Regulators descend on FTX as creditors may top 1-million

Collapsed-crypto exchange FTX outlined a “severe liquidity crisis” in US bankruptcy filings, which said the group could have more than 1-million creditors, as regulators opened investigations and legislators called for clearer rules on how the industry operates.

FTX’s filing in a US bankruptcy court, published late on Monday, 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 blow-ups after panicked traders withdrew $6bn 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 CEO Sam Bankman-Fried, said he expanded his business too fast and failed to notice signs of trouble at the exchange, whose downfall sent shock waves through the crypto industry, the New York Times reported.

There are more than 100,000 creditors involved in the bankruptcy case, though this number could surpass 1-million, the filings said, 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 cyberattack on November 11, after saying on Saturday it had seen “unauthorised transactions” on its platform.

FTX has engaged Alvarez & Marsal as financial adviser, and the firm said it has been in contact with the US attorney’s office, Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), and dozens of federal, state and international regulatory agencies over the past 72 hours.

Scrutiny

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

The Securities Commission of the Bahamas, in a statement also dated on 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”.

It said it would engage with other supervisory authorities. Several global regulators have moved to remove operating licences from local FTX units, and are looking into the company.

Investigations by the US justice department, SEC and CFTC are also under way, a source with knowledge of the investigations said. 

Crypto industry peers and partners have been quick to distance themselves from FTX and demonstrate their sound financials, though several have disclosed they are exposed to it, having held tokens on the exchange or by owning FTX’s native token, FTT, which plunged about 94% last week.

Bitcoin has lost 19% this month and other tokens, such as those affiliated with the Solana blockchain once lauded by Bankman-Fried, have suffered, too.

“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, which has so far been limited to crypto exchanges and traders, is now featuring in mainstream policy discussions. 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. “The last episodes show us that we cannot allow for a second ‘crypto winter’ to still add to uncertainty and financial instability.”

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

Reuters