Crypto exchange giant FTX collapses and files for bankruptcy

NEW YORK (AP) — It took less than a week for FTX to go from the world’s third-largest cryptocurrency exchange to bankruptcy court.

The beleaguered cryptocurrency exchange, short of billions of dollars, filed for bankruptcy protection after the exchange experienced the crypto equivalent of a bank run. FTX, hedge fund Alameda Research and dozens of other affiliates filed for bankruptcy in Delaware on Friday morning. FTX US, which was originally not to be included in a bailout, was also part of the company’s bankruptcy filing.

CEO and founder Sam Bankman-Fried has stepped down, the company announced. Bankman-Fried was recently estimated at $23 billion and has been a top political donor to Democrats. His net worth has all but evaporated, according to Forbes and Bloomberg, which closely track the net worth of the world’s wealthiest people.

“I was shocked to see things unfold the way they did earlier in the week,” Bankman-Fried wrote in a series of Twitter posts.

Detangling FTX causes ripple effects. Already, companies that have backed FTX are rating their investments. Politicians and regulators are mounting calls for tighter oversight of the crypto industry. And this latest crisis has put pressure on the prices of bitcoin and other digital currencies. The total market value of all digital currencies fell by around $150 billion last week, according to CoinMarketCap.com.

FTX’s failure goes beyond finance. The company also had major sports sponsorships, including Formula One racing and a sponsorship deal with Major League Baseball. Miami-Dade County on Friday decided to end its relationship with FTX, which means the Miami Heat gaming venue will no longer be known as FTX Arena. Mercedes has announced that it will be removing FTX from its race cars starting this weekend.

FTX and Bankman-Fried, along with his brother, were also early investors in Semafor, the high-profile news startup headed by former BuzzFeed editor and New York Times columnist Ben Smith.

Bankman-Fried also has other problems. On Thursday, a person familiar with the matter said the Justice Department and the Securities and Exchange Commission are reviewing FTX to determine whether criminal activity or securities offenses have occurred. The person could not publicly discuss details of the investigation and spoke to The Associated Press on condition of anonymity.

The investigation centers on the possibility that FTX used customer deposits to fund bets at Alameda Research. In traditional markets, brokers are expected to separate client funds from other company assets. Violations can be punished by regulators. Financial firm MF Global actually failed for a similar practice about a decade ago when it mixed client assets with its own bets.

In its bankruptcy filing, FTX listed more than 130 affiliates worldwide. The company has valued its assets at $10 billion to $50 billion, with a similar estimate for its liabilities. The company named John Ray III, a longtime bankruptcy litigator who is best known for having to clean up the mess after the Enron collapse, as its new CEO.

FTX’s bankruptcy is sure to be one of the most complicated bankruptcy cases in years. The company has more than 100,000 creditors listed on its file, and with all of its clients effectively being creditors because they deposited their funds with FTX, it will take months to determine who owes what, bankruptcy attorneys said. Cryptocurrencies have no protection under the law, and politicians on both sides of the aisle have issued statements opposing any Lehman Brothers-style bailouts for crypto investors.

“Unlike a case where there is (title insurance in the event of a brokerage failure) or where the FDIC intervenes in the event of a bank failure, these clients are totally exposed,” said Daniel Besikof, partner at Loeb & Loeb LLP, specializing in bankruptcy law. .

FTX earlier this week agreed to sell out to its biggest rival Binance after experiencing the cryptocurrency equivalent of a bank run. Customers fled the exchange after worrying about whether FTX had enough capital.

The crypto world had hoped that Binance, the world’s largest crypto exchange, might be able to save FTX and its depositors. However, after Binance reviewed FTX’s books, it concluded that the smaller exchange’s issues were too big to fix and backed out of the deal.

FTX is the latest in a series of cascading disasters that have rocked the crypto industry, now under intense pressure from collapsing prices and surrounded financial regulators. Its failure is already being felt throughout the crypto universe.

On Thursday, venture capital fund Sequoia Capital announced on Thursday that it was writing down its nearly $215 million total investment in FTX.

Cryptocurrency lender BlockFi announced Thursday night on Twitter that it was “unable to conduct business as usual” and suspended customer withdrawals following the FTX implosion.

In a letter posted to its Twitter profile on Thursday evening, BlockFi – which was bailed out by Bankman-Fried’s FTX early last summer – said it was “shocked and dismayed by the news regarding FTX and Alameda.”

The company concluded by saying that any future communication about its status “will be less frequent than what our customers and other stakeholders are used to.”

Bitcoin fell immediately after the letter’s release and is trading below $17,000. The original cryptocurrency, bitcoin, had been hovering around $20,000 for months before FTX’s troubles went public this week, dropping it briefly to around $15,500.

Shares of publicly traded cryptocurrency exchange Coinbase and online trading platform Robinhood each rose nearly 12%.

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Journalists Matt Ott and Michael Balsamo in Washington contributed.

Christy J. Olson