Last week, California billionaire Sam Bankman-Fried was touted as a key figure in cryptocurrency — even a saviour. Today, amid a series of apologetic tweets, he said “I f–ked up” after his cryptocurrency exchange bled billions of dollars.
His FTX exchange is now scrambling to raise $9.4 billion US from both investors and rivals, as customers rush to withdraw their funds.
A lot of people trusted FTX as a place to buy tokens or cryptocurrencies, like bitcoin.
Now industry watchers say its spectacular fall may be the catalyst that forces governments — including Canada’s — to crack down on cryptocurrency.
The trouble sparked when the rival owner of the world’s largest exchange, Binance, questioned the stability of FTX on Twitter. That touched off a three-day panic costing FTX an estimated $6 billion US.
Binance head Changpeng Zhao then on Wednesday backtracked on a proposed buyout of his second-ranked rival, citing regulatory concerns, according to the New York Times.
That sent FTX into a tailspin.
Bankman-Fried has said he’s in talks with others on another rescue deal, but made no promises.
“I’m sorry. That’s the biggest thing. I f–ked up, and should have done better,” he wrote on Twitter.
What exact mistakes were made, remain unclear.
But crypto experts say investor money that should be “liquid” is not.
FTX was facing mounting legal and regulatory threats before withdrawals were frozen, according to Samson Mow, CEO of Pixelmatic and JAN3, a new bitcoin technology company.
Mow says the FTX explosion has a familiar feel, though digital assets like bitcoin and ethereum were not the problem.
He says the exchange created tokens called FTT that were used to hold value. FTT was the backbone of FTX so when its value dipped, users scrambled to get out.
Mow says the U.S. Securities Exchange Commission is investigating and that it seems like client money may have been improperly used to help dig FTX’s affiliate company Alameda Research out of a $10-billion hole.
People who bought bitcoin or other currencies through the exchange now can’t withdraw them.
Mow says bitcoin is reliable but that exchanges which rely on tokens like FTT as collateral are built on a house of financial cards.
He said users know the risk of being “lazy” and leaving assets unclaimed on a currency exchange.
“You gambled on a casino that went bust — and now you’ve lost your money,” said Mow.
He says people who did not withdraw their digital assets and keep them in their own wallet now can’t get access them, because FTX used FTT as collateral and those tokens are now worthless, he says.
“There’s an old saying — not your keys, not your coins. It’s not a new lesson. People are just not learning. They are gambling — and got what they deserved.”
The implosion of FTX, which was valued at $32 billion US not long ago, is just the latest bad news for digital asset investors. Bitcoin prices are less than a third what they were at their height in 2021, before a big crash last fall.
But Bankman-Fried was seen as an influential player, someone who “was working closely with regulators,” to try to regulate the space, said Ashley Stanhope of Ether Capital Corp., a public company focused on ethereum, and a founding member for the Canadian Web3 Council, a group collaborating with governments to build better investor protections.
He had also spent millions helping other companies, claiming he was a proponent of effective altruism, a movement that espouses charitable giving to safeguard humanity’s future.
Her interpretation of his apology is that he made “genuine missteps. It doesn’t sound like he was trying to scam investors or do do them wrong,” she said.
Stanhope says this situation hurts the industry’s credibility and that she fears regulators will now “paint all crypto with the same brush.”
Among FTX’s investors is the Ontario Teachers Pension Plan’s (OTPP) which put more than $126 million into the exchange between October 2021 and January 2022.
In a statement the OTPP said Thursday the “uncertainty” at FTX will have “limited impact” on the pension plan, as the investment was less than 0.05 per cent of its total net assets.
As for FTX’s losses and how they will affect the industry, Stanhope admits it’s a challenge, and that Bankman-Fried’s fall will likely shift the crypto landscape.
“The FTX implosion will likely change investors’ approach,” she said.
“We’ll probably see more users take their assets off centralized exchanges and rely on self-hosted wallets,” until exchanges are safer and more transparent, she said.