Without any doubt, the situations in the crypto sphere has been worsened by the downfall of popular crypto exchange, FTX. Prior to this development, the sphere has continued to struggle, enduring poor market conditions. However, with the FTX crisis, the whole situation deteriorated and it is now appearing now like market recovery is far from sight.
Recall that FTX before it plunged into crisis runs as a crypto exchange. It was founded in 2019 by Sam Bankman-Fried. In 2021, the exchange rose to become the third-largest cryptocurrency exchange by volume. In January 2022, FTX launched its ventures to focus on digital asset investments. Through this venture capital, the exchange bailed numerous firms that plunged into bankruptcy. A few months into the prevailing bear market, the now troubled exchange began to give hope to struggling firms. In June for instance, it gave a $250 million revolving facility to BlockFi.
According to SBF, the goal of the bailout was to protect customer assets and avert contagion from impacting the system. Further, the same SBF, through his other firm, Alameda Research also gave $200 million cash and stablecoin credit facility to Voyager Digital. FTX maintained this spirit until it plunged into crisis in early November, thereby putting the crypto sphere in a dillema. Notably, this article seeks to critically explain the genesis of the FTX crisis and its impact on other crypto firms within the industry.
Genesis of the crisis
As earlier asserted, the crypto community, in early November, woke up to a shocking revelation about the exchange. The nucleus of the revelation revolves around FTX, its native token and Alameda Research. Reports traced the issue to a leaked balanced sheet of Alameda Research, another firm owned by SBF which revealed that it tied up billions of dollars of its assets in FTX token, FTT. Alameda Research runs as a quantitative trading firm, offering liquidity in digital assets markets.
In reaction to this shocking revelation, Binance, through its CEO, Changpeng Zhao, decided to liquidate its entire holding of the FTX token. Zhao justified the decision to liquidate the tokens as part of Binance’s risk management measures. The CEO maintained that Binance has learnt a big lessons from the collapse of LUNA and would always act proactively to prevent a recurrence. Following the decision by Binance to liquidate FTT, the token began to crash. Worthy of note that a few hours after the commencement of FTT liquidation by Binance, the token declined by more than 40 percent. More so, the move triggered an unprecedented rose in withdrawals from FTX, which consequently led to its liquidity crisis.
Binance’s failed attempt to purchase FTX
In a short twist of events, Zhao made an attempt to purchase the assets of FTX. In a then tweet by the CEO, the exchange signed a non-binding intention to fully acquire the troubled exchange to protect users and help cover liquidity crunch. This development made Zhao to halt the ongoing liquidation of FTT. However, in the end, the deal failed to materialize, with Binance citing “due diligence.”
It said in a statement, “As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of FTX.com.”
Occasioned by this development, FTX resolved to seek a $9 billion rescue funds to save the firm from collapse. However, the efforts failed to materialize, leaving the exchange with no other alternative than filing for bankruptcy. On November 11, the exchange commenced a Chapter 11 bankruptcy proceedings in the US.
Clampdown on FTX subsidiaries
Meanwhile, following the crisis befalling FTX, many regulators have began to clamp down on its subsidiaries. In Bahamas, its regulator, SCB froze the assets of FTX subsidiary in the country. Further, the regulator terminated the registration of the exchange. Worthy of note that the agency applied to the court for the appointment of a provisional liquidator. The Court approved Mr. Brian Simms, K.C. (Lennox Paton Counsel and Attorney-at Law) as provisional liquidators of the firm.
A few days later, the financial regulator in Australia suspended the financial service license of FTX. As revealed, the suspension of the license will run till May 15, 2023. The suspension of the license, according to ASIC manifested after it was placed into voluntary administration. Although, the ASIC gave the FTX subsidiary in the country a privilege to offer financial services till December 19. But, it insisted that those services must relate to the termination of existing derivatives with customera.
How Galaxy Digital, Multicoin Capital, BlockFi and Galois Capital suffered from the crisis
Galaxy Digital has about $77 million in assets on FTX at the inception of the latter’s crisis. The cryptocurrency financial services provider attempted to withdraw about $47 million from the struggling firm when the crisis took full shape. Currently, it’s unclear if the firm withdrew the funds before FTX suspended withdrawals or if the assets remain on the platform.
