The second largest cryptocurrency exchange in the world, FTX, has applied for bankruptcy protection in the US amid predictions the struggling sector could experience a catastrophe similar to the one that occurred in 2008.
Sam Bankman-Fried, the creator of FTX, also gave up his position as CEO following a swift fall from grace that started last week with news of his crypto empire's financial setup.
According to a statement released by FTX, a number of connected companies, including its US-based exchange and Alameda Research, a trading company also owned by Bankman-Fried, have initiated chapter 11 proceedings in the US state of Delaware "in order to commence an orderly process to review and monetise assets for the benefit of all global stakeholders."
The expansive FTX group, a collection of affiliated enterprises linked together through subsidiaries, legal contracts, and the shared persona of Bankman-Fried himself, was made up of "about 130" other organizations that were also listed in the bankruptcy filing.
According to CNBC, the bankruptcy filing revealed that FTX had more than 100,000 creditors, assets between $10 billion and $50 billion, and liabilities between $10 billion and $50 billion. According to the cryptocurrency website CoinGecko, FTX has completed $627 billion worth of trades so far this year, ranking it among the top five exchanges, behind market leader Binance's $4.9 trillion worth.
The FTX statement further stated that Bankman-Fried, 30, had resigned as CEO and that John J. Ray III would take over. Ray is an American attorney who first gained notoriety in 2004 when he was chosen to manage the liquidation of Enron, the Texas energy company that crashed in 2001 after massive financial fraud was discovered.
Bankman-Fried tweeted on Friday, "I'm piecing together all of the circumstances, but I was stunned to see things disintegrate the way they did earlier this week. "I'll be writing up a more thorough piece on the play-by-play shortly, but I want to make sure I get it right when I do," the author said.
Bankman-wealth Fried's was reported by Bloomberg terminals as being $3 as of Friday morning, down "100%" from $16.2 billion earlier in the year.
The assets of FTX's Bahamas business were frozen on Thursday by the Bahamas securities regulator. The securities commission for the islands declared that it had appointed a liquidator for the division and frozen the assets of FTX Digital Markets and linked parties.
On Friday, there were also indications that FTX's problems had spillover implications. Lender BlockFi said that it was halting customer withdrawals. In June, FTX backed out BlockFi with a $250 million loan, only one week after lending over $500 million to the faltering cryptocurrency broker Voyager Digital. BlockFi stated that it was "unable to conduct business as usual" because of of the situation.
On hearing about the bankruptcy, Bitcoin, the leading crypto asset, dropped as much as 7% to $16,361, which is very near to Thursday's two-year low. The cryptocurrency market peaked at $3 trillion last year but is currently trading at approximately $850 billion.
The founder of FTX's rival Binance, Changpeng Zhao, forewarned the cryptocurrency market on Friday that it was headed for a crisis akin to the one that occurred in 2008 and that there would be more failures to come. Before FTX sought chapter 11 protection, he told a conference in Indonesia that this week's events were "probably an accurate analogue" to the global financial crisis, according to the Financial Times.
A Lehman Brothers moment has been precipitated for the entire crypto economy, according to Carol Alexander, a professor of finance at the University of Sussex.
When news broke last week that Alameda's financial sheet was loaded with billions of dollars' worth of FTT, the exchange's crypto token, suggesting that both companies were susceptible to a collapse in the token's value, FTX's fall from the top of the crypto sector began.
After the largest cryptocurrency exchange in the world, Binance, announced on Sunday that it was selling its FTT holdings, there was a bank-style run on FTX as users rushed to withdraw an estimated $6 billion in just 72 hours.
Others in the sector turned on FTX as the company stumbled under the pressure of withdrawal requests. The creator of Megaupload, Kim Dotcom, revealed a text message in which the lawyer Ira Rothken claimed that FTX was under investigation for failing to stop US-based clients from trading on its offshore exchange.
Bankman-Fried acknowledged "fucking up" in a statement on Thursday but said that the US branch of FTX, which is isolated from the much bigger unregulated offshore exchange, was unaffected by the issues.
He initially wrote in all caps, "This is all about FTX International, the non-US exchange." Users of FTX US are safe.
But as of just now, the highly controlled American exchange has joined its corporate brethren in filing for bankruptcy.