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Analysis-FTX meltdown sparks investor rethink of battered crypto market

By Gertrude Chavez-Dreyfuss and Elizabeth Howcroft

NEW YORK/LONDON (Reuters) – A week of turmoil culminating in major crypto exchange FTX filing for bankruptcy has left investors questioning the viability of a sector already bruised by the bitcoin bubble bursting and closures of key market players.

The collapse of several crypto lenders, including Celsius and Voyager, major tokens terraUSD and Luna, and hedge fund Three Arrows Capital, had rung alarm bells even before the blow-up of FTX, headed by Sam Bankman-Fried. Crypto markets have also come under intense pressure this year as rising interest rates prompted investors to ditch riskier assets. FTX filed U.S. bankruptcy proceedings on Friday and Bankman-Fried stepped down as chief executive officer after a rapid liquidity crunch at the group left FTX scrambling to raise about $9.4 billion from investors and rivals. Top cryptocurrency bitcoin was trading at around $16,946, down 3.5% on Friday and had dropped below $16,000 for the first time in two years on Wednesday when rival exchange Binance abandoned a rescue for FTX. “The fallout from FTX isn’t something that’ll be resolved in hours,” said Antoni Trenchev, co-founder of crypto lender Nexo. “This will remain a dark cloud over the industry and institutions will stay away until the dust settles.” Knock-on effects are already rippling through the crypto industry. Crypto lender BlockFi early on Friday said it was pausing client withdrawals until there was clarity on FTX. FTX’s swift fall from grace followed heavy speculation about its financial health that triggered $6 billion of withdrawals in just 72 hours earlier this week. The company had published a valuation of $32 billion as recently as January. “From a financial side, it’s fair to say that confidence is going to be somewhat shaken because if you can’t trust FTX then what can you trust?” Yat Siu, co-founder of Hong Kong-based investor Animoca Brands, told Reuters on Wednesday. JPMorgan analysts said in a client note on Wednesday that the trouble at FTX “creates a confidence crisis and reduces the appetite of other crypto companies to come to the rescue.” Speaking at the Token2049 crypto conference in London on Wednesday, Andrei Kazantsev, global head of crypto trading at Goldman Sachs, said “counterparty risk is starting to be top of mind” for some clients once drawn to crypto trading by high volatility and yield. Unlike traditional corporations and financial firms, crypto entities operate in a regulatory gray area. For instance, deposits at crypto lenders are not insured by the government. In the case of FTX, U.S. residents cannot trade on its global platform due to strict regulations for the crypto space in the United States. FTX has a U.S. partner, FTX.US, but its offerings are more limited than the global platform. FTX’s bankruptcy filing makes stricter regulation of cryptocurrency exchanges more likely, said Joseph Edwards, investment partner at Securitize Capital.

“We’re likely to step back years in terms of retail market access to all but the most basic products.”

“It’s another set of headwinds adding to an already deleterious macro situation, so many will lose their appetite for the inherent risk involved in the sector,” he said. ‘POSTER CHILD’ NO MORE It was only a few months ago that Bankman-Fried, 30, had been seen as a crypto white knight, salvaging beleaguered crypto firms that faltered as prices cratered. “The show must go on, the industry needs to keep growing, but it’s definitely a step-back in itself when you see the poster child of the industry being put in this position,” said Jean-Marie Mognetti, chief executive of crypto asset manager CoinShares. “It is a lesson which seems to keep repeating itself,” he added, citing certain star traders in various companies that ended up in trouble.

While the meltdown would not stop companies from creating new blockchain-based products, Animoca’s Siu said it “probably will create a little bit of a chill effect” for institutional investors entering crypto markets.

To be sure, some investors continued to have faith in the sector.

In an interview with CNBC on Thursday, Microstrategy Chairman Michael Saylor said he will continue to acquire bitcoin when the opportunity presents itself. On Wednesday ARK Invest, led by high-profile crypto proponent Cathie Wood, bought shares in FTX rival exchange Coinbase Global. Max Boonen, co-founder of digital asset liquidity provider B2C2, said FTX’s problems have set the crypto space back by six months. Speaking at the Token2049 crypto conference in London, he suggested that investors will to have to rely more on credit asset managers doing due diligence on private financials.Ken Lo, co-founder at Hong Kong-based crypto exchange and custodian Hong Kong Digital Asset Exchange, said counterparty risk, which comes from a lack of transparency and information disclosure, underscores the need for “clear regulatory framework and vision statement.”

Top crypto exchanges by volume Top crypto exchanges by volume

https://graphics.reuters.com/FINTECH-CRYPTO/jnpwygnndpw/chart.png

(Reporting by Gertrude Chavez-Dreyfuss in New York and Elizabeth Howcroft in London; Additional reporting by Georgina Lee in Hong Kong; Editing by Alden Bentley, Catherine Evans and Matthew Lewis)

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Factbox-Global regulatory actions against FTX

LONDON (Reuters) – FTX filed for U.S. bankruptcy proceedings on Friday, capping a week of turmoil for one of the world’s largest cryptocurrency exchanges.

FTX and its local units, had already attracted scrutiny from regulators around the world.

Here’s a roundup of what global regulators are doing about FTX:

UNITED STATES

FTX is under investigation by the U.S. Securities and Exchange Commission, Justice Department, and Commodity Futures Trading Commission, according to a source familiar with the investigations.

BAHAMAS

FTX’s group headquarters is in the Bahamas. The Securities Commission of the Bahamas said on Thursday it would freeze the assets of FTX Digital Markets, the group’s local unit, and also appointed a provisional liquidator for the unit.

EUROPE/CYPRUS

Cyprus’s Securities and Exchange Commission asked FTX EU to suspend its operations on Nov. 9, the regulator said on Friday.

FTX announced in September it had received approval from the Cypriot regulator to operate as a Cyprus Investment Firm, allowing the company to fully own a local investment firm it had previously acquired.

This allowed FTX EU to serve the European Economic Area.

