FTX, the world’s second largest crypto exchange (used to purchase and sell cryptocurrencies such as Bitcoin), declared bankruptcy, affecting an estimated tens of thousands of individuals who were unable to withdraw payments. Consider this the equivalent of a stockbroker suddenly saying that you cannot sell your stocks or withdraw your money. The FTX collapse shattered investors’ confidence and spurred a new selloff in cryptocurrencies; for example, Bitcoin, which had already fallen by more than 70% this year, fell another 12% in only five days.
It also raised new worries regarding the safety of user cash, because crypto exchanges lack the gatekeeping systems that apply to traditional financial institutions such as banks. “The administration has repeatedly stated that, without adequate control of cryptocurrencies, they risk hurting regular Americans,” White House Press Secretary Karine Jean-Pierre said in a recent briefing.
Sam Bankman Fried, better known as SBM, created FTX as well as Alameda Research, a trading business. While these were meant to be two separate firms, two stories – one by Coindesk (a cryptocurrency news website) and one by The Wall Street Journal – suggested otherwise.
According to the WSJ, FTX provided loans to Alameda using funds placed by clients on the exchange. According to Coindesk, a significant portion of Alameda’s assets were in the form of a cryptocurrency called FTT – a token that FTX issued and could theoretically continue producing indefinitely.
Following the Coindesk investigation, Binance, the world’s largest cryptocurrency exchange led by Changpeng Zhao, announced plans to liquidate all of its FTT tokens “due to recent disclosures.” This alarmed investors, who raced to do the same, causing the token’s value to plummet 78% in a single day.
However, FTX was unable to manage such a large number of withdrawals – an estimated $6 billion over three days – all at once, and hence suspended the opportunity for users to withdraw their own funds.
At least three crypto exchanges have paused customer withdrawals this year alone — Vauld, FTX, and BlockFi – undermining investor trust both in India and overseas.
With FTX declaring bankruptcy, the creators of Indian cryptocurrency exchanges hurried to ensure consumers that their assets were secure. CoinSwitchKuber co-founder Ashish Singhal stated that his exchange “holds user assets 1:1.” The monies you deposit and the cryptocurrency you invest in are completely kept in your name. We do not reinvest or reuse them. You can get to them at any moment.”
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