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FTX, the world’s second largest cryptocurrency exchange, is in a crisis and has pitched the digital asset market into another crash.
Here we look at what has happened to FTX, why, and what it means for the wider market.
What is FTX
Officially headquartered in the Bahamas, FTX is managed from the US, with its biggest offices in Chicago and Miami.
It is a cryptocurrency exchange, helping people buy and sell crypto assets. Cryptocurrencies are all based on the same basic structure as their star asset, bitcoin: a publicly available “blockchain” that records ownership without having any central authority in control. FTX is big and important because, along with its rival, Binance, it processes the majority of cryptocurrency trades around the world.
Both FTX and Binance are “international” exchanges, the cryptocurrency equivalent of an offshore casino. Each also operates an arms-length US-regulated outlet, which closely follows what little regulation there is from the US government, but the bulk of the money that flows through their books is effectively unconstrained by regulatory requirements.
What happened to FTX this week?
On Wednesday last week, an article appeared in CoinDesk, a crypto industry news service, that triggered a crisis. It claimed that the balance sheet of Alameda, a crypto hedge fund owned by FTX’s founder, Sam Bankman-Fried, held billions of dollars worth of FTX’s own cryptocurrency, FTT, and had been using it as collateral in further loans. If this were the case, then a fall in FTT’s value could cause damage to both businesses, given their shared ownership. But FTT itself had no value beyond FTX’s longstanding promise to buy any tokens at $22 – prompting fears that the whole institution was a castle built on sand.
The slow-burn crisis was kicked into high gear on Sunday when Binance’s chief executive, Changpeng Zhao, tweeted that his company was selling its FTT holdings, worth about $500m, because of “recent revelations that have come to light”.
Things snowballed from there. The value of FTT collapsed, and FTX customers started withdrawing funds in a bank run-style exodus. In a message to staff this week, cited by Reuters, Bankman-Fried said the firm suffered a “giant withdrawal surge” as users rushed to withdraw $6bn (£5.1bn) in crypto tokens from FTX over a three-day period. Daily withdrawals normally ran to tens of millions of dollars, Bankman-Fried told his employees.
Zhao then stepped into rescue FTX, agreeing on Tuesday to buy the company but then announcing on Wednesday that he was stepping away from the deal. “The issues are beyond our control or ability to help,” Binance said, citing discoveries in the due diligence process and the launch of regulatory investigations in the US.
What next for FTX?
The company either needs to find billions of dollars in support to meet customers’ withdrawal demands, or to stem the exodus by finding a way of reassuring them their money is safe. That’s never easy when so many customers are rushing for the doors. Bloomberg reported on Thursday that Bankman-Fried has said the firm needs $4bn to stay solvent, with a funding gap of $8bn.
There are also deeper questions for the exchange. Just a day before the company agreed to sell itself to Binance, Bankman-Fried tweeted that FTX was “fine” and that it didn’t trade with customer assets at all. But a message to investors from Sequoia Capital, a VC firm that ploughed $150m into FTX, said the company was facing not just a liquidity crunch but solvency issues – meaning it owed more money than it actually had. It isn’t clear whether it’s possible to reconcile the two statements, and traders with money on FTX are increasingly concerned that they may struggle to withdraw their funds.
Just two months ago, Sequoia had published a long, self-congratulatory article about “the scale of SBF’s vision … a total addressable market of every person on the entire planet”. The article now opens with a note that: “FTX is exploring all opportunities to ensure its customers are able to recover their funds as quickly as possible.”
Could there be a spillover to the rest of crypto?
There already is. Since the crisis at FTX began, bitcoin has plummeted from $20k a coin to $16.5k, its lowest value since 2020. The wider sector has fallen almost 5% in the last 24 hours, according to CoinMarketCap, and major companies and protocols that have exposure to FTX are having to prove their own liquidity. A popular token on the Solana protocol, for instance, that lets users of that blockchain trade bitcoin, relies on FTX for its value: if the exchange goes under, it is unclear whether any of the bitcoin on that protocol would be retrievable, wiping millions of dollars from existence overnight.
And, as with every crypto crash, all eyes are on Tether, the $70bn “stablecoin” that underpins much of the sector’s economy. On Thursday morning, the token slipped off its “peg”, trading at $0.98 to the dollar. The chief technology officer (CTO) of the company that issues Tether, Paolo Ardoino, took to Twitter to reassure investors, noting that the company had processed around $700m of withdrawals over the last 24 hours. “No issues,” he added, “we keep going.”
What about into wider markets?
The financial system’s resilience to wobbles in the crypto market has already been tested over the past 12 months with the onset of a new “crypto winter”. The value of the entire crypto market reached a peak of $3tn last November but then collapsed this year because of a mix of crypto-specific events and wider macroeconomic issues and is currently hovering at around $800bn. Over that period, global financial markets have suffered too but that is due to much bigger issues such as the Russian invasion of Ukraine and rising interest rates.
Carol Alexander, professor of finance at University of Sussex, adds that the extra blow to the industry’s credibility from the latest wobble will prolong the chill. “This crypto winter will go on a lot longer because of this.”
She added that contagion from the crypto industry into traditional financial markets is still unlikely because institutional investors, always searching for high returns from their investments, are now finding it easier to earn from conventional assets in a high interest rate environment. “The fact is that traditional investments, like bonds, are becoming more attractive. This means crypto is less of a systemic threat.”
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