JAPAN

FTX tweeted on Thursday that its local Japanese unit would go into “close only” mode, following the guidance of Japan’s Financial Services Agency, preventing customers from opening new accounts or trading.

The local unit resumed withdrawals on Friday.

(Reporting by Alun John; Editing by Emelia Sithole-Matarise)

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Coinbase to write off investment that its ventures arm made in FTX- source

(Reuters) – Coinbase Global Inc will write off the investment its ventures arm made in cryptocurrency exchange FTX in 2021, according to a person familiar with the matter.

Coinbase had said in a blog post Tuesday that the company has $15 million in deposits on FTX that were used to facilitate business operations and client trades, but that its total exposure is minimal.

According to a source, Coinbase plans to participate in the FTX bankruptcy proceedings to seek a claim on those deposits. FTX filed for bankruptcy in the U.S. on Friday.

(Reporting by Hannah Lang in Washington)

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Crypto markets in turmoil over FTX bankruptcy

(Reuters) – Crypto exchange FTX filed for U.S. bankruptcy on Friday and Sam Bankman-Fried stepped down as CEO, after a liquidity crisis that has prompted intervention from regulators around the world.

FTX, its affiliated crypto trading fund Alameda Research and about 130 other companies have commenced voluntary Chapter 11 bankruptcy proceedings in Delaware, FTX said.

MARKET REACTION:

Shares of cryptocurrency and blockchain-related firms dropped on Friday after FTX, one of the biggest crypto exchanges, said it would initiate bankruptcy proceedings in the United States, triggering a potentially massive meltdown in the industry.

COMMENTS:

DENNIS DICK, MARKET STRUCTURE ANALYST AND TRADER AT TRIPLE D TRADING

“The bankruptcy filing happened right before the open so that actually knocked the entire stock market down too.”

“There was a lot of bad news already priced in. You would think these stocks would be down significantly on this news but many have actually come off the loss significantly. The dip got bought.”

THOMAS HAYES, MANAGING MEMBER AT GREAT HILL CAPITAL LLC IN NY

“It is sell the rumor. Now we have the news. What was feared is now done and I wouldn’t be surprised if in the coming days you see crypto start to find the bottom.”

“The shock was that this guy was the face of the crypto industry and it turned out that the emperor had no clothes. And I think that the real risk moving forward is confidence is lost in an asset class that’s not backed by anything and that’ll be something that has to play out.”

JAY HATFIELD, CEO OF INFRASTRUCTURE CAPITAL MANAGEMENT IN NEW YORK

“Bitcoin fell when the bankruptcy was announced pretty substantially and that tends to drag down most of the crypto related stocks like MicroStrategy because they own Bitcoin.”

“Well, they’ve already taken a pretty big hit. And overall, we’re in an upward trend after the inflation report. All these securities are high data, high risk so if the market goes up that’ll drag them higher.”

JOSEPH EDWARDS, INVESTMENT ADVISER AT SECURITIZE CAPITAL

“The main danger here is that the U.S. entity is involved – it essentially means contagion risk now jumps into areas that were supposed to be ringfenced, at which point it becomes much closer to an existential problem because of the regulatory implications.”

“The failure here has essentially been a failure of industry structures rather than a failure of the asset class, but when U.S. entities and authorities start getting involved, the difference between the two begins to blur.”

ERIC CHEN, CEO AND CO-FOUNDER OF INJECTIVE LABS

“The events today will likely cause ripple effects across the regulatory environment given that SBF was a major donor to the elections (sixth largest donor overall) so the politicians will likely have a negative sense of centralized crypto exchanges moving forward.

“Washington has lost one of the most important voices in crypto and I am not sure who exactly fills that gap in the short term. I suspect this volatility will be shortlived since it is mainly being driven by sudden liquidations.

“I think the events that have transpired over the past few days only add further fuel to the broader decentralization narrative and how important it will be for users to have unrestricted access to their funds at all times. In the long run, I think participants in crypto will be even more wary of centralized platforms or exchanges which will be a major boon for decentralized finance as a whole.”

OMID MALEKAN, ADJUNCT PROFESSOR AT COLUMBIA BUSINESS SCHOOL

“The ‘what’ of this latest crisis seems to be that FTX did things with client funds that an exchange should not have and now some amounts are missing. We need more details to know what the exact impropriety was and how much can be recovered.

“The ‘how’ is even tougher to answer because unlike a Terra, which was always questionable, or a Celsius, which like any lender could face a run, FTX was almost universally perceived to be safe, particularly after playing white knight to other failed crypto players. CEO SBF had taken a leadership role in things like regulations, and it almost seems pathological to have someone run a massive fraud while simultaneously working with Congress to clean up the industry. Ultimately, the lesson here is that the crypto industry needs to stop trusting cults of personality, no matter how well-intentioned they might seem.”

RICHARD GARDNER, CHIEF EXECUTIVE OFFICER OF MODULUS GLOBAL, A SOFTWARE PROVIDER TO BIG-TICKET WALL STREET CLIENTS

“FTX finds itself in this situation to begin with certainly is of no surprise. SBF’s freewheeling approach to industry consolidation was ill-conceived from the beginning. Even if he were in a position to successfully make the acquisitions, we are in the beginning of the economic crunch. To find the best deals associated with the most desirable institutions, a waiting game was in order. Shooting for the moon so fast was a surefire way to invite this kind of risk, and, while it isn’t a surprise, it is most certainly not going to give retail investors any sense of calm.”

GREG KIDD, CO-FOUNDER OF VC FIRM HARD YAKA

“Sam and FTX were playing a brilliant long-term strategic game (chess). Unfortunately for them, CZ and Binance chose to play a short-term tactical game (checkers) that put FTX under the spotlight on liquidity concentrations at Alameda that were vulnerable to price shocks that CZ/Binance could trigger by dumping particular assets. When FTX crossed the line to try to help Alameda weather the storm, the trap was sprung bringing the whole SBF ecosystem to its knees.”

