Cryptocurrency trading firm FTX has filed for bankruptcy protection after it was unable to complete its customers withdrawal requests last Friday according to The NYT. A privately held company, at one time a $32 billion cryptocurrency giant, saw its value plunged to zero after its buyout deal was canceled following an investigation by federal authorities.
Sam Bankman-Fried, a 30-year-old entrepreneur once hailed as a modern-day J.P. Morgan, watched his digital empire collapse. This included billions of dollars of his own fortune which was $26 billion just a few years ago, to zero dollars as reported in Bloomberg.
FTX reportedly used customer funds to prop up its sister hedge fund’s Alameda Research high-risk trading operation without permission, according to the Wall Street Journal. The Justice Department and the S.E.C. are currently examining that relationship.
Due to a liquidity crunch, FTX was selling its business to Binance, a rival finance company. The deal was under-process when the Binance CEO, Changpeng Zhao, said his company was liquidating $580 million worth of FTX holdings. That set off a firestorm of draw downs that FTX didn’t have the cash to facilitate.
Federal prosecutors in New York are now investigating the exchange’s collapse, according to CNN. And authorities in the Bahamas, where FTX is based, launched a criminal probe into the firm over the past weekend. Even before the bankruptcy filing and missing funds, the U.S. Department of Justice and the SEC began examining FTX to determine whether any criminal activity was committed, according to The Associated Press.
In a traditional US bank failure, the government insures customer deposits, making them whole up to $250,000. But there simply is no mechanism for depositor insurance in the largely unregulated world of cryptocurrencies. Reports suggest that this debacle has left a $8 billion hole in company finances. Thousands of individual investors saw their money disappear into thin air. Even 80 institutional investors fell for the Mr. Bankman-fried vision, pouring nearly $2 billion into FTX in just two years, are now holding their faces in their hands.
The FTX crash had a profound effect on the broader cryptocurrency market. Bitcoin value dropped more than 30 percent from $21,000 on November 9 to below $16,000 in a day. Overall cryptocurrencies are in crisis from the start of this year due to rising inflation, slowing economy and shaky investors confidence. Bitcoin which peaked at $68,000 in November last year is now trading below $16,000.
