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Crypto exchange FTX filed for U.S. bankruptcy protection on Friday and its founder Sam Bankman-Fried resigned as chief executive, after the biggest blowup in the crypto industry drew calls for tighter regulation.
The distressed crypto trading platform had struggled to raise billions to stave off collapse as traders rushed to withdraw $6 billion from the platform in just 72 hours and rival exchange Binance abandoned a proposed rescue deal this week.
FTX, its affiliated crypto trading firm Alameda Research, and about 130 of its other companies have commenced voluntary Chapter 11 bankruptcy proceedings in Delaware, the company said in a statement on Twitter on Friday.
It was an abrupt fall from grace for a company that was once a darling of the crypto industry. FTX raised $400 million from investors in January, valuing the company at $32 billion. It attracted money from investors such as Singapore state investor Temasek and the Ontario Teachers’ Pension Plan as well as celebrities and sports stars.
Bankman-Fried, 30, known for his trademark shorts and t-shirt attire, has morphed from being the poster child of crypto’s successes to the protagonist of the industry’s highest-profile crash.
“The shock was that this guy was the face of the crypto industry and it turned out that the emperor had no clothes,” said Thomas Hayes, managing member at Great Hill Capital LLC in New York.
The week’s turmoil hit already-struggling cryptocurrency markets, sending bitcoin to two-year lows . Bitcoin dropped after FTX’s announcement and was down 4.3% at $16,803 on Friday afternoon.
Shares of cryptocurrency and blockchain-related firms also dropped on the news.
FTX’s token FTT plunged 30% on Friday to $2.57, facing an 88% weekly loss.
Bankman-Fried, whose net worth was estimated as high as $26.5 billion by Forbes a year ago, repeatedly apologized.
“I’m really sorry, again, that we ended up here,” he said in a series of tweets.
Possible contagion effect
In its bankruptcy petition, FTX Trading said it has $10 billion to $50 billion in assets, $10 billion to $50 billion in liabilities, and more than 100,000 creditors. John J. Ray III, a restructuring expert, has been appointed to take over as CEO.
Cryptocurrency exchange Coinbase Global Inc will write off the investment its ventures arm made in FTX in 2021, according to a person familiar with the matter.
The company said earlier this week it had $15 million in deposits on FTX that were used to facilitate business operations and client trades, but that its total exposure is minimal.
“The next question is how wide of a contagion effect this is going to have on other exchanges and where the next potential losses can occur,” said John Griffin, founder of Integra FEC, which consults on financial fraud investigations.
U.S. Senator Elizabeth Warren, a Democrat who has previously criticized the crypto industry, tweeted that the implosion of FTX was a wake-up call for Congress and regulators to hold the industry and its executives accountable.
“Too much of the crypto industry is smoke and mirrors. It’s time for stronger rules and stronger enforcement to protect ordinary people,” she said.
FTX was scrambling to raise about $9.4 billion from investors and rivals, Reuters reported citing sources, as the exchange sought to save itself after customer withdrawals.
“The Chapter 11 filing is a necessary step to allow the company to assess the situation and develop plans to move forward for the benefit of stakeholders,” Ray, the new CEO, said in a Slack memo to FTX staff seen by Reuters.
Ray, 63, oversaw the liquidation of Enron after its bankruptcy filing and served as the senior officer of what became Enron Creditors Recovery Corp. He also led the bankruptcy restructuring at Nortel Networks.
He did not respond to a request for comment.
As FTX’s troubles mounted, regulators around the world stepped in.
FTX is under investigation by the U.S. Securities and Exchange Commission, the U.S. Justice Department and the Commodity Futures Trading Commission, according to a source familiar with the investigations.
Some investors, including Sequoia and SoftBank, had already marked their investments in FTX to zero. SkyBridge Capital is working to buy back its FTX stake, the alternative investment firm’s founder, Anthony Scaramucci, said in an interview with CNBC on Friday.
The reverberations went beyond financial markets. Mercedes’ Formula One team suspended its partnership with FTX ahead of the season’s penultimate race in Brazil.
“Once Binance walked away from buying FTX after only 24 hours of due diligence the writing was on the wall for FTX,” said Antoni Trenchev, co-founder of crypto lender Nexo.
“Now we enter the next phase of the fallout, where we witness the second order effects and discover which entities were exposed to FTX and Alameda.”
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