Cryptocurrency exchange FTX files for bankruptcy as CEO resigns

FTX, one of the world’s largest cryptocurrency exchanges, announced on Friday it will file on bankruptcy, with its CEO, Sam Bankman-Fried, stepping down in the wake of a trading scandal that has embroiled the firm in regulatory inquiries.

The Justice Department and two federal regulators have launched probes into FTX, looking into whether the collapsing cryptocurrency exchange had skirted rules on safeguarding consumer deposits and relationships with trading affiliates, according to four people familiar with the inquiries.

Authorities initiated an investigation of FTX last year, examining whether the crypto giant’s trading and lending programs were properly registered with the Securities and Exchange Commission. The SEC and Commodities Futures Trading Commission are also probing connections between FTX International, FTX.US and Alameda Research, FTX’s sister trading firm, said the people, who spoke on the condition of anonymity because the work is ongoing.

The 30-year-old Bankman-Fried, one of the Democratic Party’s top donors in this election cycle, had emerged in recent months as the industry’s self-appointed ambassador to Washington, a major force in advocating for a bipartisan Senate bill that would hand significant authority over crypto to the CFTC.

Cryptocurrency, after seeing a surge in popularity during the pandemic and drawing in millions of new investors, has faced a painful reckoning this year. Prices of bitcoin and other tokens have fallen precipitously, leading to a rush in clients trying to withdraw money. The value of bitcoin has fallen from roughly $68,000 a year ago to $17,000 now.

That has toppled a number of companies. But the collapse of FTX this week is seen as one of the most striking failures in an industry that has intentionally operated outside of traditional banking and finance rules.

Bankman-Fried, who also runs Alameda Research, allegedly used $10 billion worth of FTX customer deposits to fund transactions by the trading firm, the Wall Street Journal reported Thursday. Bankman-Fried, in a since-deleted tweet on Monday, said FTX did not make bets with customers’ assets. FTX is headquartered in the Bahamas, but Bankman-Fried has spent much of the year working to gain influence in Washington, both on Capitol Hill and with regulators.

FTX entered a tailspin Sunday, when Changpeng Zhao, CEO of rival crypto exchange Binance, announced he would sell off $530 million worth of an FTX-issued crypto token. Bankman-Fried was leaning on the native token to secure his firms’ sizable debts.

The move sparked a panic, with FTX customers racing to pull $5 billion worth of deposits off the platform. In a last-minute bid to meet the demands, Bankman-Fried turned to Zhao for help, but the Binance chief balked at buying FTX after he said a review of its books revealed “mishandled customer funds.”

Bankman-Fried on Thursday blamed FTX’s collapse on his own faulty math about its ability to cover its liabilities. “And so we are where we are. Which sucks, and that’s on me,” he tweeted. “I’m sorry.”

Representatives from the Justice Department, SEC and CFTC declined to comment, as did FTX.

The earthquake in the already volatile crypto industry set off a flurry of activity among regulators and policymakers. In the past six months, four crypto institutions—crypto hedge fund Three Arrows Capital, lenders Voyager Digital and Celsius Network, and stablecoin issuer Terra Luna—all collapsed.

The collapse of FTX, which was valued at $32 billion during a round of fundraising earlier this year, has drawn comparisons to failures—and impropriety— among mainstream financial institutions, including investment banking firm Lehman Brothers and convicted Ponzi schemer Bernard Madoff.

“Ultimately to most of the investors, it was a black box,” said Lou Kerner, founder of Web3 advisory service CryptoOracle. “To me, it doesn’t appear any different than the people who lost money with Bernie Madoff. Any time you invest in a black box, you run the risk of that being true.”

SEC Chairman Gary Gensler told CNBC’s “Squawk Box” on Thursday morning that “investors need better protection in this space” and that the crypto sector has been “significantly noncompliant” with securities laws already on the books. He warned crypto executives that the industry’s “runway” is getting shorter.

“This is a very interconnected world in crypto with a few concentrated players at the middle and one of those players had the toxic combination of lack of disclosure, customer money, a lot of leverage, meaning borrowing, and then trying to invest with that,” Gensler said. “And then when markets turned on them, it appears that a lot of customers lost money.”

Venture capital firm Sequoia Capital, which invested more than $210 million in FTX, told limited partners in a letter on Wednesday that it was marking down the entire amount. The Ontario Teachers Pension Plan, Canada’s third-largest pension fund, said it had a $95 million stake in the company but any loss would have a “limited impact” on the overall health of the plan.

Policymakers in Washington, meanwhile, are still struggling to make sense of FTX’s implosion, searching for more clarity about what happened and how to craft federal guardrails for the industry to prevent a repeat.

The fate of measure pushed by Bankman-Fried—sponsored by Sens. Debbie Stabenow (D-Mich.) and John Boozman (R-Ark.), the top lawmakers on the Senate Agriculture Committee – is now in doubt. In a Thursday night statement, Stabenow said FTX’s collapse “reinforces the urgent need for greater federal oversight of this industry.” She said she will keep pushing to move the measure through her committee.

Yet congressional aides to lawmakers from both parties said support for the bill appears to be cratering. “Sam was trying to pick his own regulator,” one aide said. Another warned that while legislators appeared eager to take up consumer protection measures, “Congress does bad things when they have knee-jerk reactions.”

The bill has also drawn objections from those in the crypto industry who rely on a more decentralized business model than the concentrated hub Bankman-Fried founded.

“I think that’s where he developed a long list of enemies in the sector,” Rep. Warren Davidson (R-Ohio) told The Washington Post. “It looked like he was trying to carve out a space for FTX, and then use the regulation to carve out a moat for his position.”