Sudden collapse of FTX sends shockwaves across crypto circles
Published: Nov 14, 2022 04:18 PM
bitcoin Photo:IC

bitcoin Photo:IC

FTX, one of the most well-known crypto trading platforms, declared bankruptcy on Friday, making it the largest bankruptcy case in the history of the nascent crypto-currency era. Reports of the clients' funds being diverted from a secret backdoor following the platform's bankruptcy over the weekend has sparked widespread concern and anxiety.

Between $1 billion to $2 billion of the clients' funds have vanished from the failed crypto exchange, the Reuters reported on Saturday. The Times reported on Sunday that bosses from crypto-currency companies had earlier warned about the disappearance of FTX funds.

FTX was founded in 2019 and has expanded rapidly. It had over one million users as of February and was valued at $32 billion in January. After the news of its bankruptcy break out, investor confidence has been greatly affected. The price of crypto-currencies has fluctuated sharply recently, with bitcoin falling to around $16,600 on Sunday.

The price of crypto-currencies such as bitcoin began to fall sharply in June as the US Federal Reserve's incessant interest rate hikes exacerbated investor fears of an incoming recession, which also increased demand for safe-haven financial assets. 

In July, the US crypto lender Voyager Digital and Celsius Network filed for bankruptcy successively, causing acute shocks across crypto circles. The follow-up impact of FTX bankruptcy, as well as the possible chain reaction, deserves close attention from investors and regulators alike.

In fact, some market analysts had sounded warnings even before the FTX bankruptcy. On Thursday, JPMorgan strategist Nikolaos Panigirtzoglou said in a note that the crypto market will face weeks of deleveraging due to the FTX liquidity crisis.  

Given the size of FTX and its interactions with the rest of the crypto ecosystem, the cryptocurrency market is expected to face a string of margin calls, deleveraging and crypto business failures, which some analysts warming that it could turn into a potential financial fiasco for crypto-currencies. Investors in the crypto market should be prepared for possible more turbulence.

Inevitably, the FTX bankruptcy is also expected to spark a round of regulatory tightening in the US. Policymakers should act quickly and cautiously. Many crypto exchanges are expected to be required to improve their management of the transparency of their funds.

The US Securities and Exchange Commission (SEC) has launched an investigation into FTX over the alleged mishandling of client funds. SEC is examining whether the platform is following securities laws related to segregation of customer assets and trading against customers, according to Reuters.

The rapid collapse of FTX has sounded alarms throughout crypto investment circles against a backdrop of increased financial market risk. At this point, investor confidence has been severely shaken, and the pressure on the currency circle from investors and regulators will intensify. Current platforms will be required to disclose more information about the balance sheet to protect customer assets.

Regulators have been focusing on the on-shoring of their respective markets. However, as clients have increasingly pursued offshore operations, regulators and policymakers should close loopholes to promote healthy development of the sector.

The author is a reporter with the Global Times.