FTX’s desperate scramble for investors to repair its balance sheet has ended in bankruptcy.
With regulators around the world freezing the troubled exchange’s assets, it was only a matter of time.
Sam Bankman-Fried has resigned as CEO and is replaced by John J Ray III.
Ray said: “The immediate relief of Chapter 11 is appropriate to provide the FTX Group the opportunity to assess its situation and develop a process to maximise recoveries for stakeholders.”
Bloomberg TV reports that FTX liabilities are anywhere between $10 billion and $50 billion.
The stock price of FTX competitor exchange Coinbase is up 9% to $55.
FTX assets frozen around the world
The Securities Commission of Bahamas had already frozen the assets of FTX Digital Markets (FDM), which acts as the service provider for other FTX entities.
That was followed by Japan’s Kanto Local Finance Bureau – responsible for regulating crypto exchanges in the country – banning FTX from taking deposits from clients, although it is hard to imagine anyone entrusting their money with FTX at this juncture.
Australia’s financial regulator followed along, putting FTX Australia into administration, the Australian Financial Review reported.
The main exchange operation, that runs FTX International, is FTX Trading and it is headquartered in Antigua and Barbuda in the Caribbean.
Cryptonews has reached out to the Antigua and Barbuda Financial Services Regulatory Commission to see if it has plans to move against FTX Trading Ltd, but we had not received a reply before publication and the filing for bankruptcy by the FTX group.
With clients of the FTX exchange in the frame to suffer substantial losses and a possible total wipeout, regulators are attempting to try and secure the funds for those affected.
The Bahamas authority stated in its press release that FTX was now in provisional liquidation:
The Commission is aware of public statements suggesting that clients’ assets were mishandled, mismanaged and/or transferred to Alameda Research. Based on the Commission’s information, any such actions would have been contrary to normal governance, without client consent and potentially unlawful.
Since the unfolding of events involving FDM, the Commission has proactively dealt with the situation and continues to do so. The Commission determined that the prudent course of action was to put FDM into provisional liquidation to preserve assets and stabilize the company.
Although opaque relationships between the various FTX entities is complicating matters, it is thought that FTX Digital Markets lent billions to Alameda Research, the trading arm that is now in the process of being wound up, according to CEO Sam Bankman-Fried.
The amount that FTX needed to raise from investors to remain solvent was variously reported to be in the region of $4 to $8 billion.
Crypto prices crash – contagion and chaos is spreading
Crypto lender BlockFi has suspended withdrawals citing a “lack of clarity”. In a Twitter statement it added that it was “not able to operate business as usual”.
Back in June this year it was FTX that bailed out BlockFi, advancing a loan of $250 million to BlockFi.
Before that intervention, FTX lent $485 million in cash and bitcoin to crypto exchange Voyager Digital.
Both Voyager and BlockFi had at that time been laid low by the implosion of the TerraUSD stablecoin and Luna.
Market participants will be wondering if Voyager will be the next company to be caught up in the contagion from FTX’s collapse.
Also, the deal between BlockFi and FTX was a revolving credit facility, so that could be problematic for returning to normal operations going forward.
Crypto price bounce after CPI data weakens
Continuing fears on the extent of the contagion led to crypto prices dipping again after yesterday’s CPI inflation-induced mega rally in risk assets. Bitcoin fell back below $17,000 but was trading at $17,355 until news of the FTX bankruptcy broke. BTC is trading at $16,841.
BNB, the trading coin of the Binance exchange is down 5% at $284, while FTX Token (FTT) is down 22%% in the past 24 hours to $32.62, but is down 90% on a week view.
Alameda Research acted as a major market maker in many crypto markets, which means the counter-party risks could be immense.
Genesis Trading is one of the first to break cover on its FTX exposure, admitting that its derivatives business stood to lose $175 million, although it said its market making activities were not affected.
For more good measure Genesis added in another tweet: “Furthermore, our operating capital and net positions in FTX are not material to our business.”
U.S. SEC looks ready to come down hard on unregistered crypto firms
The FTX implosion looks like it could be the straw that has finally broken the camel’s back, as patience among US regulators snaps – although it could be argued that both the agencies and Congress had been too lackadaisical in bringing forward and implementing legislation.
But the U.S. authorities have been getting more active on the enforcement front and that looks like it will now move into overdrive, as SEC Chair Gary Gensler’s comments on CNBC’s Squawk Box on Thursday, suggest:
“When you mix together a bunch of customer money, non-disclosure and leverage – borrowing against it – inside these companies’ trading, investors get hurt…”
Gensler continued: “This is a very inter-connected world in crypto, with a few concentrated players at the middle – and one of the those concentrated players had the toxic combinations of lack of disclosure, customer money, a lot of leverage – meaning borrowing – and then trying to invest with that. And then when markets turned on them it appears that a lot of customers lost money.
