Cryptocurrency exchange FTX now worthless, says key investor

Firm valued at $25bn in 2021 suffered bank run-style crisis as investors rushed to withdraw money

The founder of the world’s second largest cryptocurrency exchange, FTX, has apologised for his company’s near-collapse this week, saying he “fucked up” in his calculations and in his communications during the crisis.

Sam Bankman-Fried, a billionaire and major donor to the US Democratic party who has lobbied Washington for tighter regulation of the crypto market, was speaking following a run on his Bahamas-headquartered FTX exchange.

Customers withdrew $6bn (£5.15bn) in the 72 hours before Tuesday morning, Reuters reported, citing a message to staff at FTX, when the exchange was forced to block further redemptions in an effort to remain solvent.

It has yet to restart withdrawals, is blocking new account signups and advising existing customers against depositing.

The turmoil at FTX is tearing through the cryptocurrency market, with the cornerstone digital asset, bitcoin, falling 7.6% over 24 hours to $16,775 and the second largest, ethereum, falling 4.4% to $1,205. Investors pulled $700m from Tether, the “stablecoin” that underpins much of the sector’s economy.

“I’m sorry. That’s the biggest thing,” Bankman-Fried wrote in a series of tweets. “The full story here is one I’m still fleshing out every detail of, but as a very high level, I fucked up twice.”

Due to “poor internal labelling of bank-related accounts”, he said he “was substantially off” in his calculations of the sums the exchange had lent out to users to let them make leveraged bets – borrowing money to trade with, magnifying potential gains and losses.

That meant that he thought the company had enough money on hand to pay out 24 times the normal daily withdrawals – but in fact, it did not have enough to even pay out all the withdrawals on Sunday alone. “We saw roughly $5bn of withdrawals on Sunday – the largest by a huge margin.”

But, he insisted, while the exchange was suffering a liquidity crunch, it was not insolvent, and still held more assets than the total value of all the customer deposits – albeit in a form that could not be easily converted to cash.

Binance and FTX logos.
A merger between Binance and FTX had been mooted. Photograph: Dado Ruvić/Reuters

Bankman-Fried’s belated defence came hours after one FTX’s largest external investors had declared the company worthless. In a note to partners, the venture capital firm Sequoia said it had written down its $150m investment to nothing.

“In recent days, a liquidity crunch has created a solvency risk for FTX. The full nature and extent of this risk is not known at this time. Based on our current understanding, we are marking our investment down to $0,” the investors wrote, in a message signed Team Sequoia.

Just two months earlier, the firm had published a long self-congratulatory story about how its partners had invested in the company because Bankman-Fried was “obviously a genius” who had a vision to turn FTX into a super-app where you could buy everything from a bitcoin to a banana.

Other investors have lost similar sums, including the Ontario Teachers’ Pension Plan, which last year invested about $400m in the exchange, valuing FTX at $25bn.

Sam Bankman-Fried.
Sam Bankman-Fried. Photograph: FTX/Reuters

The sudden collapse in value was prompted by leaked documents which implied that Alameda Research, a hedge fund tightly intertwined with FTX through its common owner, Bankman-Fried, was in effect insolvent.

Alameda’s accounts rested on a token, FTT, that was issued by FTX and had no value other than that guaranteed by the exchange, according to the documents.

In his latest statement, Bankman-Fried did not address the root cause of the bank run, other than to say that Alameda “aren’t doing any of the weird things that I see on Twitter – and nothing large at all”.

He added: “One way or another, Alameda Research is winding down trading.”

The leaks about Alameda turned into a crisis for FTX when Binance, the largest cryptocurrency exchange, announced it would sell its own major stake in FTT. The fire sale that followed crashed the value of the token far below the $22 floor that FTX had committed to support, and prompted the equivalent of a bank run at FTX itself, as customers raced to withdraw their deposits faster than the exchange could process them.

Cryptocurrencies are an alternative way of making payments to cash or credit cards. The technology behind it allows the ‘money’ to be sent directly to others without it having to pass through the banking system. For that reason they are outside the control of governments and are unregulated by financial watchdogs – and transactions can be made in a way that keeps you reasonably pseudonymous.

If you own a crypto-asset you control a secret digital key that you can use to prove to anyone on the network that a certain amount of that asset is yours. If you spend it, you tell the entire network that you have transferred ownership of it, and use the same key to prove that you are telling the truth. Over time, the history of all those transactions becomes a lasting record of who owns what: that record is called the blockchain.

Bitcoin was one of the first and biggest cryptocurrencies and has been on a wild ride since its creation in 2009, sometimes surging in value as investors have piled in – and recently crashing back down.

Sceptics warn that the lack of central control make crypto-assets ideal for criminals and terrorists, while libertarian monetarists enjoy the idea of a currency with no inflation and no central bank.

The whole concept of cryptocurrencies has been criticised for its ecological impact, with "mining" for new coins requiring vast energy reserves and the associated carbon footprint of the whole system.

Richard Partington and Martin Belam

The fight between the two exchanges briefly turned into an alliance, as Binance agreed to make a non-binding offer to bail FTX out and merge with it. But on Wednesday night, the deal fell through.

“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,” Binance said.


Alex Hern UK technology editor

The GuardianTramp

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