Wednesday, November 30

Sam Bankman-Fried’s cryptocurrency exchange FTX trading Ltd. stopped transactions on Thursday, stoking fears the company’s ongoing cash and insolvency crisis may trigger a broader deep freeze on lending and trading platforms in the industry, mirroring what happened when the US$40 billion Terra-Luna stablecoin collapsed in May this year.   

Regulators in the Bahamas – where FTX has its headquarters – froze the assets of subsidiary FTX Digital Markets on Thursday, suspending the company’s registration in the country. The FTX Japan exchange was ordered by the Financial Services Agency (FSA) to suspend all operations until Dec. 9. 

A tweet from FTX’s official account on Friday indicated that FTX US – which operates separately from the FTX.com exchange that serves international customers – temporarily froze withdrawals of Ethereum. FTX US said it does not plan to freeze users’ funds, but that other activity may be halted in the next few days. 

In statements on Thursday, Bankman-Fried said FTX.com has a total market value higher than client deposits. However, the company’s ability to turn those assets into US dollars to pay investors varies widely.

While FTX US is a separate entity from FTX.com, the potential shared risk of all of Bankman-Fried’s businesses is under a microscope, following revelations that collateral at his crypto brokerage Alameda Research was mostly tied to FTX’s native token, FTT. 

FTX also has financial ties to a number of other crypto exchanges and lending platforms, after stepping in as a lender of last resort for a number of distressed companies after the Terra Luna crash. Only months after bailing out  lending platforms like Voyager Digital, FTX has gone from savior to potential defaulter. 

Contagion

Crypto lender BlockFi is another company helped out by FTX that could now be vulnerable. BlockFi said on Friday it was freezing user withdrawals, due to “the lack of clarity on the status of FTX.com, FTX US and Alameda.”

BlockFi received an emergency line of credit from FTX in June after the crypto lender Three Arrows Capital went bankrupt. One week later, FTX closed in on a deal to buy BlockFi for $25 million in a fire sale.

Coinbase, another large crypto currency exchange, also halted some trading activities on Wednesday. An email to users from Crypto.com said the platform would be “suspending deposits and withdrawals of USDC and USDT on the Solana Blockchain in the Crypto.com App and Exchange,” according to a report by Coindesk.

On Twitter, Crypto.com CEO Kris Marszalek said “FTX was an important bridge/venue for SOL-based stablecoins, we do not want any additional risk to our users coming from this area, hence disabling it.”

Solana’s native token SOL, which was a large part of the crypto reserves at Alameda Research, has slumped more than 50% since Monday as Alameda sold to build capital. 

Who could be next? 

Crypto Broker Genesis said on Twitter on Friday that it has US$175 million locked funds in FTX.com, as the platform has hedged and sold collateral resulting in a total loss of US$7 million.

Galaxy Digital, revealed on Wednesday it had exposure of nearly $77mn in cash and digital assets to FTX, of which $47.5mn was being withdrawn.

In addition, FTX has invested in many projects through its FTX Ventures arm, contributing to two of the 10 biggest blockchain and crypto funding rounds in the industry. 

The top five invested projects are Yuga Labs, Circle, SkyBridge, Near Protocol and Mysten Labs. 

“Unfortunately, for crypto buyers, there is no lender of last resort. Hence the sell-off could have more legs to run as industry liquidation chasers remain on the hunt selling a variety of cryptos and native FTX coins to protect their downside,” said Steven Innes, Partner at SPI Asset Management. 

“Indeed, this could be a tipping point for crypto after investors were left bag-holding a series of significant industry insolvencies earlier this year.”

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