Pushed on why the SEC had not moved more forcefully to protect investors, Gensler, in part, said:
“This is a field that is significantly non-compliant but it has got regulations and those regulations are often very clear and we have multiple paths.
“And one path is working with those crypto exchanges, crypto lending platforms and to get them properly registered. And why that matters is so that the public is protected. But we have another path is enforcement. We’ve brought… at least a 100 actions.
“We’ve been very clear in these various enforcement actions.”
“The laws are clear. Look the runway is running out. The American public and investors around the globe are getting hurt. So what I would say is come in and talk to us, the laws are clear.”
Better regulated exchanges and DEXs to be winners from FTX bankruptcy
Such is the blow to retail confidence in centralised exchanges, the most under-regulated ones are likely to suffer outflows of client funds in preference for more strongly regulated competitors such as Coinbase, Kraken and Bitstamp.
Although it has been a mantra of crypto not keep your funds on exchanges, except that needed for trading, on the basis that if it is “not your keys, it is not your crypto”, many retail investors have not heeded those warnings.
Decentralised exchanges (DEXs) such as Uniswap and Pancakeswap, as well as hardware wallet storage device vendors, are likely to be among the beneficiaries of the FTX failure.
Shelter from the storm and secure market-beating returns
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The market is currently in a news-driven environment where the prices of cryptocurrencies have been determined by news agenda rather than fundamentals.
Bitfinex analysts have warned crypto investors to be cautious as bitcoin’s (BTC) recovery over the weekend is not a sign that its correction is over; the asset could witness more bloodshed in the near term.
In the latest Bitfinex Alpha report, experts deemed the market’s reaction this week critical, especially as supply alleviated over the weekend could return when traditional markets open.
“No Man’s Land”
Since Saturday, bitcoin has risen almost 10% from $57,600 to $63,000, closing last week in the green. The asset has surged above the 125-day range low of $60,200, which it broke through earlier this month after news of the German government’s massive BTC selling hit the market.
Market sentiment began to improve after reports that wallets linked to the German government were almost empty. However, the positive sentiment may not be sustained for long as the BTC the German authorities moved to trading desks and exchanges are yet to be sold.
While the supply from Germany appears to have been factored into bitcoin’s market price, Bitfinex analysts believe the end of selling pressure depends on how the involved trading desks execute their trades in the coming days.
Although the shift in sentiment underscores the market’s capacity to integrate new information and adjust expectations quickly, analysts think the market’s reaction over the first two trading days of the week cannot be overlooked for two reasons.
First, the low support level in the $60,200 range has now become a potential resistance line. Second, trading patterns over the past three months suggest that weekends are usually favorable for markets, especially on Saturdays when supply pressure seems to subside.
“We are now in no man’s land until we get clear resolution above or below this level,” the analysts said.
A News-Driven Environment
Besides the potential resistance level and three-month weekend trading pattern, the market is currently in a news-driven environment, where the prices of cryptocurrencies have been determined by news agendas rather than fundamentals.
Since selling pressure concerns are not yet completely obsolete due to upcoming Mt Gox creditor distributions, Bitfinex analysts expect such headlines to continue to have some impact on price movements. As such, the analysts urged investors to exercise caution in their trading strategies.
BlackRock’s IBIT led with $117.25 million in inflows on July 15, also being the most traded Bitcoin ETF.
The US spot Bitcoin ETFs recorded a daily net inflow of $301 million on July 15th. This extended their winning streak to seven consecutive days amidst a broader market recovery.
None of the ETFs recorded outflows for the day.
Bitcoin ETFs Rake in $16.11B in Net Inflows Since Jan
According to the data compiled by SoSoValue, BlackRock’s IBIT, the top spot Bitcoin ETF by net asset value, recorded the largest net inflows of the day at $117.25 million. IBIT was also the most actively traded Bitcoin ETF on Monday, with a volume of $1.24 billion. Ark Invest and 21Shares’ ARKB came in close behind with net inflows of $117.19 million.
Fidelity’s FBTC experienced net inflows of $36.15 million on Monday, while Bitwise’s BITB saw $15.24 million in inflows. VanEck’s HODL, Invesco and Galaxy Digital’s BTCO, and Franklin Templeton’s EZBC funds also recorded net inflows. Meanwhile, Grayscale’s GBTC and other ETFs, such as Valkyrie’s BRRR, WisdomTree’s BTCW, and Hashdex’s DEFI, registered no flows for the day.