“CZ and Binance flexed their muscles last month by delisting Coinbase and Circle’s USDC from their exchange, squelching liquidity from the world’s second most popular stablecoin in favor of their own stablecoin. Highlander hardball tactics again carried the day, strengthening Binance’s hand at the expense of the #2 and #3 players in the industry.

“It’s a rough and tumble world that just got rougher. Longer term, CZ/Binance may have their own comeuppance over their lenient compliance controls that have well benefited the likes of the Russian version of Silk Road and been a conduit of laundering proceeds for North Korean hackers.”

JOHN GRIFFIN, CEO AND FOUNDER OF INTEGRA FEC, WHICH PROVIDES CONSULTING TO GOVERNMENT AGENCIES AND LAW FIRMS INVESTIGATING FINANCIAL FRAUDS, AND FINANCE PROFESSOR AT UNIVERSITY OF TEXAS

“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.

“Usually there is a lot of cross collateralization. So to what extent when you have a major entity like this that goes down, all the assets tied to that FTX exchange go down. It’s kind of the great financial crisis. You have people that have their custodians or assets related to FTX. It could cause somebody else to go down.

“You have a lack of trust in the crypto area, so you don’t know if someone else will be bankrupt and you might not get your crypto out (from other players). Investors could pull their crypto off the exchanges and put it on the blockchain. Then this would remove a lot of cross collateralization, a lot of leverage in the system, put downward pressure on crypto prices and potentially cause other players to fail. So this could be like a financial crisis in the crypto space.

“It seems that Alameda is short on obligations to the tune of many billions dollars. That means they owe someone billions of dollars. So those parties, as they experienced losses, that could cause them to wipe out other entities and those entities could wipe out other entities. You have an incentive to basically break all counterparties, you want to eliminate the counterparty risk, like you want to get out of any derivative trades you’ve made. You pull everything into hard cash. So you may be selling bitcoin or other crypto to raise cash. That puts downward pressure on crypto.

(Compiled by the Global Finance & Markets Breaking News team; Editing by Richard Chang)

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Factbox-Sam Bankman-Fried: The crypto mogul whose empire came crashing down

(Reuters) – Sam Bankman-Fried on Friday resigned from his role as chief executive of FTX and the crypto exchange said it will initiate bankruptcy proceedings in the United States, capping off a tumultuous week for the industry.

Following are some facts about the co-founder and former CEO:

EDUCATION AND VENTURES BEFORE FTX

Born in 1992, Sam Bankman-Fried grew up in California. As a high school student, he attended the Canada/USA Mathcamp, a summer program for mathematically proficient students that also counts his future business partner Gary Wang among its alumni.

Bankman-Fried later graduated from the Massachusetts Institute of Technology (MIT) with a degree in physics. He traded currencies, futures and exchange-traded funds for Jane Street Capital.

After a more than three-year stint at the New York-based firm, he moved to crypto trading and founded Alameda Research in 2017. Besides trading major cryptocurrencies, the company also dabbled in other digital asset products and their derivatives.

FOUNDING OF FTX

More than a year and a half after starting Alameda, Bankman-Fried teamed up with Gary Wang, a former software engineer at Google and a fellow MIT graduate, to start FTX. The company offered trading on crypto tokens and derivatives, while also boasting of a robust risk management system. Bankman-Fried, often referred to by his initials SBF, brought Binance on board as FTX’s first investor.

Bankman-Fried was based in Hong Kong, where his company was headquartered earlier. Last year, he moved to the Bahamas when FTX decided to shift its headquarters to the archipelago nation.

WEALTH

Before the FTX collapse wiped out most of SBF’s wealth, he was one of the richest people in the digital asset industry. Forbes estimates his net worth to have peaked at $26.5 billion amid a wave of institutional adoption that pumped up crypto prices to record highs last year.

After a liquidity crisis at his companies, his net worth is now reported to be around $991 million.

Data released ahead of the U.S. midterm elections showed he was the sixth-largest political donor, having contributed $39.8 million with the vast majority going to help Democrats.

CELEBRITY INTEREST

National Football League quarterback Tom Brady and supermodel Gisele Bundchen took stakes in FTX last year. The company also signed NBA star Steph Curry as an ambassador.

In February, pop star Katy Perry posted on Instagram, “im quitting music and becoming an intern for @ftx_official ok”, reportedly after a chat with SBF the day before.

(Reporting by Niket Nishant in Bengaluru; Editing by Shounak Dasgupta)

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Rise and fall of crypto exchange FTX

(Reuters) – FTX was commencing bankruptcy proceedings in the United States and its Chief Executive Officer Sam Bankman-Fried has resigned, the crypto exchange said on Friday, in a spectacular collapse that will likely send shivers through the industry.

Here is a history of FTX since its foundation in 2019:

2019:

May – Former Wall Street trader Sam Bankman-Fried and ex-Google employee Gary Wang founded FTX, the owner and operator of FTX.COM cryptocurrency exchange.

2021:

July – A $900 million funding round valued FTX at $18 billion.

September – FTX signed a sponsorship deal with Mercedes’ Formula 1 team.

October – FTX raised capital at a valuation of $25 billion from investors including Singapore’s Temasek and Tiger Global.

2022:

Jan. 27 – FTX’s U.S. arm said it was valued at $8 billion after raising $400 million in its first funding round from investors including SoftBank and Temasek.

Jan. 31 – FTX raised $400 million from investors including SoftBank at a valuation of $32 billion.

June 4 – FTX signed a reportedly $135 million sponsorship deal for naming rights of the Miami Heat’s home court.

July 1 – FTX signed a deal with an option to buy embattled crypto lender BlockFi for up to $240 million.

July 22 – FTX offered a partial bailout of bankrupt crypto lender Voyager Digital. Voyager called it a “low-ball bid”.

Aug. 19 – A U.S. bank regulator ordered FTX to halt “false and misleading” claims it had made about whether funds at the company are insured by the government.

