The Bahamian-based cryptocurrency exchange FTX is apparently on the verge of collapse due to an unanticipated spike in customer withdrawals and a failed deal with rival Binance, serving as an unsettling reminder of the events that took place after the May 2022 crypto market collapse. FTX and Binance revealed that they had signed a “non-binding letter of intent” for Binance to buy all of FTX’s non-U.S. exchange business, hoping to avoid what happened to former crypto juggernauts Three Arrows Capital (3AC), Voyager Digital, and Celsius Network, each of which filed for bankruptcy protection earlier this year. Binance declared that it would not go through with the deal within 24 hours, citing worries about improper management of customer assets and U.S. regulatory probes.
A Familiar Story
Following the crypto failures this spring, FTX frequently made headlines for its high-profile acquisitions of troubled crypto assets. As it was on the verge of bankruptcy, BlockFi, a cryptocurrency trading platform, was acquired by FTX’s U.S.-based exchange (FTX.US) in July. The winning proposal to buy the assets of the insolvent cryptocurrency lending platform Voyager was made in September by FTX.US. In recent weeks, there have also been rumours that FTX.US may attempt to acquire Celsius Network’s assets through Chapter 11 proceedings.
In a shocking turn of events, trade journals disclosed that Alameda Research, a prominent crypto hedge fund controlled by FTX, has significant exposure to FTX’s native coin FTT on its balance sheet. Binance, a significant FTT investor, later declared that it was liquidating all of its holdings, citing concerns that FTT would crash like Terra LUNA in May 2022. Following the announcement, FTX saw a spike in customer withdrawals, and rumours spread that many FTX users were having trouble getting their cryptocurrency out of the global exchange.
Before announcing the prospective strategic partnership with Binance, FTX halted withdrawals, following the lead of other cryptocurrency startups. The futures of FTX and connected companies like FTX.US and Alameda are still being determined, as there is presently no agreement in place. Additionally, FTX and its creator Sam Bankman-Fried are subject to intense criticism and heightened regulatory scrutiny.
Lessons Learned from Terra, 3AC, and Voyager.
The announcement of FTX’s liquidity crisis is reminiscent of what happened earlier this year, when the failure of the Terra platform and its accompanying native token, LUNA, in May 2022 shook consumer confidence in cryptocurrencies and had a detrimental effect on the crypto market as a whole. Many cryptocurrency hedge funds that owned LUNA suffered huge losses. For instance, LUNA’s largest holder and cryptocurrency hedge company Three Arrows Capital (3AC), filed for bankruptcy in July. The Terra collapse resulted in a total market value loss of almost $40 billion. Interpol has issued a Red Notice for the arrest of Terra’s founder, who is currently a wanted man on the global stage. U.S. regulators are reportedly looking into Terra, its founder, and 3AC over claims that they misled investors about the strength of the hedge fund’s balance sheet. These regulators include the SEC and CFTC.
Following the failure of Terra and 3AC, two well-known crypto lending platforms, Voyager and Celsius Network, were subjected to unprecedented customer withdrawal requests as a result of press reports and social media posts alleging that they were having liquidity problems. They both stopped consumer withdrawals and, soon after that, declared bankruptcy. Recently, Celsius Network revealed in court documents that it is under investigation by state and federal regulators. It has been served with a subpoena by a federal grand jury in the Southern District of New York.
Potential Impact on Crypto Market Participants
None of this is good news for FTX’s investors or account holders, and anyone who is or may be affected by a potential bankruptcy or liquidation of FTX or Alameda should be careful to grasp their rights and available options before their options are limited.
BlackRock, the Ontario Teachers’ Pension Plan, SoftBank, Sequoia Capital, and Tiger Global were reportedly among the numerous major blue-chip investors. They purportedly contributed to FTX’s $421 million Series B investment round in 2021. To that point, the funding round was regarded as the biggest venture capital round for a cryptocurrency startup. Later that year, Celsius Network raised $750 million in a Series B round. It is also claimed that many of these institutional investors participated in the concurrent Series C and Series A rounds by FTX and FTX. U.S. What will happen to their investments is a pressing concern.
Initially, if FTX is forced into liquidation, stock investments are at risk. In the Celsius bankruptcy proceedings, a group of Series B preferred shareholders requested the appointment of an official preferred equity committee, arguing in particular that Celsius and the Official Unsecured Creditors Committee (UCC) were aligned in protecting the interests of customers at the expense of equity, which they argued could have a significant recovery in the case. This is an example of the difficulties that equity holders may face in a crypto bankruptcy. The shareholders argued that “non-customer facing entities,” such as Celsius’ potentially lucrative Bitcoin mining and non-debtor crypto storage businesses, are immune from customer claims.
The Bankruptcy Court finally rejected the shareholders’ request to establish an official preferred equity committee after Celsius and the UCC raised objections to the desired remedy. It remains to be seen if equity has a workable avenue to recovery under its theory because the decision did not address whether the consumer claims can be made against all Celsius companies.
Even while the problems in Celsius are fact-specific, any bankruptcy using FTX or other digital asset exchanges may result in problems that are equally intricate and new. Therefore, investors in a struggling crypto platform or exchange should seek advice from qualified legal representatives to take into account.
