FTX scrambles for funds as regulatory pressure builds

By Selena Li and Vidya Ranganathan

SINGAPORE/LONDON (Reuters) - Regulators are moving in on distressed crypto exchange FTX as it tries to raise billions in funds to stave off collapse, while its chief executive, Sam Bankman-Fried, faces heightened scrutiny.

The week-long saga that began with a run on FTX, one of the world's largest crypto exchanges, and an abandoned takeover deal by rival Binance has hit an already struggling bitcoin and other tokens.

FTX is scrambling to raise about $9.4 billion from investors and rivals, as the exchange seeks to save itself after customer withdrawals.

Justin Sun, founder of the crypto token Tron, said on Bloomberg TV on Friday he was evaluating the FTX situation. "Once we get the full picture I think we will start to make moves,” Sun said.

FTX did not respond to a request for comment on the proposal.

Regulators have now stepped in, multiplying troubles for FTX businesses around the world.

Bankman-Fried is under investigation by the U.S. Securities and Exchange Commission for potential securities law violations, Bloomberg reported, citing a source. Bloomberg also reported, citing sources, that Cyprus plans to suspend the licence of the exchange's European arm.

The Cyprus Securities and Exchange Commission did not immediately respond to a request for comment.

Bankman-Fried did not respond to Reuters' requests for comment.

Reuters has reported the U.S. securities regulator is investigating FTX.com's handling of customer funds and crypto-lending activities.

FTX Australia called in administrators on Friday, the Australian Financial Review reported, citing a company statement. The Securities Commission of the Bahamas has frozen assets of FTX Digital Markets, an FTX subsidiary.

"The involvement of a provisional liquidator will prove helpful in a process that facilitates the requisite due diligence that will contribute to a better future for digital assets in a global landscape," VP of communications for FTX Digital Markets, Valdez Russell said of the Bahamas' regulator's action.

SHAKEN CONFIDENCE

FTX's predicament marks a rapid reversal for Bankman-Fried, the 30-year-old crypto executive, whose wealth was estimated by Forbes at around $17 billion just two months ago.

The turmoil sent bitcoin to a two-year low of $15,632 on Wednesday, it was last trading at $17,450 at 1320 GMT on Friday having been swept up in a cross-asset rally after U.S. inflation data.

FTX's token FTT was down 5.7% at $3.5 on Friday facing a 85% weekly loss.

Trading volumes in bitcoin futures and exchange traded funds have exploded.

"Confidence is gone on day one of this fallout and there is no sight of it coming back yet," said Kami Zeng, head of research at Fore Elite Capital Management, a Hong Kong-based crypto fund manager.

"We are already seeing regulators' actions from U.S. to Japan to Bahamas, etc. Expect more to come and that's what crypto market needs badly at the moment."

Unlike mainstream corporations and financial services companies, crypto entities operate in a regulatory grey area. For instance, deposits at crypto lenders are not insured by governments.

U.S. lawmakers have stepped up calls for action, including new laws to govern the sector and a probe into the FTX crisis.

BANKING ON SUPPORT

Some investors, including Sequoia and SoftBank, have marked FTX investments to zero. SkyBridge Capital is working to buy back its FTX stake, the alternative investment firm's founder Anthony Scaramucci said in an interview with CNBC on Friday.

Other crypto companies have taken steps to shield themselves. Crypto lender BlockFi said it was pausing client withdrawals until there was clarity on FTX.

Broker Genesis Trading disclosed its derivatives business had approximately $175 million in locked funds on FTX.

"There is just not enough true liquidity in the crypto world," said Anton Ruddenklau, global head of innovation, financial services, KPMG International

"When something happens there is no real cash. And the whole underlying sort of scheme then collapses with the lack of real money to be able to ensure that there’s actually proper liquid assets that can be used to back up and prop up the runs or whatever it might be.”

The seeds of FTX's troubles were sown months earlier, after Bankman-Fried stepped in to save other crypto firms hit by market turmoil.

GRAPHIC: Pain in crypto land https://graphics.reuters.com/GLOBAL-MARKETS/THEMES/lbvggrkadvq/chart.png

FTX in July, for example, had agreed to provide crypto lender BlockFi with a $400 million revolving credit facility and had an option to buy the lender which faced a jump in withdrawals.

Reuters reported this week, citing sources that FTX transferred at least $4 billion to Alameda, to support the crypto trading firm after a series of losses.

Bankman-Fried has discussed raising $1 billion each from Tron founder Sun, rival exchange OKX and stablecoin platform Tether, Reuters reported on Thursday, citing a source who has direct knowledge of the matter.

Bankman-Fried is seeking the remainder from other funds, including current investors, the source said.

Sun told Bloomberg TV on Friday Tron needed to do “full due diligence and evaluate the situation to have a full picture of what’s going on.”

Haider Rafique, OKX's global chief marketing officer said: “We passed on the initial opportunity before they engaged with Binance and at this point we are just evaluating the situation before we consider any participation from our side."

We read at: Investing.com