Nov. 2 – Crypto news website CoinDesk reported a leaked balance sheet that showed Alameda Research, Bankman-Fried’s crypto trading firm, was heavily dependent on FTX’s native token, FTT. Reuters was unable to verify the report.

Nov. 6 – Binance CEO Changpeng Zhao said his firm would liquidate its holdings of FTT due to unspecified “recent revelations”.

Nov. 7 – Bankman-Fried said “FTX is fine. Assets are fine”.

Nov. 8 – Binance said it was planning a deal to acquire FTX.

Nov. 9 – Binance decided against pursuing a nonbinding agreement to bail out FTX.

Nov. 10 – FTX suspended on-boarding of new clients as well as withdrawals until further notice

Nov. 10 – Bankman-Fried told staff in a memo that he was seeking a capital raising and had held talks with Justin Sun, founder of the crypto token Tron

Nov. 10 – Reuters reported that Bankman-Fried is seeking to put together a rescue package of up to $9.4 billion for FTX

Nov. 11 – FTX starts voluntary Chapter 11 proceedings in the United States, along with its U.S. unit, crypto trading firm Alameda Research and nearly 130 other affiliates. Bankman-Fried resigns as CEO.

Here is a list of FTX’s investors since 2019, according to private market data provider, PitchBook.

2019 Tiger Global Management, Insight Partners, SoftBank

Inves Investment Advisors, Temasek, Telstra Ventures,

tors Teachers Venture Growth, Steadview Capital Management,

Redline DAO, Paradigm, New Enterprise Associates,

Lightspeed Ventures, 500 Global, Binance Labs,

Consensus Lab, FBG Capital, Galois Capital, Greylock

Capital Management, Lemniscap, Race Capital, IVP, HOF

Capital

2020 Bitscale Capital, BR Capital, Evangelion Capital,

Inves Exnetwork Capital, Genblock Capital, Insignius

tors Capital, Pantera Capital

2021 BlackRock, Tom Brady, Gisele Bundchen, Samsung NEXT

Inves Ventures, Sequoia Capital, Coinbase Ventures, Base10

tors Partners, Astronaut Capital, AGE Crypto, Vetamer

Capital, Senator Investment Group, Sea Capital,

Paradigm, Meritech Capital Partners, ICONIQ Growth,

Third Point Ventures, Thoma Bravo, Kevin O’Leary,

Willoughby Capital, Digital Currency Group, Third

Point, Tribe Capital, Bond Capital, Standard

Investments, Circle , Ribbit Capital, Multicoin

Capital, Mayfield, 6ixth Event, Abstract Ventures,

Alan Howard, Altimeter Capital Management, Bond,

Schoeneck & King, DHVC, Israel Englander, Mark VC

2022 Temasek, SoftBank Vision Fund 2, Ontario Teachers

Inves Pension Plan, K5 Global, MiH Ventures, Mint Ventures,

tors NKB Ventures, Signum Capital, Alchemy Ventures, Lux

Capital, Fenrir, Claritas Capital, Hard Yaka, Early

Capital Group, Chapter One Ventures, One Block

Capital, Chainfund Capital, A’Z Angels, Allied

Investors Group, ArkStream Capital

(Compiled by Harish Sridharan in Bengaluru; Editing by Sam Holmes, Shri Navaratnam, Sriraj Kalluvila)

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Crypto stocks slide as FTX prepares for bankruptcy proceedings

(Reuters) – Shares of cryptocurrency and blockchain-related firms dropped on Friday after FTX, one of the biggest crypto exchanges, said it would initiate bankruptcy proceedings in the United States, triggering a potentially massive meltdown in the industry.

Silvergate Capital declined 10%, leading the losses in the sector, while bitcoin holder MicroStrategy Inc slipped 2.6%.

Crypto miners Riot Blockchain and Marathon Digital fell about 5% each.

Bitcoin fell 3.6% to $16,919 as FTX Chief Executive Sam Bankman-Fried said he will step down from his position.

“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 hedge fund Great Hill Capital LLC in New York.

“And I think that the real risk moving forward is confidence is lost in an asset class.”

The announcement comes days after larger rival Binance walked away from a proposed acquisition of FTX, leaving the distressed firm scrambling to raise about $9.4 billion following a frantic pace of customer withdrawals earlier this week.

The turmoil at FTX, which has rescued other players during the crypto market’s recent crash, has raised concerns about the future of the crypto industry.

Robinhood Markets, which counts Bankman-Fried as an investor, edged 3% higher. The online brokerage said on Thursday it does not have a direct exposure to FTX.

MicroStrategy and Silvergate’s tickers were trending on investors-focused social media platform stocktwits.com, indicating increased chatter among retail pundits.

ProShares Bitcoin Strategy ETF fell 8%, while Short Bitcoin Strategy ETF jumped 7.4%.

(Reporting by Medha Singh and Bansari Mayur Kamdar in Bengaluru; Editing by Shinjini Ganguli)

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Scaramucci’s SkyBridge Capital looking to buy back stake from FTX – CNBC

(Reuters) – SkyBridge Capital is working to buy back its stake from embattled crypto exchange FTX, the alternative investment firm’s founder Anthony Scaramucci said in an interview with CNBC on Friday.

(Reporting by Niket Nishant in Bengaluru)

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Tron founder Justin Sun ready to give billions in aid to FTX – Bloomberg reporter

(Reuters) – Justin Sun, founder of the crypto token Tron, said he was prepared to provide FTX with billions in aid, according to a tweet by a Bloomberg News reporter on Friday.

(Reporting by Manya Saini in Bengaluru; Editing by Arun Koyyur)

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FTX looks for $9.4 billion in rescue funds, Bahamas freezes some assets

By Angus Berwick and Anirban Sen

(Reuters) – FTX is scrambling to raise about $9.4 billion from investors and rivals, a source said on Thursday, as Chief Executive Sam Bankman-Fried urgently seeks to save the cryptocurrency exchange that has been buffeted by a rush of customer withdrawals.

