The magnitude of the shock reflects the central role played by FTX and its founder, Sam Bankman-Fried, in building the young industry, which aims to revolutionize traditional financial services.
This overnight implosion of a company valued at $32 billion in February, with a founder considered one of the richest men in the world, put the entire crypto sphere under pressure.
Investors seem to have lost faith and are now suspicious of every cryptocurrency company. They wonder if they can trust the accounts presented to them and the statements made by cryptocurrency executives.
“If you’re background checking someone like Sam [Bankman-Fried] you won’t find anything, it was spotless, if you will, before this incident,” said Anthony Scaramucci, the founder of alternative investment firm SkyBridge Capital at the Bloomberg New Economy Forum in Singapore on Nov. 15.
The day before FTX went bankrupt, Bankman-Fried, who was still the CEO of the platform, said his empire was “fine.”
But 24 hours later, he called his rival Changpeng Zhao for help. After initially agreeing to acquire FTX, Zhao backed down the next day, saying he found the situation was even worse than he thought once his teams began their due diligence.
Retail investors concerned
“They lied. FTX lied. I think Sam lied to his employees, his users, his shareholders, regulators around the world and all users,” Zhao said during a Twitter event on Nov. 14 . most of the blame”.
The insolvency of FTX, which filed for Chapter 11 bankruptcy on Nov. 11, was due to a lack of liquidity when clients attempted to withdraw funds from the platform a few days ago. The liquidity shortage appears to have been the result of its founder moving $10 billion in client funds from FTX to his cryptocurrency trading platform Alameda Research, according to Reuters, citing two sources who “held senior FTX positions until to this week”.
In recent days, all eyes are on Crypto.com, one of FTX’s big rivals. Uncertainties and questions surround the platform, which has acquired the naming rights for the Staples Center, the arena of the Los Angeles Lakers of the National Basketball Association.
Fearing that Crypto.com could be the next FTX, customers rushed over the weekend to withdraw their cryptocurrencies and money.
“Yes, I had my doubts from the beginning because of the CEO, but if they make it, I will continue to use their service for sure,” one crypto investor posted on social media Reddit.
Social media was full of posts from concerned retail investors.
Cronos (CRO), the cryptocurrency issued by Crypto.com, is down 33% in the past seven days according to CoinGecko. The total drop is 93% from its all-time high on November 24, 2021. While the cryptocurrency market has lost more than $2 trillion in the past year, the CRO is much lower than bitcoin (BTC), the most popular of the currencies digital, which is down 76% from its November 2021 peak.
“There was an increase in all transactions over the weekend, but the platform has stabilized,” Crypto.com spokesman Matt David told TheStreet. He acknowledged that there have been unusual withdrawals, but now things are back to normal.
But CEO and cofounder Kris Marszalek’s troubled past is now a subject of interest. It appears that prior to co-founding Crypto.com, he ran an Australian company that abruptly shut down irritating customers and business partners who claimed they were being scammed, according to the Daily Beast.
The company in question was called Ensogo and was a kind of Groupon, that is, it offered online coupons. But in June 2016, Ensogo shut down abruptly, almost simultaneously with the departure of Marszalek, who joined Crypto.com. Sellers and buyers had not been notified of the platform closure.
“The board of directors of Ensogo Limited (E88) would like to announce that they have accepted the resignation of CEO, Kris Marszalek, effective June 20, 2016,” the company announced in a statement dated June 21, 2016. “Mr Marszalek is a co – founder of E88 and has been Chief Executive Officer since August 2014. The board is yet to announce the appointment of a new Chief Executive Officer.”
On the same day, Ensogo asked stock authorities to delist the company. He also told them that he intended to shut down the platform for financial reasons.
“E88 no longer intends to provide financial support to any of its subsidiaries that conduct the company’s flash sales and marketplace activities,” the company wrote in a regulatory filing. “Voluntary suspension is required as the withdrawal of financial support is likely to result in the closure of such branches (which may include a voluntary form of administration for such branches).”
Hong Kong newspaper The Standard wrote that buyers and sellers on Ensogo’s platform were caught off guard by the shutdown and suffered losses. Some vendors have reportedly told police they were scammed.
Marszalek had co-founded the company, but according to Crypto.com spokesperson Matt David, he was no longer in control, nor was he a board member that made the decision to shut down the platform, the spokesperson told TheStreet.
“Kris started Beecrazy in 2010. She has grown it into a profitable e-commerce business. In December 2013, the business was acquired as part of a rollup and IPO by iBuy Group, controlled by Malaysia-based Catcha Group “explained David.
“In 2014, Kris was appointed by Catcha Group to lead the turn-around of iBuy Group. The merged companies assumed the Ensogo name. In mid-2016, the Catcha-controlled board decided to shut down Ensogo against the wishes and advice by Kris,” David said.
He continued: “Kris did not hold a board seat and at the time had a low single-digit percentage stake in the business. He resigned in response to the proposed closure. The closure angered many customers and consumers – one of the reasons why Kris objected to the decision. There has never been a finding of wrongdoing under Kris’ leadership.”
No back door
As a cryptocurrency exchange, FTX filled the orders for their clients, withdrawing their cash and buying cryptocurrencies on their behalf. FTX acted as custodian, holding clients’ cryptocurrencies.
Crypto.com operates in the same capacity.
FTX then used its clients’ crypto assets, through its subsidiary’s Alameda Research trading arm, to generate cash through lending or market making. The borrowed FTX money was used to bail out other crypto institutions in the summer of 2022.
At the same time, FTX was using the cryptocurrency it was issuing, FTT, as collateral on its balance sheet. This represented a significant exposure, due to concentration risk and the volatility of FTT.
“We don’t leverage our clients’ cryptocurrencies,” said David. “Our system doesn’t allow us to send money to outside accounts or random addresses.” He added that they “backed customers 1:1,” meaning they didn’t borrow money against their customers’ assets.
The spokesperson also said that Crypto.com does not have a backdoor that would allow its 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.
FTX’s financials showed there was a “back door” in the books, created with “bespoke software,” according to Reuters. It has been described as a way Bankman-Fried could alter the company’s financial records without raising any notices.
But Bankman-Fried denied the existence of a “back door”.
Crypto promises to release an audit on its balance sheet “within 30 days”.
The company, which is based in Singapore, is privately owned. As a result, it does not have to publish its financial records.
Marszalek lives in Hong Kong.