FTX 'Contagion' Creates Turmoil In The Crypto World

FTX CEO Sam Bankman-Fried (SBF) resigns from his position but sticks around to oversee an "orderly transition." Meanwhile, the FTX Group, which includes 130 companies, file for Chapter 11 bankruptcy.

FTX, FTX US, & Alameda To File For Bankruptcy

It's been a tumultuous week for the crypto exchange, as first, it looked like Changpeng (CZ) Zhao's Binance was ready to bail them out. Then pulled out of the deal almost as quickly as they had come in.

According to The Wall Street Journal, SBF's company Alameda Research owes FTX $10 billion after taking loans funded by FTX customers' deposits. The report brought a curt response from economist Frances Coppola who stated, "It shouldn't be doing anything with those assets. They should literally be sitting there so people can use them." 

As of today, FTX CEO Sam Bankman-Fried has resigned from his position. However, he will “remain to assist in an orderly transition.” FTX also sent out a press release on Twitter stating that the FTX group, along with 130 other companies, will begin the process to file for Chapter 11 bankruptcy. 

On November 10th, SBF announced, "They aren't doing any of the weird things that I see on Twitter and nothing large at all. And one way or another, soon they won't be trading on FTX anymore." He went on to tweet, "I'm sorry. That's the biggest thing. I fucked up, and should have done better."

A clearly embattled SBF continued, "Every penny of that, and of the existing collateral, will go straight to the users, unless or until we've done right by them. After that, investors, old and new, and employees who have fought for what's right for their career, and who weren't responsible for any of the fuck ups."

Today he went on to add, "Hopefully things can find a way to recover. Hopefully this can bring some amount of transparency, trust, and governance to them. Ultimately hopefully it can be better for customers."

ftx files for bankruptcy. Image of a man jumping off a stack of coins.

Bahamas Issues Order To Halt FTX Assets

On Thursday, before SBF had filed for bankruptcy, The Securities Commission of The Bahamas issued an order freezing the assets of the embattled crypto exchange. In addition to freezing the company assets, the agency suspended FTX's registration and requested that the Supreme Court of the Bahamas appoints a provisional liquidator. 

The Securities Commission of the Bahamas made the press release on Twitter. 

Traders Lose Faith In Centralized Exchanges

This financial chaos caused investors to withdraw Bitcoin from Centralized Exchange (CEX) wallets in serious numbers. Community manager at on-chain analytics firm CryptoQuant, JA Maartun, said, ”More than 80,000 BTC left exchanges wallets in the last 24 hours. Investors are withdrawing their Bitcoin to store them in places other than an exchange." Drawing on the adage, "not your keys, not your coins," he went on to say, "How are you holding your coins? Are they stored on an exchange, in a hardware wallet, or another option? It might be the right time to re-evaluate it."

(Suggested read: Understanding Crypto Wallets | A Beginner's Guide)

Crypto Exchanges Try To Implement 'Proof of Reserves'

Nine prominent exchanges announced they would publish proof-of-their-reserve holdings within the next month. The move comes in the wake of the FTX calamity as crypto investors fear insolvency. The nine exchanges – Binance, Bitget, Bybit, Deribit, Huobi, Gate.io, KuCoin, OKX, and Poloniex, have all issued statements that, in the name of increased transparency, they will publish their Merkle tree reserve certificate.

Merkle tree is a data structure used in computer science applications. They are also known as "binary hash trees."

Inflation Decrease Gives Markets A Bump

Following the collapse of FTX, cryptocurrencies and equities posted better-than-expected gains on Thursday. Both Bitcoin and ETH rallied 12% and 21%, respectively. Bitcoin reached $17,434 and ETH $1,298 at the time of writing. 

Analysts at Satoshi Labs published a statement that said, "This week's events also underline the power of bitcoin as a genuinely decentralized cryptocurrency offering financial self-sovereignty to the individual, in stark contrast to supposedly reputable tokens that can be wiped out overnight."

(Related read: What Is Inflation and How Does It Affect Crypto)

Other Crypto Stories

image of a person trading on a mobile device.

