The Securities and Exchange Commission, Commodity Futures Trading Commission and Justice Department are looking into whether crypto trading platform FTX.com improperly handled customer funds, according to reports by Bloomberg and The Wall Street Journal.
Regulators are also looking into the platform’s relationship with FTX US, the exchange’s American counterpart, and owner Sam Bankman-Fried’s trading firm Alameda Research, according to people familiar with the matter.
The investigations are related to the liquidity issues that led Changpeng “CZ” Zhao, CEO of competitor Binance, to consider purchasing FTX on Tuesday.
By Wednesday, however, Zhao back out of the deal after looking at FTX’s balance sheet.
“As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of http://FTX.com,” Binance tweeted Wednesday. “In the beginning, our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help.”
Bankman-Fried took to Twitter on Thursday to take the blame for FTX’s downfall: “I fucked up, and should have done better,” he said.
“The full story here is one I'm still fleshing out every detail of, but as a very high level, I fucked up twice. The first time, a poor internal labeling of bank-related accounts meant that I was substantially off on my sense of users' margin. I thought it was way lower,” he tweeted.
Now, Bankman-Fried said, his team is “spending the week doing everything we can to raise liquidity,” though he can’t make any promises. “Every penny of [the liquidity] — and of the existing collateral — will go straight to users, unless or until we've done right by them. After that, investors — old and new — and employees who have fought for what's right for their career, and who weren't responsible for any of the fuck ups.”
FTX lent billions of dollars in customer assets to “fund risky bets” by sister company Alameda Research, sources told The Wall Street Journal. That laid the bricks for FTX’s current financial turmoil.
Bankman-Fried recently told an investor that Alameda owes FTX around $10 billion, one of the publication’s sources said, adding that FTX loaned Alameda more than half of all customer funds — money they had deposited on the platform for trading purposes — in a move Bankman-Fried explained as a “poor judgment call.”
It’s a turning of the tables for billionaire-until-yesterday Bankman-Fried, who is said to have walked away from an opportunity to buy bankrupt crypto exchange Celsius after catching a glimpse of its books, according to The Block.
The SEC’s inquiry into FTX predates news of its potential insolvency by months. It began as a probe “into FTX US and its crypto-lending activities,” according to Bloomberg’s sources. It is not clear how long the DOJ investigation has been going on, The Wall Street Journal reported.
Zhao wrote Tuesday in a note to employees that FTX’s downfall has “severely shaken” confidence in the crypto world, and that more scrutiny by regulators is to come.
On Wednesday afternoon, the website of FTX’s sister company Alameda Research was down without explanation. It still wasn’t up Thursday.
In response to FTX’s turmoil, Sen. Elizabeth Warren, D-MA, tweeted a call for regulation.
“The collapse of one of the largest crypto platforms shows how much of the industry appears to be smoke and mirrors,” she wrote. “We need more aggressive enforcement and I'm going to keep pushing @SECGov to enforce the law to protect consumers and financial stability.”
The SEC declined to comment on the investigation.
FTX did not return a request for comment by press time.