Bankman-Fried has discussed raising $1 billion each from Justin Sun, the founder of crypto token Tron, rival exchange OKX and stablecoin platform Tether, according to the source who has direct knowledge of the matter.

He is seeking the remainder from other funds, including current investors in FTX such as venture capital fund Sequoia Capital, the source added.

It was not clear, however, whether Bankman-Fried will be able to raise the funds he needs and these investors would participate.

Tether’s chief technology officer, Paolo Ardoino, tweeted that it had “no plans to invest in or lend assets to FTX.”

One of the 30 to 40 investors in FTX’s data room is Daniel Loeb’s Third Point, but according to a source familiar with the matter the hedge fund is not discussing giving FTX more money.

FTX and Sequoia did not immediately respond to requests for comment on the latest news of talks. OKX also was not immediately available for comment on the latest news of talks. Earlier on Thursday, however, OKX told Reuters it had been approached this week by Bankman-Fried, who described liabilities of $7 billion that needed covering fast.

“That was too much for us,” Lennix Lai, director of financial markets at OKX, told Reuters.

FTX also got hit by the Bahamas Securities Commission, where the company is based, freezing assets of FTX Digital Markets “and related parties”. FTX Digital Markets Ltd is a subsidiary of FTX, licensed in the Bahamas.

“The Commission has proactively dealt with the situation and continues to do so,” the commission said adding “the prudent course of action” was to put the unit into “provisional liquidation to preserve assets and stabilize the company”.

FTX did not immediately respond to a request for comment.

In a tweet, FTX said it had reached a deal with Tron to establish a special facility that would allow clients to swap some crypto assets from FTX to external wallets. It said initially $13 million of assets will be deployed to facilitate the swaps.

A spokesperson for Tron said this was the “first step for us” but “we are open to talks about other rescue plans” and that the conversation was ongoing. A credit line was “no doubt one of the topics” but the spokesperson said it had not been discussed in detail.

Earlier in the day, Bankman-Fried said in tweets and a memo to employees seen by Reuters that he was in talks with “a number of players” in the crypto sector, including Sun, after a potential rescue deal with larger rival Binance fell apart.

But he added that he did not want to “imply anything about the odds of success.”

Bankman-Fried also said his trading firm Alameda Research, which sources have said was partly behind FTX’s problems, was winding down trading.

FTX’s predicament marks a stunning downfall for the 30-year-old crypto executive who was once worth nearly $17 billion, but in a matter of days transformed from his status of industry savior to the one who needed saving.

The problems at FTX, one of the world’s largest crypto exchanges, have triggered a broader crisis of confidence in cryptocurrencies, with bitcoin falling below $16,000 overnight for the first time since late 2020.

Graphic: Pain in crypto land Pain in crypto land https://graphics.reuters.com/GLOBAL-MARKETS/THEMES/lbvggrkadvq/chart.png

However, a surge in the broader market after better than expected U.S. inflation data buoyed cryptocurrencies. FTX’s native token, FTT, was up nearly 140% at $3.83 in afternoon trading but down more than 80% for the week. Bitcoin was up 13%.

Trading volumes in bitcoin futures and exchange traded funds have exploded amid the turmoil.

FTX said it was not able to process any withdrawals, except some in the Bahamas because of regulations there. Bankman-Fried said FTX.US, the U.S. operations of the exchange, had not been financially impacted.

RAISING FUNDS

The seeds of FTX’s downfall were sown months earlier, in mistakes made by Bankman-Fried after he stepped in to save other crypto firms, sources have said. Sources told Reuters that FTX transferred at least $4 billion to Alameda, including some customer deposits, to prop up the trading firm after a series of losses.

Bankman-Fried told investors that Alameda owes FTX about $10 billion, the Wall Street Journal reported. FTX had lent more than half of its customer funds to Alameda, the newspaper said.

The U.S. securities regulator is investigating FTX.com’s handling of customer funds and crypto-lending activities, according to a source with knowledge of the inquiry.

Reuters could not learn what specific activities were the focus of the probe. Meanwhile the White House said the developments show why “prudent regulation” is needed.

Users rushed to withdraw $6 billion in crypto tokens from FTX within days, after a news report earlier this month raised questions about Alameda’s balance sheet and Binance CEO Changpeng “CZ” Zhao tweeted that his firm would sell its entire share in FTT, which gives holders discounts on FTX trading fees. The outflow caused a liquidity crunch at FTX.

(Reporting by Angus Berwick and Anirban Sen in New York, Georgina Lee in Hong Kong, Tom Westbrook in Singapore, Elizabeth Howcroft in London, Hannah Lang and Chris Prentice in Washington, Jasper Ward in the Bahamas and Noor Zainab Hussain in Bangalore; Writing by Paritosh Bansal and Megan Davies; Editing by Anna Driver, Matthew Lewis & Shri Navaratnam)

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Bahamas securities regulators freeze assets of FTX’s unit

(Reuters) – The Securities Commission Of the Bahamas said on Thursday it had frozen assets of FTX Digital Markets, a subsidiary of the cryptocurrency exchange.

The regulator said it had also suspended the registration and applied to the Supreme Court of The Bahamas for the appointment of a provisional liquidator of FTX Digital Markets Ltd.

(Reporting by Aishwarya Nair in Bengaluru; Editing by Anil D’Silva)

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Mercedes F1 team evaluating FTX sponsorship, branding stays for now

SAO PAULO (Reuters) – The Mercedes Formula One team said on Thursday they were keeping the branding of troubled cryptocurrency exchange FTX on their cars at this weekend’s Sao Paulo Grand Prix in Brazil while watching developments.

FTX, one of the world’s largest crypto exchanges, has been buffeted by a rush of customer withdrawals and is scrambling to raise about $9.4 billion from investors and rivals, a source said on Thursday.

Mercedes, then the reigning Formula One champions, signed a sponsorship deal with FTX in September, 2021.

