The collapse of the cryptocurrency FTX under scrutiny by federal authorities | Cryptocurrencies

The rapid collapse of the FTX cryptocurrency exchange sent more shockwaves through the crypto world on Thursday, with authorities now investigating the firm for potential securities violations and analysts bracing for a further downturn in crypto prices.

FTX had agreed earlier this week to sell itself to larger rival Binance after suffering the cryptocurrency equivalent of a bank run. Customers fled the exchange after becoming concerned about whether FTX had enough capital.

People familiar with the matter said the Department of Justice and the Securities and Exchange Commission (SEC) are examining FTX to rule out criminal activity or securities violations it may have committed.

This week’s developments mark a shocking turnaround for FTX CEO and founder Sam Bankman-Fried, who was hailed as a savior earlier this year when he helped several cryptocurrency companies run into financial trouble.

The investigation of Bankman-Fried and FTX by those in the crypto world as well as securities regulators is centered on the possibility that the company has used customers’ deposits to finance bets on Bankman-Fried’s hedge fund, Alameda Research. In traditional markets, brokers are expected to separate client funds from other company assets. Violations can be punished by the regulator.

Meanwhile, investors in the popular digital currency got some relief from the latest crypto crisis Thursday after a day of selling. Bitcoin rose to $17,691 after dropping as low as $15,512 on Wednesday. Ethereum is up 12%. The gains came after government reports showed inflation cooled a little last month to give rise to riskier assets.

The crypto world hopes that Binance, the world’s largest crypto exchange, can save FTX and its depositors. However, after Binance had a chance to look at FTX’s books, it became clear that the smaller exchange’s problems were too big to solve.

A person familiar with the affairs between FTX and Binance described the book as a “black hole” where it is impossible to distinguish between the assets and liabilities of FTX exchange and the opinion of Alameda Research. This person spoke on condition of anonymity because they are not authorized to speak publicly about the matter.

This person said Bankman-Fried committed the “ultimate sin” by tapping into FTX’s custodial assets to finance Alameda Research.

In a further illustration of FTX’s financial straits, Bankman-Fried asked its investors on Wednesday for $8 billion to cover withdrawal requests, according to The Wall Street Journal, citing an unnamed source.

In a series of Tweets on Thursday, the founder and CEO of FTX said that he did not have enough liquidity to cover withdrawals and that he was more leveraged than he thought.

1) I'm sorry. That's the biggest thing.

I fucked up, and should have done better.

— SBF (@SBF_FTX) November 10, 2022

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1) I’m sorry. That’s the biggest thing.

I’m a bastard, and should do better.

– SBF (@SBF_FTX) November 10, 2022

The latest crisis in the crypto industry is fueling new calls for tighter regulation. White House press secretary Karine Jean-Pierre said the development of FTX “highlights why prudent regulation of cryptocurrencies is indeed necessary. The White House, and the relevant agencies, will monitor the situation as it develops.

The collapse of the third largest cryptocurrency exchange is likely to cause further disruption across the crypto world, analysts say, meaning Thursday’s rally could be temporary.

“The unwinding of FTX, as well as the shock and confidence in the system, will cause the crypto price to drop even further leading to a “new cascade of margin calls”, said analysts at JP Morgan in a note to investors. This will be similar to the selloff that occurred after the collapse of Terra stable coin earlier in the year, where the price continued to fall weeks after the failure.

“This deleveraging is likely to last at least several weeks unless a rescue for Alameda Research and FTX is agreed quickly,” JP Morgan analysts wrote.

The crypto industry is waiting to see what other companies are affected by the collapse of FTX. Venture capital fund Sequoia Capital said Thursday it had written down its total investment of nearly $215m in FTX.

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