FTX, the cryptocurrency exchange that went bankrupt last week in a shock to markets and the digital asset industry, likely leaves in its wake more than one million creditors in what filings call an “unprecedented” failure.
Filings made in a Delaware court by the new leadership of FTX, appointed to handle operations through its bankruptcy, offer fresh insight into the death throes of Sam Bankman-Fried’s crypto empire—and the casualties it leaves behind.
“The events that have befallen FTX over the past week are unprecedented,” the filings say, detailing how barely more than a week ago the group sat atop the industry as one of the largest crypto exchanges and the jewel in Bankman-Fried’s crown. The 30-year old entrepreneur was once considered one of the most respected voices in the digital asset industry, and also controlled Alameda Research—now bust, too—which was one of the largest crypto market makers and trading firms.
The filings detail how FTX faced a “severe liquidity crisis” that required emergency bankruptcy last Friday, after “questions arose” about Bankman-Fried’s leadership and his handling of the complex array of assets and businesses he owned. Bankman-Fried resigned at 4:30 a.m. on Friday after consultation with his own legal counsel, according to the filings, before veteran restructurer John J. Ray III was appointed the new CEO.
The mess Ray will have to deal with is immense. FTX expects more than one million creditors, and is also dealing with “substantial interest” from regulatory authorities globally. In recent days, representatives of FTX have been in contact with authorities including the U.S. attorney’s office, the U.S. Securities and Exchange Commission, the Commodity Futures Trading Commission, and dozens of Federal, state, and international agencies, according to the filings.
But the new CEO is no stranger to tough jobs. Ray previously served on the board overseeing the liquidation of Enron in the wake of the energy company’s high-profile bankruptcy in 2001.
Just as Enron triggered a stock market meltdown decades ago and fueled a wave of new accounting regulations, the crisis at FTX delivered a body blow to the crypto market and is expected to usher in tough scrutiny from regulators.
FTX went bust less than a week after concerns began in earnest over its health. Speculation started with a focus on how potential losses at Alameda could lead to trouble for the exchange. As customers raced to withdraw deposits at FTX, the exchange reportedly faced a multibillion-dollar shortfall and was quickly forced to declare bankruptcy after plans for a rescue takeover or capital raising failed.
The entrails of Bankman-Fried’s empire not only spell trouble for creditors, but also the crypto market.
Liquidity in crypto markets is dominated by a handful of trading firms, several of which held enough assets trapped on FTX that it could impact their market-making operations, according to a team of analysts led by Clara Medalie at data firm Kaiko.
“Alameda Research was one of the largest market makers in crypto, providing billions of dollars worth of liquidity for high-cap and low-cap tokens alike,” Medalie’s team wrote in a report Monday.
“With the loss of one of the largest market makers, we can expect a significant drop in liquidity, which we will call the ‘Alameda Gap,’” the Kaiko analysts said. “The drop in liquidity we have observed over the past week is far larger than any other previous market drawdown, which suggests the Alameda Gap in liquidity could be here to stay, at least in the short term.”
Write to Jack Denton at jack.denton@barrons.com
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