A team spokesman said they were evaluating the situation and branding would be staying on the race cars of seven-times world champion Lewis Hamilton and fellow-Briton George Russell for the time being.

The weekend’s race at Interlagos is the penultimate round of the season, which finishes in Abu Dhabi on Nov. 20.

(Reporting by Alan Baldwin in London, editing by Ed Osmond)

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Crypto broker Genesis discloses locked funds on FTX

(Reuters) – U.S. cryptocurrency broker Genesis Trading disclosed its derivatives business has approximately $175 million in locked funds on FTX, the company said Thursday in a Twitter post.

Gensesis said its operating capital and net positions in FTX “are not material to our business” and that it has no ongoing relationship with FTX or Alameda Research, the crypto trading firm belonging to FTX CEO Sam Bankman-Fried.

The locked assets on FTX do not impact the company’s market-making activities, Genesis said.

(Reporting by Hannah Lang in Washington; Editing by Leslie Adler)

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Exclusive-Behind FTX’s fall, battling billionaires and a failed bid to save crypto

By Angus Berwick and Tom Wilson

(Reuters) – On Tuesday morning, Sam Bankman-Fried, owner of cryptocurrency exchange FTX, caught his employees off-guard with a somber message.

“I’m sorry,” he told them. “I fucked up.”

The reason for the mea culpa: His announcement half an hour earlier that FTX’s arch-rival, Binance, planned to mount a shock takeover of its main trading platform to save it from a “liquidity crunch.” Binance founder Changpeng “CZ” Zhao, whom the billionaire had accused of sabotage, would now be his White Knight.

The seeds of FTX’s downfall were sown months earlier, stemming from mistakes Bankman-Fried made after he stepped in to save other crypto firms as the crypto market collapsed amid rising interest rates, according to interviews with several people close to Bankman-Fried and communications from both companies that have not been previously reported.

Some of those deals involving Bankman-Fried’s trading firm, Alameda Research, led to a series of losses that eventually became his undoing, according to three people familiar with the company’s operations.

The interviews and messages also shine new light on the bitter rivalry between the two billionaires, who in recent months competed for market share and publicly accused each other of seeking to hurt the one another’s businesses. It culminated on Wednesday, with Binance pulling out of its deal and throwing FTX’s future into uncertainty.

Stuck without a buyer, Bankman-Fried was now searching for alternative backers, two people close to him said. After Binance pulled out, he told FTX staff in a message that Binance had not previously told them of any reservations about the deal and he was “exploring all options.”

Neither Binance nor FTX responded to requests for comment. Bankman-Fried told Reuters on Tuesday that “I’ll probably be too swamped” to do interviews. He didn’t respond to further messages.

Binance earlier said it decided to pull out of the deal as a result of its due diligence on FTX and news reports about U.S. investigations into the company.

Zhao’s unveiling of the planned takeover capped a stunning reversal for Bankman-Fried. The 30-year-old had set up Bahamas-based FTX in 2019 and led it to become one of the largest exchanges, accumulating a near $17 billion fortune.

News of the liquidity crunch at FTX – valued in January at $32 billion with investors including SoftBank and BlackRock – sent reverberations through the crypto world.

The price of major coins plummeted, with bitcoin slumping to its lowest in almost two years, heaping further pain on a sector whose value has fallen about two-thirds this year as central banks tightened credit.

By ditching the deal, Binance had also avoided the regulatory scrutiny that would likely have accompanied the takeover, which Zhao had flagged as a likelihood in a memo to employees that he posted on Twitter.

Financial regulators around the world have issued warnings about Binance for operating without a license or violating money laundering laws. The U.S. Justice Department is investigating Binance for possible money laundering and criminal sanctions violations. Reuters reported last month that Binance had helped Iranian firms trade $8 billion since 2018 despite U.S. sanctions, part of a series of articles this year by the news agency on the exchange’s financial crime compliance. 

RELATIONSHIP SOURS

Zhao and Bankman-Fried’s relationship began in 2019. Six months after FTX’s launch, Zhao bought 20% of the exchange for about $100 million, a person with direct knowledge of the deal said. At the time, Binance said the investment was “aimed to grow the crypto economy together.” 

Within 18 months, however, their relationship had soured.

FTX had grown rapidly and Zhao now viewed it as a genuine competitor with global aspirations, former Binance employees said.

When FTX in May 2021 applied for a license in Gibraltar for a subsidiary, it had to submit information about its major shareholders, but Binance stonewalled FTX’s requests for help, according to messages and emails between the exchanges seen by Reuters.

Between May and July, FTX lawyers and advisors wrote to Binance at least 20 times for details on Zhao’s sources of wealth, banking relationships, and ownership of Binance, the messages show.

In June 2021, however, an FTX lawyer told Binance’s chief financial officer that Binance wasn’t “engaging with us properly” and they risked “severely disrupting an important project for us.” A Binance legal officer responded to FTX to say she was trying to get a response from Zhao’s personal assistant, but the requested information was “too general” and they may not provide everything.

By July of that year, Bankman-Fried had tired of waiting. He bought back Zhao’s stake in FTX for about $2 billion, the person with direct knowledge of the deal said. Two months later, with Binance no longer involved, Gibraltar’s regulator granted FTX a license.

That sum was paid to Binance, in part, in FTX’s own coin, FTT, Zhao said last Sunday – a holding he would later order Binance to sell, precipitating the crisis at FTX.

Graphic: Binance dominance https://graphics.reuters.com/FINTECH-CRYPTO/egvbynrnypq/chart_eikon.jpg

“TRYING TO GO AFTER US”

This May and June, Bankman-Fried’s trading firm, Alameda Research, suffered a series of losses from deals, according to three people familiar with its operations.

These included a $500-million loan agreement with failed crypto lender Voyager Digital, two of the people said. Voyager filed for bankruptcy protection the following month, with FTX’s U.S. arm paying $1.4 billion for its assets in a September auction. A Voyager spokesman said the company only used $75 million of Alameda’s credit line.