Also, Multicoin Capital a prominent venture capital firm has about 10% of all the assets under its care trapped in FTX. While the firm didn’t reveal the exact amount of the funds therein, yet one cannot shy away from the impact of the FTX crisis on the firm.
Furthermore, the crisis of FTX also affected BlockFi, currently, the cryptocurrency lender is edging towards bankruptcy due to its financial exposure to FTX. Around July, BlockFi almost went bankrupt if not for the $400 million credit facility provided by FTX. As part of its efforts to rescue the cryptocurrency lender then, the firm contemplated buying BlockFi for about $240.
Though the deal didn’t materialize, yet, FTX and BlockFi still maintain a business relationship. Now, the fresh crisis of FTX will heap more bankruptcy pressure on BlockFi. Notably, Galois Capital is one of the firms outside the cryptocurrency sector that suffered from the crisis. The firm has about $100 million on FTX as the crisis unfolded.
Voyager exposure to FTX
During this period, the relationship between the affected firms and FTX emanated. Among those firms is Voyager Digital which has gone bankrupt due to it’s exposure to FTX. Worth noting that within 2022 alone, Voyager digital had issues due to its exposure to struggling firms. Voyager issue with 3AC pushed the firm to turn to Alameda for a financial bailot of $500 million.
Recall that about five months ago, Voyager entered into an agreement with FTX’s sister company, Alameda for a $500 million loan. The firm turned to Alameda after the crisis of 3AC cost Voyager about 15,250 BTC and 350 million USDC coins. This heavy damage pushed Voyager to the brink of Bankruptcy until Alameda came to the rescue.
Now, since Alameda and FTX are battling bankruptcy issues now, Voyager is also on the verge of a new collapse. Recently, Voyager said it had about $3 million worth of virtual assets on FTX when the cryptocurrency exchange filed for bankruptcy. Now, the firm will be looking for a way out of this fresh crisis due to the collapse of FTX. Voyager Digital has suffered the most from the crisis that befell prominent firms in the industry.
Other firm affected by the crisis
Singapore-based cryptocurrency exchange, Crypto.com has about $10 million on FTX when the crisis surfaced. Before then, the firm previously had about $1 billion on FTX. Luckily, the exchange reduced it significantly before the inception of the crisis. Another cryptocurrency exchange, Coinbase has about $15 million on FTX according to an official announcement. The exchange described the exposure as small. It also emphasized that it has no loans to FTX or its sister firm, Alameda.
Likewise, CoinShares, a virtual asset manager base in Europe deposited about $30 million on FTX before the crisis. However, when the crisis surfaced, the firm said it has minimized its exposure to FTX weeks. Pantera Capital, a cryptocurrency hedge fund firm has about 3% of it’s assets in FTT, a native token of FTX. Though the firm said it has liquidated a larger percentage of its holding in FTT before the crisis.
Similarly, Celsius has declared itself bankrupt due to the demise of FTX. The cryptocurrency lender’s relationship with the defunct crypto exchange dates back to January 2020. Then, Celsius had about $3.5 billion worth of financial exposure to the FTX group. Further, while the crypto lender recently declared bankruptcy, it has about $12 million outstanding loan to Alameda. Genesis Trading is another cryptocurrency firm affected by the crisis. Early last month in the wake of FTX’s struggles, Genesis said it locked about $175 million on FTX.
It’s imperative to note that most of the firms affected by the crisis of the defunct cryptocurrency exchange FTX got help from the firm in their own time of need. At the early stages of the crypto winter, FTX and its sister company, Alameda were all over the industry in a philanthropic manner, assisting struggling firms.
Presently, the entirety of the cryptocurrency sector is bracing for the negative impact of the FTX crisis. Regulators around the globe are monitoring the situation closely to devise regulatory frameworks that will shield investors against future occurrences. Without a doubt, the collapse of FTX will prolong the price downturn in the industry. Thereby leaving investors with a long walk out of the crypto winter.
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