The size and scope of the FTX failure is becoming increasingly clear as users fear the worst

Ken Sweet and Thalia Beaty, The Associated Press

Posted Tuesday November 15, 2022 5:50 PM EST

Last updated Tuesday, November 15, 2022 7:27 PM EST

NEW YORK (AP) — Just days after the third-largest cryptocurrency exchange collapsed, the public is getting a sense of just how complicated FTX’s bankruptcy case could be. Other crypto firms are failing in the wake of the FTX collapse, an event reminiscent of the domino collapse of the 2008 financial crisis.

Frustrated users remained in the dark Tuesday about when they might get their funds back, if ever, and directed much of their anger at FTX founder and CEO Sam Bankman-Fried.

In a court filing, FTX lawyers said there are already more than 100,000 lawsuits against the company and estimate that number could rise to more than 1 million, mostly customers, once the case is complete. The court ordered FTX to provide at least a list of the company’s 50 largest creditors by November 18.

Lawyers said the company was in contact with the Justice Department, the Securities and Exchange Commission, the Commodity Futures Trading Commission, as well as dozens of other state, federal and international authorities, confirming earlier reports that the U.S. government was looking into the possibility that Bankman- Fried and his lieutenants violated US securities laws.

FTX filed for bankruptcy protection on Friday, sending tsunami-like waves through the cryptocurrency industry, which has seen significant volatility and turmoil this year, including a sharp decline in the price of bitcoin and other digital assets. For some, the events are reminiscent of the failures of Wall Street firms during the 2008 financial crisis, especially now that supposedly healthy firms like FTX are failing.

The Wall Street Journal reported that BlockFi, which halted withdrawals over the weekend after the FTX crash, is now actively considering bankruptcy and plans to lay off employees. In previous public comments, BlockFi management made it clear that the failure of FTX was pushing the company toward business demise. FTX provided financial assistance to BlockFi this summer, including a $400 million credit facility backed by its own balance sheet.

“We are shocked and appalled by the news about FTX and Alameda,” BlockFi said Saturday, referring to FTX’s hedge fund Alameda Research and Bankman-Fried. “Due to the uncertainty surrounding the status of FTX.com, FTX US and Alameda, we are unable to conduct business as usual.”

Another crypto firm, crypto lending firm SALT Blockchain, also appeared to be on the verge of collapse. Bnk to the Future pulled out of the SALT purchase agreement, citing its FTX exposure. SALT CEO Shawn Oren said in tweets that he “remains committed to recovering from the damages as a victim.”

In a sign of how investors fear the cascading effects could cause long-term damage, cryptocurrency exchange Binance has proposed creating a rescue fund to save otherwise healthy crypto companies from collapse. Binance founder and CEO Changpeng Zhao effectively outlined the possibility of a central bank or crypto-like deposit insurance fund being the lender of last resort to prevent healthy firms from failing.

Meanwhile, FTX users lamented their losses in Telegram chat groups for traders who used the FTX exchange, writing that they had lost access to amounts ranging from thousands to millions of dollars.

Some begged for information. Others speculated on the likelihood of getting their funds back, while others advised that they should just accept that their investments were gone.

One group’s moderators posted intermittently, saying things like, “No death threats, please.” They wrote that they had no information about Bankman-Fried’s whereabouts or what would happen to his companies.

“No news,” wrote one moderator.

Many FTX users pointed to Bankman-Fried as being responsible, making puns on his name such as “Sam Bankrun-Fried” and calling for his prosecution.

On Tuesday, the support account for FTX US responded on Twitter to posts from people asking about their funds, directing them to message the Twitter account for help.

Mohit Sorout, 30, said he lost access to 95% of the value of his cryptocurrency holdings when FTX stopped its services last week, posting on Twitter: “The pain is f(asterisk)(asterisk) real.

An electrical engineer based between Delhi and Dubai started trading in 2017 and quit his job in 2018 to devote himself full-time to cryptocurrency trading. Together with a business partner, he created his own algorithm and invested several thousand dollars in an amount that was many times larger, although he did not want to disclose the value of his holdings when he lost access to them.

It is unclear what will happen to the funds of retail investors like Sorout who are locked into the FTX ecosystem. His withdrawal requests were denied last week, and now he can’t even register on the stock exchange, he said Monday.

Sorout didn’t intend to keep all his investments on a single platform, he said, but the tools FTX created for traders like him were very efficient and his algorithm worked well there. He also trusted Bankman-Fried partly because of his high profile.

“The problem was a founder who donates eight figures to presidential campaigns, meets with top bureaucrats, sponsors chess tournaments, sponsors stadiums,” Sorout said. “You really don’t expect such a huge business, especially its CEO, to cheat its customers, you know?”

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