What do we know so far about the collapse of the crypto exchange FTX? | cryptocurrencies

The collapse of FTX, one of the world’s largest cryptocurrency exchanges, has sparked further volatility in the highly speculative digital asset market. The fortune of FTX founder Sam Bankman-Friedwent from nearly $16 billion to zero in a matter of days when his crypto empire made his application Bankruptcy protection in the United States on 11.11. Here we answer some of your questions about the story so far.

How was FTX structured and what was its business model?

From a corporate perspective, FTX was a chaotic web of more than 100 different companies, all united under the common ownership of Bankman-Fried and his co-founders Gary Wang and Nishad Singh. In a bankruptcy filing, John Ray III – an American bankruptcy specialist who previously oversaw the collapse of Enron – described it as four main “silos”: a venture capital arm that invested in other companies; a hedge fund that traded crypto for profit; and two exchanges, one ostensibly dedicated and regulated for US public, and an international exchange where the rules were much freer.

The sources of income were as varied as the business, but the core of the group was the stock exchange. Most people buy cryptocurrency by transferring money (“fiat”) to an exchange like FTX, which works like a currency exchange and trades currency pairs at a floating exchange rate. The regulated exchange of FTX offered this service, and the company took a cut of every transaction, but the big bucks were in much more aggressive trading on the international exchange, where traders sought to profit from crypto asset price fluctuations by trading Borrowed money to increase their potential gains (or losses). The more complex the trade, the bigger the cut.

Why did it collapse?

Short term because of a token called FTT. This was effectively a stake in FTX that the company had issued itself and promised to buy back with a portion of its profits. But documents leaked to news site CoinDesk suggested that Alameda, the group’s hedge fund, used FTT to make risky loans – effectively trading company shares. The revelation prompted a major financial transaction tax holder to Competitor exchange Binanceto explain that it was selling its holdings, leading to a rush on the exchange as other customers scramble to withdraw their funds.

In the medium term, it collapsed due to deeper issues related to the connection between FTX and Alameda. The exchange was unable to accept wire transfers, so customers transferred funds to Alameda and FTX credited their accounts. But the real money was never passed: Three years later, Alameda had stored, traded, and frequently lost $8 billion in FTX client funds. When the run on the stock market began, FTX couldn’t find the money it thought it had because it never took it.

In the long run, FTX failed because the company was down. “Never in my career have I seen such a complete failure of corporate controls and a complete lack of trustworthy financial information,” said Ray, the bankruptcy specialist.

What does the fate of FTX tell us about cryptocurrencies?

Different conclusions were drawn within the sector. Some have argued the collapse is a triumph for “decentralized finance,” or DeFi, which uses computer code to create versions of financial services that don’t rely on trust or a central party. The head of a DeFi exchange can’t buy a $40 million penthouse with customer funds because there’s no head.

But outside the sector, the conclusion is clear. cryptocurrencies are a bet on the idea that a world where government control over money and finance ends would be a better one: FTX’s collapse is perfect proof that government regulation over finance is actually quite useful.

Do people get their money back?

Some people will get some money back, but nobody will get everything. Even Bankman-Fried believes it would take an $8 billion capital injection to bail out every depositor. But the reports presented by Ray make it clear that that is wishful thinking. There isn’t even a single document listing all of the company’s depositors, he says, and while the balance sheet suggests a healthy mix of assets and liabilities, “I have no confidence in it and the information it contains is possible as of this writing.” incorrect date specified”.

Robert Frenchman, a partner at New York law firm Mukasey Frenchman, said that US FTX clients whose money is trapped in the failed deal must join a creditor queue as there are no special protections for clients of unregistered crypto firms like FTX are.

“There is no backstop here for US customers, unlike bank or broker account holders. Customers will have to argue with everyone else because they don’t have special protection. They go into this process as individual believers, or as a group of believers as they band together, who must compete against legions of other believers, large and small.”

Meanwhile, the U.S. Attorney for the Southern District of New York is reportedly investigating the case, and U.S. Treasury Secretary Janet Yellen has said crypto markets need tighter oversight.

Could there be contagion within the crypto markets?

There are already signs of a spillover effect. BlockFi, a crypto lender bailed out by FTX over the summer, has suspended customer payouts and admits it has “significant exposure to FTX.” On Wednesday, crypto exchange Genesis made “the difficult decision to temporarily suspend redemptions” from the company’s lending business following a string of withdrawals from the service.

This week, the chief executive of Singapore-based crypto exchange Crypto.com said his firm would refute those who said the platform was in trouble, adding that it has a robust balance sheet and takes no risks. Kris Marszalek made the statement after investors questioned Crypto.com’s transfer of $400 million worth of ether tokens to another exchange called Gate.io on Oct. 21. Marszalek said the transfer was a mistake and the ether tokens were returned to the exchange.

Crypto market watchers are anticipating more instability, although core crypto asset Bitcoin has held up this week by remaining largely flat around $16,700.

Teunis Brosens, head of regulatory analysis at Dutch bank ING, said the crisis will “surely deepen” the recent crypto winter, which has caused the value of the crypto market to drop from $3 trillion last year to less now when $1 trillion fell.

“In terms of prices, we saw bitcoin fairly stable at $19,000-$20,000 for months. I would think it’s likely that we’ll seek stability at lower levels now – but first the storm needs to clear and we’re definitely not there yet.”

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