Crypto trading platform FTX collapses into bankruptcy, dragging bitcoin price down with it
130 affiliated companies also insolvent
Cryptocurrency trading company FTX is formally seeking protection from its creditors and entered bankruptcy proceedings, the company said in a news release on Friday.
The company's founder, chair and CEO, Sam Bankman-Fried, has also resigned, the company announced.
About 130 other companies associated with FTX, including Bankman-Fried's investment firm Alameda Research, "have commenced voluntary proceedings under Chapter 11 of the United States Bankruptcy Code," the company said.
It's the latest development in a whirlwind week for the company that has in a matter of days gone from one of the largest cryptocurrency trading platforms in the world with $16 billion in assets, to insolvency, frozen customers' accounts, regulatory and judicial investigations and rumblings of fraud.
'Black eye' for crypto
In a court filing, Alameda lists liabilities in excess of $10 billion US. On the company's balance sheet, more than $4 billion of the company's assets consist of something called FTT, which is a crypto token created by FTX.
About a year ago, one FTT token was worth about $80 US. On Monday morning, each one was worth about $22. By Friday morning, they were changing hands for less than $3.
That's a major red flag, said Charley Cooper, a former chief operating officer with the U.S. Commodity Futures Trading Commission, because it means the company is "valuing itself based on something that they invented."
"The first problem is much of their balance sheet was in the very token they created, which no one really knew how much it was valued at," he said.
Cooper called the FTX saga a "black eye" for crypto and said it illustrates how it is fundamentally far more risky than the conventional financial system.
"This industry has a lot of exposure to itself. You have a group of entities within an ecosystem that trade with each other, that hold positions in each other's crypto tokens. Money moves back and forth quite frequently, and it also draws in various different retail customers, which creates a reputational issue if any of them go down," he said.
The downfall of FTX is only the most recent fall of a major crypto platform. Earlier this year, crypto company Celsius went under, after the value of some so-called stablecoins plummeted and the exchange wasn't able to process the deluge of requests for withdrawals from customers.
"I think you're going to see a more aggressive push in the wake of the collapse of FTX with those regulators trying to stake out a claim," Cooper said.
Bankman-Fried, the founder of FTX, has emerged in recent years as one of the faces of crypto, appearing at flashy events alongside such celebrities as former U.S. president Bill Clinton and supermodel Gisele Bundchen.
The only upside of the FTX insolvency:<br><br>Gisele Bündchen, who held all her money on FTX, will likely return to modeling🤝<a href="https://twitter.com/hashtag/FTT?src=hash&ref_src=twsrc%5Etfw">#FTT</a> <a href="https://twitter.com/hashtag/FTX?src=hash&ref_src=twsrc%5Etfw">#FTX</a> <a href="https://t.co/H9R6JDwmUX">pic.twitter.com/H9R6JDwmUX</a>—@CryptoHub210
"Here's a company that was paraded as being the gold standard, got celebrity endorsements, all for it to come crashing down in an instant," technology analyst Ritesh Kotak told CBC News in an interview. "It just goes to show the lack of understanding or due diligence that organizations have put into these companies before making significant investments."
The 30-year-old Bankman-Fried was born in Silicon Valley and lives in the Bahamas, but his crypto empire stretched all the way to Canada.
The Ontario Teachers' Pension Plan participated in a funding round for FTX as recently as 2021, with a stake of roughly $95 million.
"While there is uncertainty about the future of FTX, any financial loss on this investment will have limited impact on the plan, given this investment represents less than 0.05 per cent of our total net assets," the pension plan said.
In June, Calgary-based cryptocurrency startup Bitvo agreed to be bought by FTX, but that deal has not yet closed, and the company continues to operate independently.
"We wanted to ensure our customers that your funds are secure with Bitvo and that trading operations as well as withdrawals and deposits have and will continue seamlessly," the company said.
Dragging down all cryptocurrencies with it
The downfall of FTX has sparked a broader decline in just about all cryptocurrency assets, as investors rush to dump the opaque investments with more risk than they anticipated.
The price of bitcoin dipped below $17,000 US on Friday morning, a level it hasn't hit since 2020. The price of bitcoin hit an all-time high in late 2021 of roughly $64,000 US before the spectre of high inflation sparked a sell-off that has continued to this day.
Suneet Muru, an analyst with GlobalData in England, said FTX's collapse signals more pain for the sector, but he believes it will emerge stronger.
"It will deflate the crypto market cap over the next few months but will force exchanges to realign their business models toward effective risk management," he said. "Now more than ever, exchanges must demonstrate how they differ from banks and keep far less of their own cryptocurrencies on their books."
With files from the CBC's Meegan Read