FTX Bankruptcy Details | Crypto Contagion Spreads

FTX’S FILINGS REVEAL SHOCKING MISMANAGEMENT

In new documents submitted by the exchange Thursday, FTX’s new CEO, John J. Ray III, issued a scathing critique of the mismanagement that prompted the former crypto darling’s sudden collapse. “Never in my career have I seen such a complete failure of corporate controls,” wrote Ray, a bankruptcy attorney who had led disgraced energy firm Enron after its collapse in 2001. He called the situation at FTX “unprecedented”—marked by “faulty regulatory oversight abroad” and controlled by a “very small group of inexperienced, unsophisticated and potentially compromised individuals.” Ray went on to detail what several financial statements for FTX and Bankman-Fried’s proprietary trading firm Alameda alleged and repeatedly said he did not have “confidence” in the information. The filings came after a series of nearly three dozen bizarre tweets from FTX’s former CEO, which also prompted Ray to issue a statement saying Bankman-Fried does not speak on FTX’s behalf.      

THE FATEFUL MARRIAGE

The relationship between FTX and its affiliated hedge fund Alameda Research seems to have been flawed since the founding of the cryptocurrency exchange. According to blockchain data analyzed by research firm Nansen, Alameda received 5 million of the exchange’s native tokens (FTT) before they were officially issued on July 29, 2019. Nansen suggested that the setup could have allowed Alameda to function as a market maker for FTT and FTX to dump tokens onto retail customers at an elevated price. The two firms held the majority of FTT supply so if one entity was forced to sell its holdings, the other would consequently take a huge hit to its balance sheet.      

Source: Forbes Digital Assets, powered by Nomics.  Prices as of 11:00 a.m. on November 18, 2022.

LAWYERS BATTLE OVER VENTURE

Bahamian liquidators who have taken control of a subsidiary of FTX in their Caribbean nation want to move the parent company’s liquidation to New York from Delaware, potentially complicating the unraveling of the failed cryptocurrency exchange. Lawyers for provisional liquidators of FTX Digital argued during a hearing Thursday that at the time the parent had filed its Delaware bankruptcy petition on November 11, the Securities Commission of Bahamas had already placed the Bahmanian unit into liquidation proceedings. That would have prevented the parent company from filing in the federal court in Wilmington, Delaware, without the liquidators’ permission, they contended. The liquidators petitioned for a chapter 15 proceeding–used in conjunction with overseas bankruptcies–for FTX Digital, which ran a cryptocurrency exchange in the Bahamas. FTX representatives took the opposite tack, asking the Delaware court to take over the chapter 15 proceedings, in which more than 100 subsidiaries of FTX have filed for chapter 11 bankruptcy protection. Michael Wiles, the judge presiding over the New York case, agreed to wait for the Delaware court’s decision before making his own ruling on the liquidators’ motion. A hearing is scheduled for Tuesday.      

CONTAGION SPREADS

Embroiled in turmoil in the wake of FTX’s collapse, the lending arm of the crypto investment bank Genesis Global Trading suspended new loan originations and redemptions Wednesday. At the end of its third quarter, the business had more than $2.8 billion in total active loans. That led Gemini, the crypto exchange owned by the Winklevoss brothers, to freeze withdrawals on its interest-bearing Earn accounts since Genesis was its partner in that program. Crypto lender BlockFi, bailed out by FTX in July, has also suspended customer withdrawals and is reportedly preparing to file for bankruptcy.

On Monday, Binance CEO Changpeng Zhao announced a bailout fund for crypto projects having liquidity problems and warned retail investors to avoid digital tokens. Zhao did not provide details about the fund but said several parties have reached out with interest in joining the effort.      

ELSEWHERE

Sam Bankman-Fried Tries To Explain Himself [Vox]

Trading Firm Genesis To Get $140 Million Equity Infusion From Parent Company DCG [The Block]

Jump Crypto Says No Plans To Shut Down, Quashing Rumors [The Block] 

Nina Bambysheva
Reporter
Forbes Money & Markets

Steven Ehrlich
Editor 
Forbes CryptoAsset & Blockchain Advisor

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