Fallout from troubled crypto exchange FTX spreads through market

Without fresh funding, FTX founder Sam Bankman-Fried told investors his firm faces bankruptcy. PHOTO: NYTIMES

SINGAPORE – Hours after cryptocurrency exchange Binance announced it would walk away from a deal to bail out rival FTX, a prominent investor of the troubled firm marked down its FTX investment to zero, sending fresh shock waves through a market already reeling from a slew of company failures.

Venture capital firm Sequoia Capital said in a note sent to its partners on Thursday, and which was posted on Twitter, that it would mark its investment in FTX worth about US$210 million (S$294 million) to zero. It had put in this amount in FTX’s international and United States businesses last year.

It said the firm’s “exposure to FTX is limited”, that it owns FTX.com and FTX US in one private fund called Global Growth Fund III, and that “FTX is not a top ten position in the fund”.

“The full nature and extent of this risk are not known at this time,” Sequoia noted, adding that it is monitoring the quickly developing situation.

Sequoia is one of the many prominent backers of FTX, alongside Singapore state investor Temasek, BlackRock and SoftBank.

Temasek said on Wednesday that it is aware of the developments between FTX and Binance, and is engaging FTX in its capacity as a shareholder.

Observers and investors fear the spillover effect is just starting and could be “more detrimental” than the crash of stablecoin TerraUSD and sister token Luna in May.

FTX has already stopped withdrawals of its FTT token, but the firm’s close association with the Solana blockchain has sent the price of that network’s SOL token down as well.

SOL had fallen by more than 30 per cent to US$14.74 by midday on Thursday, just hours after the Binance announcement.

FTX founder Sam Bankman-Fried was an early investor in the Solana blockchain project through Hong Kong crypto trading firm Alameda Research, which he founded and holds a majority stake in.

Dr Julian Hosp, chief executive and co-founder of platform Cake DeFi, is more worried about the contagion effect from Alameda than FTX’s collapse. “There is a very real possibility of a crash happening, which is bound to ignite selling pressure once again, resulting in the inevitable collapse of several projects and companies due to exposure.”

Investors now expect US$330 million worth of SOL tokens to flood the market, in turn causing the price to plunge further.

Trader Charles Tan, who still holds 1,000 FTT tokens, said he had a close shave: “I got wind of what was unfolding on Saturday afternoon, so I basically unwound my positions and withdrew 99 per cent of holdings by Sunday night.”

He said he is “one of the lucky ones” who went along with crypto-savvy friends to liquidate his holdings.

“I’m still a little bit in shock,” he added, noting that FTX had a good reputation and managed to count Temasek as an investor.

Exchanges around the world have moved to assure their users in the wake of the FTX crisis.

The founder of Tron network, Mr Justin Sun, said on Thursday that his team was “putting together a solution together with FTX to initiate a pathway forward”, in a cryptic message indicating a possible rescue.

He said they have been working round the clock “to avert further deterioration”, and he has faith that the situation is manageable.

Mr Adrian Przelozny, co-founder and chief executive of Independent Reserve exchange, said the firm “has no exposure to FTX or the FTT token”.

Binance said early on Thursday that it was not going to acquire FTX due to “corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged United States agency investigations”.

Binance, which observers said would benefit from the fall of rival FTX, said “the issues are beyond our control or ability to help”.

The decision came a day after Binance disclosed that it had signed a non-binding letter of intent to buy FTX.

Without fresh funding, Mr Bankman-Fried reportedly told investors on Wednesday that FTX faces bankruptcy given the volume of customer withdrawal requests. FTX is said to have a shortfall of US$8 billion.

Meanwhile, reports said exchange Crypto.com has told its users that it would be “suspending deposits and withdrawals of USDC and USDT on the Solana blockchain”. USDC and USDT are both stablecoins.

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