Crypto world teeters in wake of FTX collapse

THE CRYPTOCURRENCY world is in chaos after the dramatic fall last week of FTX, a US crypto exchange once valued at almost $32 billion, which announced it would file for bankruptcy and the resignation of its chief executive, Sam Bankman-fried.

Days earlier, industry leader Binance had backed out of a planned buyout after disclosing a review of FTX’S books had unearthed “mishandled customer funds” and amid news reports that US regulatory agencies were circling the smaller exchange.

FTX is one of the largest such crypto exchanges in the world, along with the much larger Binance. Sam Bankman-fried, often referred to as SBF, is the 30-year-old founder and chief executive of FTX. Bankman-fried also owns cryptocurrency trader Alameda Research, which is technically separate from FTX.

Recently, crypto news site Coindesk published a report, citing a private document, that raised questions about whether FTX and Alameda Research were more interconnected than previously disclosed. Alameda reportedly had a large portion of its balance sheet tied up in an Ftx-issued cryptocurrency called FTT, raising questions about whether Bankman-fried's companies could survive a major drop in FTT'S value.

Binance, which held a large stake in FTT, announced it would sell about $530 million of FTT, depleting the value of the token and prompting FTX customers to start pulling out their investments. Despite Bankman-fried’s efforts to calm customers, they withdrew some $654m from FTX.

After Bitcoin then walked away from a buyout, FTX announced it would file for Chapter 11 protection, along with Alameda and other affiliated companies.

“The collapse really shakes up confidence in the whole system,” Reena Aggarwal, director of Georgetown University's Psaros Center for Financial Markets and Policy, said.

Also worrying are the possible ripple effects of the collapse. After Binance walked away from the buyout, Bitcoin dropped 15%, until then on the rise, along with other major cryptocurrencies. Yesha Yadav, a law professor at Vanderbilt University who closely follows cryptocurrency and financial markets, characterised the most recent situation as “close to an apocalypse”.

FTX’S collapse “means a lot of worries about the credibility of the industry and its ability to actually run itself”, Yadav said. “Existential questions have been raised about how it is going to exist afterwards – what it’s going to look like, what the standards are going to look like, who’s going to be allowed to be here, what kind of rules we need for that to happen safely,” she said.

Yadav called the collapse an “inflection point” that may prompt a harder regulatory push and “restore credibility to this very broken industry”.