Coinbase Gets Rid Of 60 Plus Employees

Coinbase crypto exchange announces 60 staff redundancies in the wake of the tumultuous week in crypto. While bad news for those affected, it’s not on the same scale as the 11,000 staff layoffs announced by Meta. The move by Coinbase comes just five months after they laid off 18% of their workforce, citing the forthcoming “extended crypto winter.” (Read more)

Pro-crypto Politicians On The Move In The US Capitol

In the latest elections in the US, Republican Tom Emmer and Democrat Bill Foster, both seen as crypto-friendly, are heading to Washington. Democrat Caucus members Josh Giottheimer and Ritchie Torres were also successful, with results that look positive for the crypto world. However, how these results will affect the possibility of regulation remains to be seen. 

General counsel at Bitcoin.com, Joseph Collement, mused, “Some believe that Republicans are more friendly to our industry, while others believe that there is possibly an emerging bipartisan consensus over formulating friendly and pro-growth regulation.” (Read more)

EU Lawmakers Vote In Favor Of Strict Cybersecurity Laws

In a successful 556 to 18 vote on Thursday, European Union lawmakers supported stricter cybersecurity rules on crypto providers and other financial institutions. Mairead McGuinness, European Commissioner, commented in the debate that, The Digital Operational Resilience Act (Dora) is “a cornerstone of our work on digital finance in the European Union, making sure that we support innovation and do it in a safe way. Protecting the financial system from cyber attacks and cyber fraud is vital.” (Read more)

Musk Tells Twitter Employees To Return To Office

In a move seen by staff as unnecessarily antagonistic, Elon Musk has ordered Twitter employees, working from home for months, to return to the office for at least 40 hours per week. The workers who believe they are more productive in a home-work environment have expressed disappointment. Many experts believe that Musk’s stance is flawed. Natacha Postel-Vinay of The London School of Economics commented, “Most of the evidence shows that productivity has increased while people stayed at home.” (Read more)

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Markets Down After Binance Pulls Out Of FTX Deal

Binance, the world’s largest exchange, announced that it will not go ahead with the proposed acquisition of Sam Bankman-Fried’s FTX. Changpeng “CZ” Zhao walked away from the deal yesterday, almost as quickly as it was offered.

Binance Explains Why The FTX Deal Is Off

The FTX deal collapsing was sensationally announced in a short run of tweeted statements, which read:

“As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of FTX.

In the beginning, our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help.

Every time a major player in an industry fails, retail consumers will suffer. We have seen over the last several years that the crypto ecosystem is becoming more resilient, and we believe, in time, that outliers that misuse user funds will be weeded out by the free market.

As regulatory frameworks are developed, and as the industry continues to evolve toward greater decentralization, the ecosystem will grow stronger.”

image of a person doing research (representative of the binance ftx deal)

The news was met with incredulity and turmoil among investors. FTX, which came under extreme liquidity issues earlier in the week, holds substantial funds belonging to retail investors. 

Many think that the initial problems for Binance stem from an article on the Coindesk website, which pointed to worrying links between FTX, its native token FTT, and research and trading firm, Alameda, also owned by FTX boss SBF.

(Beginner's Guide: What Is DeFi? Decentralized Finance Explained)

An Investigation By US Regulators

FTX is facing a US government investigation into its client fund and lending business. The investigation is a joint one by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission. The liquidity crunch at the center of the probe pushed FTX to the brink. The SEC began scrutinizing FTX US months ago.

According to unnamed sources on the inside, American regulators are also looking into the relationship between FTX, its American counterpart FTX US, and SBF’s research and trading house Alameda Research. However, there have been no official comments from the SEC, the CFTC, FTX, and FTX US. 

(In case you missed it: SBF Responds To Criticism About Regulation Proposal)

SEC to investigate SBF after FTX deal sours

There has been a long-standing suspicion surrounding crypto in the eyes of the SEC. The commission’s chair Gary Gensler has repeatedly commented on risks associated with crypto exchanges. He believes many platforms violate securities law by dealing in unregistered securities to US citizens, providing improper loans, and even front-running their clients’ trades. In addition, he raises concerns that platforms are engaging in conflicting lines of business. His long-term goal has been to split up the different functions of crypto exchanges.

FTX Ventures and Alameda Offline

Two of SBF’s companies, FTX Ventures, and Alameda, went dark as news of the collapsed deal spread. As of 7:00 pm UTC on Wednesday, 9th November, the sites were not accessible. Staff was not notified, leaving FTX Ventures executive Amy Wu to state that she is “finding out along with everyone else on Twitter.”

The two associated companies of FTX.com and FTX.US remain online. However, it appears that customer withdrawals have been suspended, and customers advised to cease depositing funds. 

