LDN - Business

FTX scrambles for funds as regulatory pressure builds

[November 11, 2022] By Selena Li and Vidya Ranganathan

SINGAPORE/LONDON (Reuters) - Regulators are moving in on distressed crypto exchange FTX as it scrambles to raise billions in funds to stave off collapse, while its chief executive, Sam Bankman-Fried, faces heightened scrutiny.

The week-long saga that began with a run on FTX, one of the world's largest crypto exchanges, and an abandoned takeover deal by arch-rival Binance has hit an already struggling bitcoin and other tokens.

FTX is scrambling to raise about $9.4 billion from investors and rivals, a source said on Thursday, as the exchange seeks to save itself after customer withdrawals.

Justin Sun, founder of the crypto token Tron, said on Bloomberg TV on Friday he was evaluating the FTX situation. "Once we get the full picture I think we will start to make moves,” Sun said.

FTX did not respond to a request for comment.

Regulators have now stepped in, multiplying FTX's troubles. The Securities Commission of the Bahamas has frozen assets of FTX Digital Markets, an FTX subsidiary. FTX Australia called in administrators on Friday, the Australian Financial Review reported, citing a company statement.

Bankman-Fried is under investigation by the U.S. Securities and Exchange Commission for potential securities law violations, Bloomberg reported, citing a source.

Bankman-Fried did not immediately respond to Reuters' requests for comment.

Reuters has reported that the U.S. securities regulator is investigating FTX.com's handling of customer funds and crypto-lending activities.

FTX's predicament marks a rapid reversal for Bankman-Fried, the 30-year-old crypto executive, whose wealth was estimated by Forbes at around $17 billion just two months ago.

The turmoil sent bitcoin to a two-year low of $15,632 on Wednesday, it was last trading at $17,338 at 1127 GMT on Friday having been swept up in a cross-asset rally after U.S. inflation data.

FTX's token FTT was down 1.3% at $3.67 facing a 83% weekly loss.

Trading volumes in bitcoin futures and exchange traded funds have exploded.

"Confidence is gone on day one of this fallout and there is no sight of it coming back yet," said Kami Zeng, head of research at Fore Elite Capital Management, a Hong Kong-based crypto fund manager.

"We are already seeing regulators' actions from U.S. to Japan to Bahamas, etc. Expect more to come and that's what crypto market needs badly at the moment. People get hurt and need protection."

Unlike mainstream corporations and financial services companies, crypto entities operate in a regulatory grey area. For instance, deposits at crypto lenders are not insured by governments.

U.S. lawmakers have stepped up calls for action, including new laws to govern the sector and a probe into what caused the FTX crisis.

BANKING ON SUPPORT

A source close to Japan's SoftBank Group Corp said on Friday the tech investor's vision fund investments in the U.S. and international operations of cryptocurrency exchange FTX were less than $100 million, which it would mark down to zero.

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Representations of cryptocurrencies are seen in front of displayed FTX logo and decreasing stock graph in this illustration taken November 10, 2022. REUTERS/Dado Ruvic/Illustration

This source said helping out FTX was the question for larger investors in FTX.

Another venture capital fund Sequoia Capital wrote down a $150 million exposure to FTX to zero, it said on Wednesday.

Other crypto companies have taken steps to shield themselves. Crypto lender BlockFi said it was pausing client withdrawals until there was clarity on FTX.

Broker Genesis Trading disclosed its derivatives business had approximately $175 million in locked funds on FTX.

"We believe there is a 20-30% chance of a FTX rescue at best," said Matthew Dibb, chief operating officer of Singapore-based crypto investment manager Stack Funds.

"The damage looks to be done and even if FTX was bailed out, it would no longer be an avenue to trade as they have lost all credibility. A rescue of FTX would not be for the company, but for the clients and crypto ecosystem," Dibb said.

The seeds of FTX's troubles were sown months earlier, after Bankman-Fried stepped in to save other crypto firms hit by market turmoil.

FTX in July, for example, had agreed to provide crypto lender BlockFi with a $400 million revolving credit facility and had an option to buy the lender which faced a jump in withdrawals.

Reuters reported this week, citing sources that FTX transferred at least $4 billion to Alameda, to support the crypto trading firm after a series of losses.

Bankman-Fried has discussed raising $1 billion each from Tron founder Sun, rival exchange OKX and stablecoin platform Tether, Reuters reported on Thursday, citing a source who has direct knowledge of the matter.

Bankman-Fried is seeking the remainder from other funds, including current investors, the source said.

Sun told Bloomberg TV on Friday the company needed to do “full due diligence and evaluate the situation to have a full picture of what’s going on how serious is FTX’s liquidity crunch. Once we get the full picture I think we will start to make moves.”

Sun said he did not know the exact amount required to bail out FTX, though it was in the billions, and at the levels that had been reported there was “something on the table”.

Haider Rafique, OKX's global chief marketing officer said: “We passed on the initial opportunity before they engaged with Binance and at this point we are just evaluating the situation before we consider any participation from our side," said

(Additional reporting by Rae Wee in Singapore, Hannah Lang in New York, David Shepardson in Washington, Aishwarya Nair in Bangalore, Georgina Lee in Hong Kong and Alun John in London; Editing by Sam Holmes and Jane Merriman)

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