The illustration shows the FTX logo with cryptocurrency coins on a 100 dollar bill. FTX has filed for bankruptcy in the US, looking for a way to return money to users.
Jonathan Ra | Nurphoto | Getty Images
Cryptocurrency exchange FTX may have more than 1 million creditors, according to a new bankruptcy filing, indicating the huge impact its collapse will have on crypto traders.
When it filed for Chapter 11 bankruptcy protection last week, FTX said it had more than 100,000 creditors with claims in the case.
But in an updated filing Tuesday, lawyers for the company said, “There could actually be more than one million creditors in these Chapter 11 cases.”
Typically, in such cases, debtors must submit a list of the names and addresses of the 20 largest unsecured creditors, the lawyers said. However, given the scale of its debts, the group instead plans to submit a list of its top 50 creditors on or before Friday.
Five new independent directors have been appointed to each of FTX’s main parent companies, including former Delaware District Judge Joseph J. Farnan, who will serve as lead independent director, according to the filing.
In the past 72 hours, FTX has contacted “dozens” of regulators in the U.S. and abroad, the company’s lawyers wrote. These include the US Attorney’s Office, the Securities and Exchange Commission, and the Commodity Futures Trading Commission.
Many crypto companies, including Celsius and Voyager Digital, have failed this year as they grappled with falling digital asset prices and resulting liquidity problems.
In past bankruptcies, traders on these platforms have been referred to as “unsecured creditors”, meaning they could face long queues with institutions seeking repayment, from suppliers to employees.
Before the collapse, FTX offered amateur and professional traders instant cryptocurrency investments as well as more complex derivatives trades. At its peak, investors valued the platform at $32 billion and it had more than 1 million users. The company’s failure has had a chilling effect on the industry, with investors selling their positions and moving funds out of the stock exchanges.
On Monday, executives from Binance and Crypto.com sought to reassure investors about their companies’ financial health. Binance’s Changpeng Zhao said his exchange has seen only a small increase in withdrawals, while Crypto.com CEO Chris Marschalek said his company has an “extremely strong balance sheet.”
Pooling of customer funds
FTX filed for bankruptcy on Friday as concerns about its financial health led to a surge in withdrawals and a drop in the value of its native FTT token. Sam Bankman-Fried, founder of FTX, stepped down as CEO and was replaced by John J. Ray III.
FTX initially approached Binance for a bailout deal, but that fell apart when Binance backed out, citing reports of misuse of customer funds and a possible US government investigation into FTX. Over the weekend, FTX was hit with an apparent cyber attack that resulted in the theft of more than $400 million worth of tokens.
“FTX faced a severe liquidity crisis that necessitated the emergency filing of these cases last Friday,” the lawyers wrote on Tuesday. “Questions arose about Mr. Bankman-Fried’s leadership and FTX’s complex array of assets and businesses under his management.”
CNBC reported Sunday that FTX’s sister company, Alameda Research, has borrowed billions in client funds from the exchange to ensure it has enough liquidity to handle withdrawals.
Under US securities law, it is generally illegal to commingle client funds with and trade with counterparties without express consent. It also violates the FTX Terms of Service.
Bankman-Fried declined to comment on the allegations, but said the company’s recent bankruptcy filing was related to problems with its leveraged trading position.
“I think it’s becoming increasingly clear, even at a basic level, that this kind of conflation of interests between a market maker and an exchange is highly unethical,” Jamie Burke, CEO and founder of Web3-focused venture capital firm Outlier Ventures, told CNBC.
Inside the mysterious Twitter thread this week, Bankman-Fried intermittently spelled the word “What” followed by the letters “H,” “A,” “P,” “P,” “E,” “N,” “E,” “D.” tweets.
He ended the thread on Tuesday with the sentence: “10) [NOT LEGAL ADVICE. NOT FINANCIAL ADVICE. THIS IS ALL AS I REMEMBER IT, BUT MY MEMORY MIGHT BE FAULTY IN PARTS.]”