The rapid decline of cryptocurrency exchange FTX sent more shock waves through the crypto world on Thursday, with authorities now investigating the company for potential securities violations and analysts looking for further declines in crypto prices.
FTX agreed this week Sell itself to its bigger competitor, Binance After experiencing the cryptocurrency equivalent of a bank run. Customers exited the exchange after worrying whether FTX had enough capital.
A person familiar with the matter said the Justice Department and the Securities and Exchange Commission (SEC) are investigating FTX to determine whether any criminal activity or securities violations have been committed.
On Thursday, the Securities Commission of the Bahamas froze the assets of cryptocurrency exchange FTX Digital Markets, Reuters reported.
This week’s developments marked a shocking turn of events for FTX CEO and founder Sam Bankman-Fried, who was hailed as a savior earlier this year when he helped revive several cryptocurrency companies that ran into financial trouble.
An investigation into Bankman-Fried and FTX by crypto insiders and securities regulators has focused on the possibility that the firm used customer deposits to make bets on Bankman-Fried’s hedge fund, Alameda Research. In traditional markets, brokers are expected to separate client funds from other institutional assets. Regulators can punish violations.
Meanwhile, investors in popular digital currencies got some relief from the latest crypto crisis on Thursday after days of sell-off. Bitcoin rose to $17,691 after dropping to $15,512 on Wednesday. Ethereum rose 12%. The gains came after a government report last month that showed inflation eased slightly raised riskier assets.
The crypto world hoped that the world’s largest crypto exchange, Finance, could rescue FTX and its depositors. However, after Finance had a chance to look at the FTX books, it became clear that the small exchange’s problems were insurmountable. Binance announced its withdrawal from the deal on Wednesday.
A person familiar with the transactions between FTX and Binance described the books as a “black hole” where it was impossible to distinguish the assets and liabilities of FTX and Alameda Research. The person spoke on condition of anonymity because they were not authorized to speak publicly about the matter.
This person said Bankman-Fried committed the “ultimate sin” by tapping FTX’s custodial assets to fund the Alameda research.
In a further explanation of FTX’s financial crisis, Banker-Fried on Wednesday asked its investors for $8bn to cover withdrawal demands, the Wall Street Journal reported, citing unnamed sources.
In a series of tweets on Thursday, the FTX founder and CEO said he didn’t have enough cash flow to get the money back and was more profitable than he thought.
The recent crisis in the crypto industry has prompted renewed calls for stricter regulations. White House spokeswoman Karine Jean-Pierre said the FTX developments “highlight why prudent regulation of cryptocurrencies is absolutely necessary.” The White House, along with relevant agencies, will again closely monitor the situation as it develops.
The collapse of the cryptocurrency’s third-largest exchange could cause further disruption across the crypto world, analysts say, meaning Thursday’s rally could be temporary.
FTX, and a shock to confidence in the system, could cause crypto prices to fall further, leading to “a new round of margin calls,” analysts at JP Morgan said in a note to investors. This would be similar to the sell-off that took place after the collapse of the stablecoin Terra earlier this year, whose prices have continued to fall even after its failure.
“Unless a recovery is agreed upon for Alameda Research and FTX soon, this disengagement could last at least a few more weeks,” JP Morgan analysts wrote.
The crypto industry is waiting to see what other companies are affected by the FTX collapse. Venture capital fund Sequoia Capital said on Thursday it would write down nearly $215m of its total investment in FTX.
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