day, Zhao posted on Twitter that Binance had completed its “corporate due diligence” and said it would not acquire FTX. Zhao tweeted that reports of “misappropriation of customer funds” and “an alleged US agency investigation” contributed to his decision. Banksman-Fried mentioned Zhao’s influence on FTX’s collapse in a cryptic post on Twitter where he said, “Well played; you win.”
On Tuesday, FTX halted all non-fiat customer withdrawals. On Twitter, Bankman-Fried posted a string of apologies explaining FTX’s liquidity issues and promising more transparency. He emphasized that FTX’s US arm was not affected by the crisis, but as of Thursday, FTX.US said on its website that trading could be halted “in a few days.”
According to a recent report in The Wall Street Journal, Bankman-Fried told an investor that Alameda owed FTX about $10 billion that FTX lent to Alameda using customer deposits. But before the lending, FTX had just $16 billion in assets, meaning it lent out more than half of its assets.
What does this mean for US customers?
FTX’s Bankman-Fried and Binance’s Zhao emphasized that the liquidity issue pertains to FTX International, not FTX.US, the US arm of the exchange, which is subject to more regulation.
However, on Thursday, FTX.US posted a warning on its website for users at the log-in screen, noting that trading “may be paused on FTX US over the next few days.” Users were told in the message to close any position they wanted and the withdrawal would remain open.
Bankman-Fried tweeted on Thursday that the FTX.US exchange is “100% liquid,” meaning users can completely withdraw all of their invested funds. However, Bloomberg reported that he told FTX.com investors on Wednesday that without a bailout, the company would need to file for bankruptcy. It is unclear whether this will include FTX.US.
What does this mean for the US crypto market?
FTX troubles have had a profound effect on the US crypto market:
The price of bitcoin fell below $16,000 on Wednesday.
Ethereum fell below $1,100 on Wednesday.
Solana fell below $13 on Wednesday after CoinDesk reported that Alameda had significant holdings.
Tether briefly tumbled from the US dollar, falling 3% on Thursday.
Cryptocurrency is a relatively risky investment and should be treated accordingly. High-risk investments should make up a small portion of your overall portfolio, and diversifying the range of cryptocurrencies you buy can help reduce risk.
I am concerned about placing my crypto with an exchange. What should I do?
Consider moving your digital assets to a separate crypto wallet. Most exchanges allow you to transfer assets to these wallets, which can be online (on a different platform) or offline (on a thumb drive with additional security features).
Which Exchanges Are Exposed to the FTX Crisis?
With such high volatility and so many clients unable to withdraw their funds from FTX, investors are concerned about the fate of their assets on other exchanges. Here’s what the major exchanges said about their exposure to FTX and FTT:
FTX is under investigation by the Securities and Exchange Commission, or SEC, and the Commodity Futures Trading Commission for its handling of client funds, Reuters reported. The investigation started several months ago.
Binance.US, the US arm of Binance, which is managed separately, posted on Twitter that Binance’s dealings with FTX will not affect US users.
Coinbase CEO Brian Armstrong tweeted that the platform does not pose any material exposure to FTX, FTT or Alameda.
Gemini co-founder Cameron Winklevoss tweeted that the platform poses no content exposure to FTX, FTT or Alameda.
Robinhood told NerdWallet that the service has no direct links to Alameda, FTX or any of its entities. FTT cannot be traded on the platform. FTX’s Bankman-Fried holds a 7.6% stake in Robinhood.
eToro told NerdWallet that the platform has no corporate exposure to FTX or FTT. Users can trade FTT on eToro, however this is not applicable for US users.
Kraken told CoinDesk that the platform has no material exposure to FTX or Alameda and does not support FTT trading.
Crypto.com CEO Chris Marszalek tweeted that the company’s direct exposure to the “FTX meltdown” is “immaterial,” given the company has less than $10 million in its own capital. The platform suspended withdrawals of stablecoins USD and USDT on the Solana network, but did not explain why.
TradeStation, Webull and BlockFi did not respond to NerdWallet’s request for comment. FTX was set to acquire BlockFi, and FTX.US extended a $400 million line of credit to BlockFi.
How will this affect crypto regulation?
US exchanges are subject to more regulation and reserve requirements than international exchanges. But recent events could lead to more regulatory scrutiny. In a Twitter post on Wednesday, Sen. Elizabeth Warren, D-Mass., called for more aggressive enforcement and said she is pushing the SEC to protect consumers.
Neither the author nor the editor held positions in the above investments at the time of publication.