Cryptocurrency FTX declares to be bankrupt

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Bahama-based cryptocurrency FTX (Future Foreign exchange) has started process of declaring itself as bankrupt, while people who invested millions of dollars by trusting FTX as dependable would not be left with nothing. Such disastrous fate of FTX would now put people who have invested in the crypto world, even including Bitcoin and Binance will feel risked as those companies also may follow the fate of FTX – sooner or later. Others say, collapse of FTX is mainly responsible for its wild investments in high-risk trading while its Chief Executive Office (CEO) Sam Bankman-Fried has also spent hugely in funding politicians and political parties such as Democratic Party.

Before its unraveling, FTX.com marketed itself as a safe-for-beginners destination for buying and selling cryptocurrencies. But a liquidity crunch last week forced FTX to halt withdrawals, leaving customers and investors in limbo. FTX reportedly used customer funds to prop up its sister hedge fund’s high-risk trading operation without permission, according to the Wall Street Journal.

On November 11, 2022, FTX and the hedge fund, Alameda Research, filed for bankruptcy.

Federal prosecutors in New York are now investigating the exchange’s collapse, a person familiar with the matter told CNN. And authorities in the Bahamas, where FTX is based, launched a criminal probe into the firm over the weekend.

“We just don’t know the extent of contagion,” said Howard Fischer, a partner at law firm Moses Singer and a former Securities and Exchange Commission lawyer. “The first ring of victims are the people who had assets held in FTX…They are probably not going to be made whole, or anywhere close to it”.

There are a few reasons for this.

In a traditional US bank failure, the government insures customer deposits, making them whole up to US$250,000. But there simply is no mechanism for depositor insurance in the largely unregulated world of cryptocurrencies.

In theory, FTX’s customers should get a cut of what’s left of the company’s assets at the end of the bankruptcy process. But so far, at least, it’s not clear how much will be left to disburse.

“As far as I know, they have two assets — the goodwill value of the exchange and the value of their FTT coins,” said Eric Snyder, head of the bankruptcy department at the law firm Wilk Auslander. (Goodwill value refers to intangible assets like a brand’s reputation and intellectual property. And FTT coins, the crypto token issued by FTX, have lost more than 90% of their value over the past week).

In bankruptcies, Snyder explains, there’s a fairly simple formula to figure out how much creditors — in this case, FTX depositors — will receive.

“The numerator is the assets, the denominator’s liability. You divide one into the other, and the [result] is what everybody gets,” he said. “But if people are pulling out all the assets, then there’s not going to be much of a numerator”.

He added: “It’s very conceivable that the return will be minimal at best.”

Of course, the suddenness of FTX’s downfall makes it a difficult case to assess this early on, lawyers say.

Normally, companies would have weeks to prepare bankruptcy filings that disclose, among other things, an explanation of why the company sought Chapter 11 protection and what it aims to accomplish in bankruptcy court.

Dan Besikof, a partner at Loeb & Loeb who specializes in bankruptcy, says it’s too soon to say whether customers are going to get any money back.

“All you can really do is guess from tweets where things stand”, he said.

“And how customers recover their money might depend on a lot of different things, including which entity they hold the money through, what amount of the coins still remain”.

The FTX fallout has rattled the entire crypto industry, raising serious questions about the future of digital assets and the lack of global regulation.

On Monday, Changpeng Zhao, the CEO of FTX competitor Binance, sought to reassure his audience of the sector’s legitimacy.

“It’s obvious that people are jittery,” said Zhao, widely known as CZ, in a question-and-answer session on Twitter. “I want to say, short-term, it is painful. But I think this is actually good for the industry long-term”.

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