The unexpected bankruptcy of FTX, one of the world’s largest cryptocurrency exchanges, caused an earthquake in business and political circles.
The scale of the blowout reflects the central role that FTX and its founder, Sam Bankman-Fried, have played in building a fledgling industry aimed at disrupting traditional financial services.
The overnight explosion of a company valued at $32 billion in February, with its founder considered one of the world’s richest men, has put pressure on the entire cryptocurrency space.
Investors seem to have lost confidence and are now suspicious of every crypto firm. They wonder if they can trust the accounting provided to them and the statements made by cryptocurrency executives.
“If you’re doing a background check on someone like Sam [Bankman-Fried] you’re not going to find anything, it was flawless before this event, if you will,” Anthony Scaramucci, founder of alternative investment firm SkyBridge Capital, said on Nov. 15 at the Bloomberg New Economics Forum in Singapore.
A day before FTX collapsed, Bankman-Fried, who was still the platform’s CEO, said his empire was “doing well.”
But 24 hours later, he called his rival Changpeng Zhao for help. After initially agreeing to buy FTX, Zhao backed out a day later and discovered the situation was worse than he thought after his team began due diligence.
Concerned Retail Investors
“They lied. FTX lied. I think Sam lied to his employees, to his users, to his shareholders, to regulators around the world, to all users,” Zhao said in a Nov. 14 event on Twitter. much of the blame.”
The bankruptcy of FTX, which filed for Chapter 11 bankruptcy on November 11, was due to a lack of liquidity when customers tried to withdraw funds from the platform several days earlier. The lack of liquidity is the result of its founder transferring $10 billion of client funds from FTX to crypto-currency trading platform Alameda Research, according to Reuters, citing two sources who “worked in senior FTX positions until this week.”
Over the past few days, all eyes have been on Crypto.com, one of FTX’s big competitors. Uncertainties and questions surround the platform that acquired the naming rights to Staples Center, home of the National Basketball Association’s Los Angeles Lakers.
Fearing that Crypto.com could be the next FTX, customers rushed to withdraw their cryptocurrencies and money over the weekend.
“Yes, I have my doubts about the CEO from the beginning, but if they get over it, I will continue to use their service,” said a crypto investor on social media Reddit.
Social media was flooded with posts from worried retail investors.
Cronos (CRO), a cryptocurrency issued by Crypto.com, has fallen 33% in the past seven days, according to CoinGecko. The total decline is 93% since hitting an all-time high on Nov 24, 2021. Although the cryptocurrency market has lost more than $2 trillion over the past year, CRO is far below the most popular bitcoin (BTC). digital currencies lost 76% compared to November 2021.
“There was an increase in all transactions over the weekend, but the platform stabilized,” Crypto.com spokesman Matt David told TheStreet. He admitted that there have been some unusual withdrawals, but things are back to normal now.
But CEO and co-founder Chris Marszalek’s troubled past is now the subject of interest. Before founding Crypto.com, he apparently ran an Australian company that abruptly shut down angry customers and business partners who claimed they had been defrauded, according to the Daily Beast.
The company in question was called Ensogo and was sort of a Groupon, in other words, it offered online coupons. But in June 2016, Ensogo abruptly shut down almost simultaneously with the departure of Marszalek, who joined Crypto.com. Sellers and buyers were not informed about the closure of the platform.
“Ensogo Limited (E88) Board of Directors wishes to announce that it has accepted the resignation of CEO Mr. Chris Marszalek effective June 20, 2016,” the company said in a statement dated June 21, 2016. “Mr. Marszalek is a co-founder of E88 and has been CEO since August 2014. The Board has not yet announced the appointment of a new CEO.”
On the same day, Ensogo asked the stock market authorities to delist the company. He also said that he plans to close the platform due to financial reasons.
“E88 no longer intends to provide financial support to any of the Company’s subsidiaries that carry out their extraordinary sales and marketplace businesses,” the company wrote in a regulatory filing. “As the withdrawal of financial support results in the closure of those subsidiaries (which may include a voluntary form of administration for those subsidiaries), a voluntary winding-up is required.”
Hong Kong newspaper The Standard reported that buyers and sellers on the Ensogo platform were blindsided by the shutdown and left with losses. Some sellers told the police that they were deceived.
Marszalek was a co-founder of the company, but he no longer has control and was not a member of the board that made the decision to close the platform, according to Crypto.com spokesman Matt David, the spokesperson told TheStreet.
“Chris started Beecrazy in 2010. He built it into a profitable e-commerce business. In December 2013, the business was acquired by iBuy Group, managed by Malaysia-based Catcha Group, as part of a generalization and IPO,” said David .
“In 2014, Chris was asked by Catcha Group to lead the turnaround of iBuy Group. The combined companies were named Ensogo. In mid-2016, the Catcha-controlled board decided to close Ensogo against Chris’ wishes and advice,” said David. .
He continued: “Chris did not sit on the board and held a low-digit stake in the business at the time. He resigned in response to the proposed closure. The closure angered many customers and consumers – which was one of the reasons Chris opposed the decision. Under Chris’ leadership, no wrongdoing was ever discovered.”
No Back Door
As a cryptocurrency, FTX fulfilled orders for its clients, received their cash and bought cryptocurrency on their behalf. FTX acted as a custodian, holding customers’ cryptocurrencies.
Crypto.com operates in the same capacity.
FTX then used its customers’ cryptocurrencies to borrow through its sister company’s trading arm, Alameda Research, or generate cash through marketing. Borrowed cash FTX was used to bail out other cryptocurrency organizations in the summer of 2022.
At the same time, FTX used the cryptocurrency FTT, which it issued as collateral on its balance sheet. This was a significant exposure due to the concentration risk and variability of the FTT.
“We don’t use our customers’ cryptocurrency,” David said. “Our system does not allow us to send money to external accounts or random addresses.” He added that they “returned clients 1:1,” meaning they did not borrow against their clients’ assets.
The spokesperson also claimed that there is no backdoor that would allow Crypto.com executives to alter the books without the knowledge of third parties such as auditors and investors.
“We don’t have a back door,” David said.
Financial indicators of FTX, according to Reuters, showed that there was a “backdoor” in the books, created with “customized software”. This has been described as Bankman-Fried being able to change the firm’s financial records without warning.
But Bankman-Fried denied the existence of a “backdoor”.
Crypto promises to release an audit of its balance sheet “within 30 days.”
The Singapore-based company is privately held. As a result, it does not need to publish its financial statements.
Marszalek lives in Hong Kong.