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The impact of 'bankruptcy of ftx' on cryptocurrency markets

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ftx us bankruptcy ftx us bankruptcy

The bankruptcy of FTX US came as a shock in the middle of the crypto season.

Market reaction shares of companies involved in cryptocurrencies and blockchain fell on Friday after FTX US users, one of the largest cryptocurrency exchanges, announced it will file for bankruptcy in the US, potentially setting off a huge market collapse.

Sam Bankman-Fried, the founder and former CEO of the cryptocurrency exchange FTX US, and the company are closely related. For years to come, the fast and severe collapse of FTX in late 2022 will affect the global crypto community.

In November 2022, the Bahamas-based cryptocurrency exchange FTX US president started its liquidation. The bankruptcy of FTX was prompted by the company's token, FTT, experiencing a liquidity problem that led to its collapse. FTX had over a million members and was the third-largest cryptocurrency exchange by volume before its bankruptcy.[1]

The market price of the token fell when Binance, a rival cryptocurrency exchange and former investor in FTX US users, stated it would sell its FTT. The action also sparked a surge in FTX withdrawals, which forced the exchange to halt withdrawals and resulted in a liquidity crisis. Binance signed a bid to buy FTX on November 8th but then withdrew the offer. On November 11, FTX, Alameda Research, and more than a hundred connected companies filed for bankruptcy.

This well-publicized fall in the rapidly expanding cryptocurrency market may have a dampening effect on future crypto asset activity, or it may simply serve as a stark reminder to smaller retail investors about the high risks associated with investing in cryptocurrencies. Global regulators have frequently communicated to the public about the dangers of cryptocurrencies and have used a variety of strategies in terms of how much they intervene in these markets.

More recently, the U.S. Federal Deposit Insurance Corporation issued a directive to several cryptocurrency exchanges ordering them to stop suggesting to investors that their money was protected by the federal government. The cryptocurrency markets are generally unregulated, although several nations have put in place authority to monitor how crypto asset enterprises manage the risk of money laundering and counter-terrorist financing due to worries that cryptocurrencies could enable money laundering activities.[5] The failure of FTX US may also prompt regulators to take further action to control the cryptocurrency markets to safeguard consumers and prevent systemic financial contagion.

Bankman-Fried informed Bloomberg after the January fund-raising that the funds would probably be used for mergers and acquisitions, with potential targets including payment businesses, NFT-focused companies, and the metaverse.[8]

what is ftx

What is ftx?

Bankman-Fried was able to establish a crypto empire because of the success of Alameda Research. The establishment of the cryptocurrency exchange FTX US in 2017 was one of the portfolio's essential elements. Customers can purchase and sell digital assets using both digital assets and conventional currency on cryptocurrency exchanges. The majority of all cryptocurrency deals done worldwide were processed by the FTX US president and its rival Binance, who jointly controlled this market. FTX is headquartered in the Bahamas and was incorporated in Antigua and Barbuda. Since Binance doesn't have a permanent headquarters, the two companies were able to engage in and approve trade that is against American law. As the first investor, Binance played a key role in the founding of FTX. [6]

FTT, a "native" cryptocurrency that FTX established in addition to its trading platform, is used, among other things, to pay for using the FTX platform. Changpeng Zhao, the CEO of Binance, sold his early investor share in FTX in 2021 and received payment in part in FTT tokens.

bankman-fried steps down

Bankman-fried steps down as ceo; ftx files for bankruptcy

On November 11, Bankman-Fried resigned from her position as CEO of FTX. John Ray, who had previously guided the energy trading company Enron through bankruptcy procedures, was chosen by a court to take over.

The Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the Department of Justice (DOJ) in the United States,[20] as well as the Royal Bahamas Police Force and the Securities Commission in the Bahamas, are all looking into how FTX handled customer funds. According to Reuters's anonymous sources, between $1 billion and $2 billion in consumer monies were missing.[3]

The same day, the FTX US president revealed that around 130 other associated firms were also involved in the proceedings when it filed for Chapter 11 bankruptcy protection. According to the bankruptcy documents, FTX had assets and liabilities totaling between $10 billion and $50 billion.

down fall of ftx

What lessons can we learn from the downfall of ftx?

The FTX US users' collapse has a lot in common with the other business disasters this crypto winter. The crypto market was created to eliminate allegedly exclusive financial intermediaries; however, what has been produced is a market that is dependent on strong, vertically integrated intermediaries in the form of exchanges, custodians, and asset managers.[4] Contrary to conventional financial institutions, however, crypto intermediaries are largely exempt from regulatory frameworks intended to ensure investor protection, segregation of proprietary and customer assets, and control frameworks intended to ensure prudent business practices, which has the overall effect of increasing consumer risk.

How could this affect blockfi and other businesses?

The collapse of FTX shocked the cryptocurrency and financial industries. FTX was involved with numerous funds and cryptocurrency start-ups, and after the spring meltdown of the market, it provided lifelines to other businesses.

On Monday, the price of Bitcoin dropped along with other crypto asset markets.[7]

BlockFi, a lender of cryptocurrencies and provider of financial services with connections to FTX, filed for bankruptcy on Monday. BlockFi said it had "significant exposure" to FTX and had suspended withdrawals this month.[7]

This month, Genesis Global Capital, a cryptocurrency lender and trading partner of FTX, informed its clients that withdrawals will be suspended due to liquidity concerns.

Then, as it considers its options, including a potential bankruptcy, Genesis recruited a restructuring advisor. When FTX halted accounts, about $175 million of its assets were in that exchange.

Conclusion

Bankman-Fried, the founder and former CEO of FTX, and the company's success are intertwined. The cryptocurrency exchange FTX crashed over 10 days in November 2022. The exchange experienced a liquidity problem when a report raised potential leverage and solvency issues. It attempted to negotiate a bailout with competitor Binance, but the talks immediately broke down. Later, its CEO was detained, extradited to the United States, freed on a $250 million bond, and is now scheduled to stand trial in October.[9]

It is yet unclear what the collapse will mean for FTX's future and how it will affect the larger cryptocurrency market.

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