Controversial cryptocurrency executive Sam Bankman-Fried struggled on Thursday to find a lifeline for his collapsed exchange, FTX, as crypto markets continued to rattle and his company faced mounting legal and regulatory threats.
After a deal to sell FTX to its biggest rival, Binance, collapsed, Mr. Bankman-Fried told his employees he would try to raise money the following week, although he acknowledged that new financing may not be possible. He said he was in talks with Justin Sun, a prominent crypto entrepreneur, about a plan to help FTX, even as some of his biggest backers said their nine-figure investments in his company were now essentially worthless.
And as he fought to keep his company alive, Mr. Bankman-Fried faced a growing number of legal and regulatory threats, including investigations by the Securities and Exchange Commission and US prosecutors in New York. Washington lawmakers also raised questions about FTX’s conduct, as the regulators and law enforcement officers investigated whether it had improperly used customers’ money to support a trading firm that Mr. Bankman-Fried founded, Alameda Research.
“I don’t want to give any sense of confidence in what will happen, and don’t want to imply anything about the chances of success here,” Mr Bankman-Fried said in a note to staff explaining his fund on Thursday. educate plans. “But for the coming week this will be my top priority.”
FTX collapsed on Tuesday after a deposit run that sent the crypto industry into a slump. Mr. Bankman-Fried struck a deal with Binance to sell FTX, which was recently valued at $32 billion. But the larger company backed out, leaving FTX to look for other options.
In the note to employees, Mr. Bankman-Fried said FTX had “theoretically a lot in and/or potential for the raise,” referring to the funding it sought, but acknowledging that those deals may not come together.
“The goal of the raise will be to do good by customers first; second by current and potential new investors,” he wrote in the memo to employees, obtained by The New York Times. “Third all of you.”
The demise of FTX has reversed years of efforts to get the crypto industry into the mainstream of finance. Crypto firms were already reeling from a damaging spring crash, and the chaos at FTX has caused the prices of the popular virtual currencies Bitcoin and Ether to plummet even further.
It is unclear who, if anyone, is willing to put money into FTX after Binance pulled out of the deal.
According to a person with knowledge of the situation, who was not authorized to talk about it, at least one investor has declined to offer assistance due to concerns about the relationship between FTX’s customer deposits and Alameda Research. Another person familiar with FTX’s finances said the exchange had lent as much as $10 billion in client money to Alameda. The figure was previously reported by The Wall Street Journal.
The total amount still owed by FTX remains unclear, but it could be as high as $8 billion, according to three people familiar with the figures, who were not authorized to discuss them.
An FTX spokesperson declined to comment. Mr Bankman-Fried’s memo to staff was previously reported by Reuters.
Until this week, Mr. Bankman-Fried is considered one of the most trusted and powerful figures in the crypto industry. He spent hundreds of millions of dollars trying to bail out other crypto companies and became a frequent presence in the halls of Congress, trying to shape crypto regulations.
That all changed last weekend when Changpeng Zhao, the CEO of Binance, expressed concerns about FTX’s financial stability in a series of viral Twitter posts. FTX faced a deluge of withdrawal requests that it was unable to fulfill. On Tuesday, Binance announced it had tentatively agreed to buy FTX, only to pull out of the deal a day later, citing regulatory concerns and “corporate due diligence” issues.
Shortly before the deal fell through, Mr. Bankman-Fried made a phone call with FTX’s investors. He seemed confused, apologized repeatedly and used an expletive to emphasize how much he’d screwed up, one person familiar with the conversation said.
Mr. Bankman-Fried attributed some of FTX’s struggles to a negative public relations campaign against the company, which he says had been going on for about a month. He also insisted that the Binance transaction go ahead, the person said, explaining that FTX had some assets available but it would not be able to liquidate them quickly enough to meet customer demand for withdrawals.
The rapid collapse of FTX seemed to surprise some deep-seated institutional investors who pride themselves on doing companies due diligence before committing money to them.
