FTX, the Bahamas-based cryptocurrency exchange founded by Sam Bankman-Fried, filed for Chapter 11 bankruptcy protection in the United States on Nov. 11, along with more than 130 affiliate companies.
The filing comes after the exchange halted user withdrawals because of insufficient liquidity, an issue that Bankman-Fried had assured wouldn’t affect its U.S. platform.
The Bahamas Securities Commission has frozen FTX’s assets and is conducting an investigation into whether the firm’s actions were unlawful. U.S. authorities are also investigating Bankman-Fried to determine if he violated securities rules, according to Bloomberg.
A great deal of wealth has been destroyed for FTX investors, users of the online exchange, and Bankman-Fried himself as a result.
Once hailed as the “new John Pierpont Morgan” and amassing a net worth of $26.5 billion, Bankman-Fried has fallen from grace and officially lost billionaire status in a matter of days, according to Forbes.
FTX users are potentially facing $8 billion in cumulative losses as the company scrambles to make up for the shortfall. Many are sounding the alarm on the billions that FTX lent to sister company Alameda Research, with The Wall Street Journal accusing FTX of using “customer accounts to fund risky bets.”
“If these are indeed the facts then it does appear to be possibly the largest financial fraud ever within the brokerage space—across all asset classes,” Gene A. Grant II, founder and CEO of LevelField Financial, told Fortune.
Investors in the company are likely to lose their entire investment as a result of the bankruptcy.
“Based on our current understanding, we are marking our investment down to $0,” venture capital firm Sequoia Capital stated on Twitter on Nov. 9 in reference to its $150 million loss.
Other notable investors include the Singaporean government-owned firm Temasek and the Ontario Teachers’ Pension Plan (OTPP), which invested $205 million and $95 million, respectively. OTPP manages the retirements of 330,000 teachers and boasts a “proven track record of delivering stable returns” on its website.
The FTX problem has rocked digital asset markets broadly.
(Courtesy of 2022 CFA Institute Investor Trust Study)
According to a survey by the CFA Institute, government pension funds seeking a high yield have been diving head-first into the digital asset space, with 94 percent of the funds surveyed claiming to own crypto-related assets.
Bitcoin dropped below the $16,000 level on Nov. 9, prices not seen since November 2020. Ethereum and Dogecoin are down 20 percent and 27 percent on the week, respectively.
Crypto investors are in disarray while critics take long-awaited victory laps.
“I don’t want to call it fraud at this moment, because that’s a legal term and none of us know,” Anthony Scaramucci, founder of digital asset-focused SkyBridge Capital and a personal friend of Bankman-Fried, told CNBC. “We have to leave it up to the regulars. But I’m distressed about it.”
“A year ago, Bitcoin hit $69,000,” Peter Schiff, chief economist at Euro Pacific Capital, posted on Twitter on Nov. 11. “The FTX bankruptcy proves the entire rally was a fraud. It will never be repeated. Bitcoin mania is over.”
As the company tries to salvage the situation, Bankman-Fried has been replaced as CEO by John Ray—a seasoned litigator known for cleaning up the Enron scandal in 2001.
“The FTX Group has valuable assets that can only be effectively administered in an organized, joint process,” the new FTX CEO said.
Some market commentators say FTX’s bankruptcy could be worse than Enron’s.
The FTX crisis comes on the heels of a survey by Banklesstimes.com showing that one-third of Americans believe cryptocurrencies are scams or Ponzi schemes.
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