A total of $2.26 billion was traded on Monday. The trading volume for these ETFs was less than in March when it exceeded $8 billion on some days. Meanwhile, these funds have collectively attracted $16.11 billion in net inflow since their January launch.
What’s Next For Bitcoin?
Earlier this month, bitcoin’s price decline was mainly due to fears of massive selling pressure from Mt. Gox and the German government’s BTC sales.
But the assassination attempt on pro-crypto former US President and presumptive Republican candidate Donald Trump at Saturday’s rally seemed to spark a recovery in the world’s largest digital asset, and experts are bullish on the asset’s price trajectory going forward. Bitcoin surged more than 9% over the past week and was currently trading slightly below $64,000.
Veteran trader Peter Brandt discussed bitcoin’s price outlook, suggesting a potential major rally. He referred to a pattern he terms “Hump->Slump->Bump->Dump->Pump” and highlighted that the July 5 double top attempt was a bear trap, confirmed by the July 13 close. He sees a likely continued upward trend but warned that a close below $56,000 would negate this bullish view.
“Bitcoin $BTC could be unfolding its often-repeated Hump…Slump…Bump…Dump…Pump chart construction. Jul 5 attempt at the double top was a bear trap, confirmed by Jul 13 close. Most likely scenario now is that bears are trapped. Close below $56k negates this interpretation”
PeckShield alert reveals LI.FI’s protocol vulnerability is similar to a March 2022 attack, with the same bug recurring.
The decentralized finance (DeFi) platform LI.FI protocol has suffered an exploit amounting to over $8 million.
Cyvers Alerts reported detecting suspicious transactions within the LI.FI cross-chain transaction aggregator.
LI.FI Issues Warning After $8 Million Exploit
LI.FI confirmed the breach in a statement on July 16 via X: “Please do not interact with any http://LI.FI powered applications for now! We’re investigating a potential exploit.” The team clarified that users who did not set infinite approval are not at risk, emphasizing that only those who manually set infinite approvals seem to be affected.
According to Cyvers Alerts, more than $8 million in user funds have been stolen, with the majority being stablecoins. According to on-chain data, the hacker’s wallet holds 1,715 Ether (ETH) valued at $5.8 million and USDC, USDT, and DAI stablecoins.
Cyvers Alerts advised users to revoke relevant authorizations immediately, noting that the attacker is actively converting USDC and USDT into ETH.
Crypto security firm Decurity provided insights into the exploit, stating that it involves the LI.FI bridge. “The root cause is a possibility of an arbitrary call with user-controlled data via depositToGasZipERC20() in GasZipFacet, which was deployed 5 days ago,” Decurity explained on X.
“In general, the risks behind routers, cross-chain swaps, etc. are about token approvals. Raw native assets like (unwrapped) ETH are safe from these kinds of hacks b/c they don’t have approvals as an option. Most users & wallets also no longer do “infinite approvals” which gives a smart contract total control on removing any amount of their tokens. It’s important to understand which tokens you’re approving to which contracts.
This dashboard looks for all transactions of a user that intersects Lifi. Not all of these transactions indicate risk- but you can see how, broadly, integrations & layers of tech (like how Metamask bridge uses Lifi on BSC) can complicate how users do or don’t put their assets at risk. Revoke Cash is the most well known approval manager app.
But it’s also good security practice to simply rotate your address. New addresses start with 0 approvals, so starting fresh by moving your tokens to a fresh address is another good security practice.” – commented Carlos Mercado, Data Scientist at Flipside Crypto.
Recent Exploit Mirrors March 2022 Attack
Further analysis by PeckShield alert revealed that the vulnerability is similar to a previous attack on LI.FI’s protocol that occurred on March 20, 2022. That incident saw a bad actor exploit LI.FI’s smart contract, specifically the swapping feature, before bridging.
The attacker manipulated the system to call token contracts directly within their contract’s context, making users who had given infinite approval vulnerable. This exploit resulted in the theft of approximately 205 ETH from 29 wallets, affecting tokens such as USDC, MATIC, RPL, GNO, USDT, MVI, AUDIO, AAVE, JRT, and DAI.
“The bug is basically the same. Are we learning anything from the past lesson(s)?” PeckShield Alert said in a July 16 X post.
Following the 2022 incident, LI.FI disabled all swap methods in its smart contract and worked on developing a fix to prevent future vulnerabilities. However, the recurrence of a similar exploit raises concerns about the platform’s security measures and whether adequate steps were taken to address the vulnerabilities identified in the previous breach.
LI.FI is a liquidity aggregation protocol that allows users to trade across various blockchains, venues, and bridges.