Sequoia Capital, one of FTX’s largest lenders, said Wednesday night that it found its $213 million investment worthless. In a letter to its own investorsthe company said FTX was at risk of bankruptcy, though it did not know “the full nature and extent” of the risk.
Paradigm, a crypto-focused investment fund, had put $278 million into FTX. In a letter to its investors reviewed by The Times, the company said its investment would likely go to zero. FTX’s problems “will take many months to fully understand,” the company wrote.
Dozens of other venture capitalists, including major companies like Lightspeed Venture Partners, BlackRock, and Thoma Bravo, have previously pledged funds to FTX, once considered one of the most promising and stable crypto exchanges.
In total, investors have invested nearly $2 billion in FTX, including about $95 million from a venture capital fund affiliated with the Ontario Teachers’ Pension Plan, according to PitchBook. The pension said it expected any loss to have “limited impact”.
Last week, FTX executives sought funding from investors in the Middle East, although it was unclear whether the effort was related to the issues revealed over the weekend, two people familiar with the matter said.
And in recent days, Mr. Bankman-Fried held talks with Mr. Sun, the creator of the Tron cryptocurrency project. On Thursday, FTX announced an agreement with Tron that allows customers to withdraw a small set of cryptocurrencies, using a $13 million injection.
“Together with we propose a solution FTX to initiate a way forward,” Mr Sun said on Twitter Wednesday night. He did not respond to a request for comment.
Mr. Bankman-Fried also faces dissent within the senior ranks of FTX. On Wednesday evening, FTX’s US branch general counsel wrote on an internal messaging system that he had “advised US regulators about my instruction to the founders to disable functionality” of the FTX and US branch websites, according to two people who saw the message and a screenshot that is circulating on Twitter.
“Sam has a different take on this than I do,” attorney Ryne Miller wrote. He added that “we should not be optimistic about a positive outcome.” The message was quickly deleted.
In a sign that FTX’s collapse was sweeping the crypto industry, crypto lending firm BlockFi — which had received rescue funding from FTX earlier this year — said Thursday night that it was freezing operations. “Give the lack of clarity on the status of FTX.com, FTX US and Alameda, we are unable to conduct business as usual,” the company said. A BlockFi spokeswoman did not immediately respond to a request for comment.
Mr. Bankman-Fried’s control is growing in Washington. The SEC has been asking the company to voluntarily transfer information for several months. Now it is investigating the collapse of FTX, said two people familiar with the matter. The Commodity Futures Trading Commission is also investigating the crisis. And federal prosecutors in Manhattan have launched an investigation, said one person briefed.
The Justice Department has contacted at least one third party to obtain information about FTX’s finances, according to a person familiar with the case. One issue federal authorities are investigating is whether FTX misused customer money to keep Alameda afloat. The two companies are technically separate, but they have close financial ties: both were founded by Mr. Bankman-Fried and Alameda transacts on FTX’s platform.
“The recent collapse of FTX is a loud warning that cryptocurrencies could fail,” Senator Sherrod Brown, the Ohio Democrat who heads the Senate banking committee, said in a statement. “It is critical that our financial watchdogs investigate what led to the collapse of FTX so that we can fully understand the misconduct and abuses that have taken place.”
The collapse of FTX has also shocked its employees, some of whom say they feel betrayed. Many received their salaries through deposits into their FTX accounts, meaning the company’s implosion could take their savings, said one person familiar with the matter.
In the memo to employees, Mr. Bankman-Fried apologized for the chaos. “Ultimately, it’s my responsibility to make sure the right things happen,” he said.
He said two executives, Mr. Miller and Zach Dexter, ran day-to-day operations in the US arm of the company, and Constance Wang, the company’s chief operating officer, was involved in the fundraising.
mr. Bankman-Fried, also in a somewhat unusual move… went to Twitter on Thursday morning to post a sort of mea culpa, saying “I’m sorry” and “should have done better”. In a series of posts, he said he could no longer communicate with customers and investors because his “hands were tied for the duration of the potential Binance deal.”
A lawyer for Mr. Bankman-Fried at law firm Paul Weiss did not respond to a request for comment.