FTX Token On Its Way Down as Crypto Markets Tank

Unsurprisingly this shambles had led to a severe collapse in the price of FTX tokens. At the time of writing, they are trading at $2.28, an alarming drop of 51%.

In addition, news of the proposed acquisition collapse sent the markets into chaos. Bitcoin, Ethereum, Solana, and most other cryptocurrencies saw huge downward swings. All three of the big hitters dropped at least 20%. At the time of writing, Solana is down 29% at around $15. Bitcoin is trading at circa $16,700, which, although it has rallied slightly today, is still 29% down over the week. Ethereum sits at $1,190, 8% up on the day but still 20% down on the week.

It’s fair to say that there are tumultuous times ahead in the coming few days. 

(You may also like: The Ultimate Beginner’s Guide To Ethereum)

Other Crypto News

graphic image of a bear and bull (crypto markets)

Nearly $1 Billion Of SOL Hitting The Market

Almost $1 billion of Solana is set to be unlocked at 8:30 UTC today, Thursday, November 10th. The amount represents 13% of Solana’s supply. This is the second-largest volume of tokens Solana has unlocked in any epoch. It is happening at a time of considerable turmoil in the crypto market. (Read more)

Sam Bankman-Fried No Longer A Billionaire

According to the latest Bloomberg Billionaire list, SBF lost an estimated $14.6 billion. This massive amount represents 94% of his total wealth. He still has around $991 million, so he’s not starving yet. However, the enormous tumult surrounding his companies this week has had a devastating effect on his assets. SBF made the promise earlier this year to donate most of his fortune, which was then valued at $21 billion, to charity. (Read more)

Twitter Files To Become A Money Service Business

The Musk Twitter era continues on its rocky start. Hundreds of thousands of users, including many high-profile people, vowed to leave the site. In the wake of this, Musk applied for Twitter to become a money service business. They filed an application to conduct money services within the US and several of the country’s international territories. (Read more)

US Treasury “Redesignates” Sanctions Against Tornado Cash

The US has moved to redesignate Tornado Cash as a sanctioned business amid allegations that North Korea used the crypto company to fund its (WMD) weapons program. In a treasury press release, it stated, 

"This action is part of the United States' ongoing efforts to limit the DPRK's ability to advance its unlawful weapons of mass destruction (WMD) and ballistic missile programs that threaten regional stability and follows numerous recent DPRK ballistic missile launches, which are in clear violation of multiple United Nations (UN) Security Council resolutions."

The Treasury Department's Office of Foreign Asset Control (OFAC) first designated Tornado Cash in August 2022. (Read more)

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Binance Planning To Acquire FTX In Massive Deal

Samuel Bankman-Fried, also known as SBF, announced that he had "come to an agreement on a strategic transaction with Binance" for cryptocurrency trading platform FTX. The move comes as Binance CEO Changpen (CZ) Zhao tweeted that he had signed a non-binding letter of intent (LOI) to acquire FTX fully.

Announcements Shook the Crypto World

The two announcements by SBF and CZ took the crypto market by surprise. SBF was at pains to point out that FTX and Binance were two separate companies. 

The FTX' Liquidity Crunch'

Things moved quickly over the last week. First, someone leaked part of Alameda Research's balance sheet. Sam Bankman Fried's crypto empire comes in two parts. Alameda Research is his trading company, while FTX is his exchange. The leaked balance sheet shows that it is full of FTX tokens. These tokens are issued to users and provide discounts on FTX's marketplace trading fees. 

The leaked balance sheet caused Alameda CEO Caroline Ellison to immediately rebuff claims that the company was on the brink of insolvency. She tweeted that the leak did not show the full scope of the company's assets. 

Reuters then announced that SBF had told FTX staff that the exchange had paused withdrawals. In the days leading up to SBF's announcement to staff, the exchange saw approximately $6 billion in net withdrawals. It soon became apparent that CZ had liquidated all of Binance's FTX tokens. He tweeted that the maneuver was not a move against his competitor, saying, "Regarding any speculation as to whether this is a move against a competitor, it is not. Our industry is in its nascency and every time a project publicly fails it hurts every user and every platform."

SBF Asks CZ And Binance For Help

Samuel Bankman-Fried turned to Changpen Zhao for help in protecting its users, and CZ agreed, tweeting, "This afternoon, FTX asked for our help. There is a significant liquidity crunch. To protect users, we signed a non-binding LOI, intending to fully acquire http://FTX.com and help cover the liquidity crunch. We will be conducting a full DD in the coming days."

