The FTX logo with crypto coins with a 100 dollar bill is shown for illustration. FTX has filed for bankruptcy in the United States, seeking court protection as it seeks a way to return money to users.
Jonathan Raa | Nurphoto | Getty Images
Embattled cryptocurrency exchange FTX could have more than a million creditors, according to a new bankruptcy filing, hinting at the huge impact of its collapse on crypto traders.
Last week, when it filed for Chapter 11 bankruptcy protection, FTX said it had more than 100,000 creditors with claims in the case.
But in a filing updated Tuesday, attorneys for the company said, “In fact, there could be over a million creditors in these Chapter 11 cases.”
Generally, in such cases, debtors are required to provide a list of the names and addresses of the top 20 unsecured creditors, the lawyers said. However, given the scale of its debts, the group instead intends to file a list of the 50 largest creditors by Friday at the latest.
Five new independent directors have been appointed at each of FTX’s major parent companies, according to the filing, including former Delaware District Judge Joseph J. Farnan, who will serve as the lead independent director.
Over the past 72 hours, FTX has been in contact with “dozens” of regulators in the United States and abroad, the company’s attorneys wrote. These include the US Attorney’s Office, the Securities and Exchange Commission, and the Commodity Futures Trading Commission.
This year has seen a series of crypto firms, including Celsius and Voyager Digital, fail as they deal with falling digital asset prices and subsequent liquidity issues.
In previous bankruptcy cases, traders on these platforms have been named as “unsecured creditors”, meaning they will likely be at the back of a long queue of entities seeking reimbursement, suppliers to employees.
Prior to its collapse, FTX offered both amateur and professional traders one-off crypto investments as well as more complex derivatives trading. At its peak, the platform was valued by investors at $32 billion and had over a million users. The company’s failure had a chilling effect on the industry, with investors selling their positions and moving funds off exchanges.
On Monday, the CEOs of Binance and Crypto.com sought to reassure investors about the financial health of their companies. Binance’s Changpeng Zhao said his exchange had seen only a slight increase in withdrawals, while Crypto.com chief Kris Marszalek said his company had an “extremely strong balance sheet”.
Pooling of client funds
FTX filed for bankruptcy on Friday as concerns over its financial health led to increased withdrawals and a plunge in the value of its native FTT token. Sam Bankman-Fried, the founder of FTX, stepped down as CEO and was replaced by John J. Ray III.
FTX initially turned to Binance for a bailout deal, but that fell apart when Binance backed down citing reports of mismanaged client funds and alleged US government investigations into FTX. Over the weekend, FTX was hit by a apparent cyberattack resulting in the theft of over $400 million in tokens.
“FTX faced a severe liquidity crisis that necessitated the filing of these emergency filings last Friday,” the attorneys wrote in the filing on Tuesday. “Questions have arisen about Mr. Bankman-Fried’s leadership and the management of FTX’s complex array of assets and businesses under his leadership.”
CNBC reported Sunday that Alameda Research, FTX’s sister company, borrowed billions in client funds from the exchange to ensure it had enough cash to process withdrawals.
In general, mixing client funds with counterparties and trading them without express consent is illegal under US securities law. This also violates FTX’s Terms of Service.
Bankman-Fried declined to comment on the allegations, but said the company’s recent bankruptcy filing was the result of issues with a leveraged trading position.
“I think it’s becoming increasingly clear, even at a basic level, that this kind of mixing of interests between the market maker and the exchange is highly unethical,” Jamie Burke told CNBC. , CEO and founder of Web3-focused venture capital firm, Outlier Ventures.
In a Encrypted Twitter feed this week, Bankman-Fried wrote the word “What” followed by the letters “H”, “A”, “P”, “P”, “E”, “N”, “E”, “D”, intermittently tweets.
He ended the thread on Tuesday with the phrase: “10) [NOT LEGAL ADVICE. NOT FINANCIAL ADVICE. THIS IS ALL AS I REMEMBER IT, BUT MY MEMORY MIGHT BE FAULTY IN PARTS.]”
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