Reuters could not determine the full extent of losses Alameda suffered.

Seeking to prop up Alameda, which held almost $15 billion in assets, Bankman-Fried transferred at least $4 billion in FTX funds, secured by assets including FTT and shares in trading platform Robinhood Markets Inc, the people said. Alameda had disclosed a 7.6% share in Robinhood that May.

A portion of these FTX funds were customer deposits, two of the people said, though Reuters could not determine their value.

Bankman-Fried did not tell other FTX executives about the move to prop up Alameda, the people said, adding he was afraid that it could leak.

On Nov. 2, however, a report by news outlet CoinDesk detailed a leaked balance sheet that allegedly showed that much of Alameda’s $14.6 billion in assets were held in FTT. Alameda CEO Caroline Ellison tweeted that the balance sheet was merely for a “subset of our corporate entities,” with over $10 billion of assets not reflected. Ellison did not return requests for comment.

That failed to douse growing speculation over what Alameda’s financial health might mean for FTX.

Then Zhao said Binance would sell its entire share in the token, FTT, worth at least $580 million, “due to recent revelations that have come to light.” The token’s price collapsed 80% over the next two days and a torrent of outflows from the exchange gathered pace, blockchain data show.

WITHDRAWAL SURGE

In his message to staff this week, Bankman-Fried said the firm saw a “giant withdrawal surge” as users rushed to withdraw $6 billion in crypto tokens from FTX in just 72 hours. Daily withdrawals normally totaled tens of millions of dollars, Bankman-Fried told his employees.

After Zhao’s tweet that Binance would sell its FTT holding, Bankman-Fried projected confidence that FTX would weather its rival’s attacks. He told staff on Slack that withdrawals were “not shockingly, way up,” but they were able to process the requests.

“We’re chugging along,” he wrote. “Obviously, Binance is trying to go after us. So be it.”

But by Monday the situation became dire. Unable to quickly find a backer, or sell other illiquid assets short-notice, Bankman-Fried contacted Zhao, according to a person familiar with the call. Zhao later confirmed that Bankman-Fried had called him.

Bankman-Fried signed a non-binding letter of intent for Binance to buy FTX’s non-U.S. assets. This valued FTX at several billion dollars, two people familiar with the letter said – enough for the exchange to cover all withdrawal requests but a fraction of its January valuation.

Zhao announced the potential deal several hours later, with Bankman-Fried tweeting “a huge thank you to CZ.”

“Let’s live to fight another day,” Bankman-Fried told staff on Slack.

His employees were shocked. Even executives had been in the dark about the Alameda shortfall and takeover plan until Bankman-Fried informed them that morning, two people working with him said. Both people said they had been unaware that the withdrawal situation was so serious.

Then came Binance’s announcement on Wednesday scrapping the takeover. “The issues are beyond our control or ability to help,” Binance said. Zhao tweeted “Sad day. Tried,” with a crying emoji.

(Reporting by Angus Berwick in New York and Tom Wilson in London; additional reporting by Hannah Lang in Washington and Elizabeth Howcroft in London; Editing by Paritosh Bansal and Chris Sanders)

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Analysis-FTX debacle sparks investor rethink of battered crypto market

By Gertrude Chavez-Dreyfuss and Elizabeth Howcroft

NEW YORK/LONDON (Reuters) – With major cryptocurrency exchange FTX on the brink of collapse, some investors are beginning to question the viability of a sector already bruised by the bitcoin bubble bursting and closures of key market players.

Crypto markets have come under intense pressure this year, as rising interest rates prompt investors to ditch risky or speculative assets. The collapse of several crypto lenders, including Celsius and Voyager, major tokens terraUSD and Luna, and hedge fund Three Arrows Capital, had rung alarm bells even before the fiasco at FTX, headed by Sam Bankman-Fried.

He was racing on Thursday to find finance to prop up his embattled crypto exchange, according to a Slack message to FTX staff seen by Reuters, after rival Binance scrapped a proposed bailout following a review of the company’s structure and books.

A spokesperson for FTX did not comment on the Slack message. Bankman-Fried later said in a series of tweets that FTX was seeking to raise liquidity.

FTX is scrambling to raise about $9.4 billion from investors and rivals, a source said on Thursday.

Some in the industry say this fundraising challenge could be beyond Bankman-Fried’s reach, however, as concerns over patchy oversight and counterparty risk begin to overwhelm likely returns from the asset class, at least in the near-to-medium term.

“From a financial side, it’s fair to say that confidence is going to be somewhat shaken because if you can’t trust FTX then what can you trust?” Yat Siu, co-founder of Hong Kong-based investor Animoca Brands, told Reuters on Wednesday.

FTX’s swift fall from grace followed heavy speculation about its financial health that triggered $6 billion of withdrawals in just 72 hours earlier this week. The company had published a valuation of $32 billion as recently as January.

“What makes this new phase of deleveraging more problematic is that the number of entities with stronger balance sheets able to rescue those with low capital and high leverage is shrinking within the crypto ecosystem,” analysts at JP Morgan said in a note to clients.

“Now that the balance sheet strength of Alameda Research and FTX is under question only a few months after being perceived as strong balance sheet entities, it creates a confidence crisis and reduces the appetite of other crypto companies to come to the rescue.”

Speaking at the Token2049 crypto conference in London on Wednesday, Andrei Kazantsev, global head of crypto trading at Goldman Sachs, said “counterparty risk is starting to be top of mind” for some clients once drawn to crypto trading by high volatility and yield.

Unlike traditional corporations and financial firms, crypto entities operate in a regulatory gray area. For instance, deposits at crypto lenders are not insured by the government.

In the case of FTX, U.S. residents cannot trade on its global platform due to strict regulations for the crypto space in the United States. FTX has a U.S. partner, FTX.US, but its offerings are more limited than the global platform.