He went on to say, "Our teams are working on clearing out the withdrawal backlog as is. This will clear out liquidity crunches; all assets will be covered 1:1. This is one of the main reasons we've asked Binance to come in. It may take a bit to settle etc. — we apologize for that… But the important thing is that customers are protected."

Prices Go Plunging

Predictable news of the proposed acquisition sent the markets into meltdown, with Bitcoin, Ethereum, Solana, and most other cryptocurrencies swinging wildly. As prices spiraled up and down, the markets saw huge sell-offs. Bitcoin, the largest of them all, was trading at $21,000 at one point but then dropped to under $18,000. 

Ethereum saw an 11% drop over a 24-hour period and well below its crucial $1,500 mark. The news hit Solana even harder, losing almost 30% over 24 hours, finishing at just $23.87. This week Bitcoin and Ethereum have unusually not been following the US equities markets. The DOW was up 200 points on the day. 

image depicted the crash resulting from thr binance ftx feud

Greater Implications Of The Binance FTX Feud

The longstanding Binance-FXT feud could have long-lasting consequences for all cryptocurrencies. As a result, many predict that the crypto winter traders are experiencing could last even longer. While at the same time, the specter of regulation may well have moved closer. 

Related read: SBF Responds To Criticism About His Regulation Proposal

Matthew Feibach, a Blockworks research analyst, remains positive, stating, "People may lose confidence in [centralized exchanges], learn about self custody and operate on chain. An added bonus, it could help make ETH deflationary.”

Meanwhile, Peter Eberle, chief investment officer and president of Castle Funds, predicted a more prolonged crypto winter, "Uncertainty is bad for markets. This is one more example why people should keep their crypto on their wallets. Only use exchanges, DeFi or traditional, for trading, and then keep your tokens and coins on a hardware wallet off of exchanges. 'Not your keys, not your coins!'"

US Regulators Keeping A Close Eye

The implications regarding regulation are uncertain, as are the effects that regulation might have. While many fear regulation, others see it as a catalyst that opens crypto to a broader audience. US regulators are certainly monitoring the situation regarding Binance and FXT. However, there have yet to be any responses from either the Securities and Exchange Commissioner or the U.S. Treasury Department.

image explaining how US regulators are eyeing FTX and Binanace

Following the Biden administration's findings on digital asset regulation this fall, US regulators were already planning to double down on enforcement of any existing financial laws applying to cryptocurrencies. Most of Binance's and FXT's business operates outside the US. However, this acquisition will undoubtedly sharpen the minds of Washington policymakers. 

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Vitalk Updates The Ethereum Roadmap

Ethereum co-founder Vitalik Buterin releases an update on the network roadmap. Traders see the roadmap positively, resulting in bullish trading in ETH. In Buterin’s own words, the next development phase will see new features that will “ensure reliable and fair credibly neutral transactions inclusion.” These would effectively solve Ethereum’s Maximal (or Miner) Extractable Value (MEV) issues. In addition, this phase will see Ethereum becoming totally “SNARKed.” Snark stands for Succinct Non-Interactive Argument of Knowledge. It should see improved anonymity without any loss to transacting or traceability. (Read more)

50k Bitcoins Seized From DarkWeb Marketplace Silk Web 

US Attorney for the Southern District of New York stated that last November, authorities had seized 50,676 bitcoins linked to Silk Road, the darknet marketplace. The haul was valued at $3.36 billion when it was discovered but now has a value of $1.04 billion. Silk Road collapsed following the arrest and subsequent life sentence given to the site’s operator Ross Ulbright. (Read more)

OpenSea NFT Marketplace Planning ‘On-Chain Enforcement Tool’ 

OpenSea, the No 1 NFT marketplace, is releasing an “on-chain enforcement tool” that will enable artists to prevent the sale of their work on non-royalty sites. Royalties are a sore point for many in the NFT space. So this move will be welcomed by creators everywhere. However, the NFT community expresses concerns that artists will blacklist collections. (Read more)

Google Cloud Web3 Integrations Support Ethereum and Solana

Google Cloud has announced several collaborations with blockchain networks Ethereum and Solana recently. These announcements accelerated Google’s support of Web3. Ethereum became the first blockchain to gain Google’s support, and Solana will follow soon. At Solana’s weekend Breakpoint 2022 conference in Lisbon, Nalin Mittal for Google Web3 explained the broadening of investment that the company has put into Web3. (Read more)

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