Ken Lo, co-founder at Hong Kong-based crypto exchange and custodian Hong Kong Digital Asset Exchange, said counterparty risk, which comes from a lack of transparency and information disclosure, underscores the need for “clear regulatory framework and vision statement.” ‘POSTER CHILD’ NO MORE It was only a few months ago that Bankman-Fried, 30, had been seen as a crypto white knight, salvaging beleaguered crypto firms that faltered as prices cratered. “The show must go on, the industry needs to keep growing, but it’s definitely a step-back in itself when you see the poster child of the industry being put in this position,” said Jean-Marie Mognetti, chief executive of crypto asset manager CoinShares. “It is a lesson which seems to keep repeating itself,” he added, citing certain star traders in various companies that ended up in trouble.

While the meltdown would not stop companies from creating new blockchain-based products, Animoca’s Siu said it “probably will create a little bit of a chill effect” for institutional investors entering crypto markets.

To be sure, some investors continued to have faith in the sector and bitcoin, the world’s largest cryptocurrency, rebounded 12.5% to $17,853.

In an interview with CNBC on Thursday, Microstrategy Chairman Michael Saylor said he will continue to acquire bitcoin when the opportunity presents itself. On Wednesday ARK Invest, led by high-profile crypto proponent Cathie Wood, bought shares in FTX rival exchange Coinbase Global. FTX’s snowballing troubles rocked digital currencies on Wednesday. Bitcoin hit a two-year low of $15,632, down about 77% from an all-time peak of $69,000 from November 2021. Ether, the second-largest, hit its lowest level since July before steadying on Thursday.

FTT, the smaller token tied to FTX, plunged. Its market cap dropped to around $360 million, down from around $3 billion at the start of the week, according to CoinGecko data. Max Boonen, co-founder of digital asset liquidity provider B2C2, said FTX’s problems have set the crypto space back by six months. Speaking at the Token2049 crypto conference in London, he suggested that investors will to have to rely more on credit asset managers doing due diligence on private financials.

Graphic: Top crypto exchanges by volume Top crypto exchanges by volume https://graphics.reuters.com/FINTECH-CRYPTO/jnpwygnndpw/chart.png

(Reporting by Gertrude Chavez-Dreyfuss in New York; Additional reporting by Georgina Lee in Hong Kong; Editing by Alden Bentley, Catherine Evans and Matthew Lewis)

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Tron says open to talks with FTX on rescue plans

(Reuters) – Justin Sun’s Tron is focused on enabling the withdrawal of its tokens from FTX but is open to talks about other rescue plans for the struggling cryptocurrency exchange, a spokesperson said on Thursday.

FTX rescue talks include the possibility of a credit line, the spokesperson said. They added that a deal on Thursday to establish a special facility that would allow clients to swap some crypto assets from FTX to external wallets was a “first step.”

(Reporting by Elizabeth Howcroft)

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Ontario Pension says any loss from FTX investment to have limited impact

TORONTO (Reuters) – The Ontario Teachers Pension Plan (OTPP) said on Thursday it had invested a total of $95 million to the troubled cryptocurrency exchange FTX and any financial loss from the exposure will have limited impact on the pension plan.

OTPP, Canada’s No. 3 pension fund, said it made the investments in FTX International and FTX U.S. exchange through its Teachers’ Venture Growth fund, representing less than 0.05% of the pension fund’s total net assets, it said.

FTX is scrambling to raise funds investors and rivals as Chief Executive Sam Bankman-Fried urgently seeks to save the cryptocurrency exchange that has been buffeted by a rush of customer withdrawals.

(Reporting by Divya Rajagopal)

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Coinbase cuts jobs again as cryptocurrencies extend fall

(Reuters) – Crypto exchange Coinbase Global Inc cut over 60 jobs in its recruiting and institutional onboarding teams, a spokesperson said on Thursday, at a time when pummeled digital coins risk another contagion in the sector and bigger rival FTX inches closer to a collapse.

The job cuts, the second time this year, follow a week after “crypto market headwinds” contributed to Coinbase’s net loss of $544.6 million for the three months ended Sept. 30, compared to a profit of $406.1 million a year ago.

The job cuts will help operate as efficiently as possible,” the spokesperson said.

In June, Coinbase cut 1,100 jobs, or 18% of its workforce, weeks after it said it would extend a hiring freeze and rescind a number of accepted offers.

Cryptocurrencies languished this year as higher interest rates and exacerbating worries of an economic downturn cratered prices that eliminated key players such as Voyager Digital, Three Arrows Capital and Celsius Network.

But the bigger blow to digital assets came since FTX showed early cracks. The larger crypto exchange, which had developed a penchant for bailing out troubled crypto firms, is exploring options since a liquidity crunch came to light and now faces scrutiny from U.S. regulators over its handling of customer funds, as well as its crypto-lending activities.

(Reporting by Mehnaz Yasmin in Bengaluru; Editing by Shailesh Kuber)

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Key U.S. senator urges probe into FTX collapse

WASHINGTON (Reuters) – U.S. Senate Banking Committee Chair Sherrod Brown said on Thursday it is critical that U.S. financial agencies investigate what led to cryptocurrency exchange FTX’s collapse and he pledged to take steps to ensure the stability of American markets.

“It is crucial that our financial watchdogs look into what led to FTX’s collapse so we can fully understand the misconduct and abuses that took place,” the Democratic senator said.

“I’m committed to finding the best path forward to protect consumers and the stability of the U.S. markets and banking system.”

(Reporting by David Shepardson; Editing by Chris Reese)

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White House: Crypto needs oversight to avoid harming Americans

WASHINGTON (Reuters) – Cryptocurrencies risk harming everyday Americans without proper oversight and latest news involving crypto underscores these concerns, White House press secretary Karine Jean-Pierre said on Thursday.

She said the White House will continue to monitor developments on cryptocurrencies.

(Reporting by Trevor Hunnicutt and Steve Holland, Editing by Franklin Paul)