Collapsed crypto exchange FTX reportedly used $10 billion in customer funds for risky bets

New details have emerged about the implosion of crypto exchange FTX, which has ensnared some high-profile celebrities.

Crypto exchange FTX allegedly lent billions of dollars in customers’ money to a sister company to fund risky bets prior to its implosion.

FTX, which had been rumoured to be having liquidity issues, went into meltdown this week after being hit with $US5 billion ($7.5 billion) in withdrawal requests on Sunday — which it was unable to fulfil.

“FTX has enough to cover all client holdings,” FTX founder Sam Bankman-Fried said in a tweet on Monday, which he later deleted. “We don’t invest client assets (even in treasuries).”

The fourth-biggest exchange paused withdrawals as it scrambled for emergency investment, striking a deal to sell itself to top-rated rival Binance on Tuesday — which confirmed it had been approached to help with a “significant liquidity crunch”.

But Binance walked away from the takeover less than 24 hours later citing “reports regarding mishandled customer funds and alleged US agency investigations”, adding while it had hoped to be able to support FTX’s customers to provide liquidity, “the issues are beyond our control or ability to help”.

In a profanity-laden Twitter thread on Thursday as FTX teetered on the brink of total collapse, Mr Bankman-Fried — a high-flying crypto entrepreneur who had wooed the likes of Super Bowl champion Tom Brady and then-wife Gisele Bündchen as major investors — acknowledged he “f**ked up”.

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Sam Bankman-Fried says he ‘f**ked up’. Picture: Lam Yik/Bloomberg

Funds misused

The Wall Street Journal reports that Mr Bankman-Fried told investors this week that Alameda Research, a separate trading firm he also founded, owed FTX around $US10 billion ($15 billion).

FTX had extended loans to Alameda — which specialised in risky cryptocurrency trading strategies described by one blockchain analyst as “essentially like picking up pennies before a steamroller” — using money customers had deposited.

The exchange held total customer assets of $US16 billion ($24 billion), so it lent more than half to its sister firm, in what Mr Bankman-Fried described as a poor judgment call, according to the report.

“An exchange really shouldn’t have problems getting its customers their deposits,” UK-based economist Frances Coppola told The Wall Street Journal. “It shouldn’t be doing anything with those assets. They should literally be sitting there so people can use them.”

FTX faces a shortfall of up to $US8 billion ($12 billion), according to multiple reports.

Binance was reportedly taken aback by the extent of the exchange’s financial troubles, which contributed to its decision to back out.

In a letter to employees prior to pulling out of the deal, Binance co-founder and CEO Changpeng ‘CZ’ Zhao warned FTX going down was “not good for anyone in the industry”.

“Do not view it as a ‘win for us’,” he wrote. “User confidence is severely shaken. Regulators will scrutinise exchanges even more. Licenses around the globe will be harder to get.”

In his Twitter thread on Thursday, Mr Bankman-Fried said Alameda would be “winding down trading”. He maintained the problems were contained to FTX’s international platforms and that its US users were “fine”.

“The full story here is one I’m still fleshing out every detail of, but as a very high level, I f**ked up twice,” he wrote. “The first time, a poor internal labelling of bank-related accounts meant that I was substantially off on my sense of users’ margin. I thought it was way lower.”

He acknowledged he had vastly misjudged FTX’s liquidity, which was far too low to meet Sunday’s withdrawal requests.

“Because, of course, when it rains, it pours,” he said. “We saw roughly $US5 billion of withdrawals on Sunday — the largest by a huge margin.”

Tom Brady and Gisele Bündchen were major investors in FTX. Picture: Kevin C. Cox/Getty Images

Brady wipe-out

Brady, the seven-time Super Bowl champion and star NFL quarterback, announced with then wife Bündchen in June 2021 that they had closed a major equity deal with FTX.

“It’s an incredibly exciting time in the crypto-world, and Sam and the revolutionary FTX team continue to open my eyes to the endless possibilities,” Brady said in a press release at the time.

“This particular opportunity showed us the importance of educating people about the power of crypto while simultaneously giving back to our communities and planet.”

Under the deal, Brady became a brand ambassador for FTX while Bündchen joined as an environmental and social initiatives adviser.

In April this year, the couple joined other celebrities including former US President Bill Clinton, former UK Prime Minister Tony Blair and Michael Lewis, author of The Big Short, for FTX’s three-day Crypto Bahamas conference.

My guy @SBF_FTX has no time for TikToks… @FTX_Official#CryptoBahamaspic.twitter.com/UFo1QuGn3Y

— Tom Brady (@TomBrady) April 27, 2022

The high-profile power couple, who had a combined net worth estimated at $US650 million ($983 million), divorced last month.

It’s unclear how much of their net worth was tied up in FTX, which was valued at $US32.5 billion ($49 billion) early this year — but investors look set to lose all or most of their cash.

Other burnt investors include major hedge funds Tiger Global Management, Third Point and Altimeter Capital Management, venture capital firms and even a Canadian teacher’s pension scheme.

Mr Bankman-Fried said on Thursday the company was “doing everything we can to raise liquidity”.

“I can’t make any promises about that,” he said.

“But I’m going to try. And give anything I have to if that will make it work. Every penny of that — 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 f**k ups.”

He also appeared to take a shot at Mr Zhao, his longtime rival, for scrapping the deal.

“At some point I might have more to say about a particular sparring partner, so to speak,” he said. “But you know, glass houses. So for now, all I’ll say is: well played; you won.”

FTX allegedly used customer deposits to fund risky trades. Picture: Michael M. Santiago/Getty Images

‘Completely insane’

Concerns first began to mount last week after reports that Alameda’s balance sheet was too heavily reliant on illiquid tokens including FTX’s own FTT.

In response, Mr Zhao publicly announced that he would sell his holdings of FTT worth — at the time — $US584 million ($883 million), triggering a near-total collapse of the token mirroring the Terra/Luna disaster earlier this year.

Bloomberg columnist Matt Levine said FTX had been caught in a “death spiral” as a result of holding FTT — effectively a stock in the company — as collateral.

“This is completely insane,” he wrote.

“If people start to worry about the investment bank’s financial health, its stock will go down, which means that its collateral will be less valuable, which means that its financial health will get worse, which means that its stock will go down, etc. It is a death spiral. In general it should not be possible to bankrupt an investment bank by shorting its stock. If one of the bank’s main assets is its own stock — is a leveraged bet on its own stock — then it is easy to bankrupt it by shorting its stock.”

obv this was the top... pic.twitter.com/9F0M1Wej7I

— delian (@zebulgar) November 8, 2022

The FTT sell-off and collapse of the FTX exchange sent shockwaves through the cryptocurrency market, driving down the price of bitcoin to a two-year low of below $US16,000 ($24,000)

Edward Moya, senior market analyst with OANDA trading group, said while bitcoin and other cryptocurrencies had seen a rise on Thursday after a better-than-expected inflation report, “FTX contagion risks remain elevated”.

“Investment into cryptocurrencies will likely struggle here as too many key institutional investors and crypto companies have money tied up with the bankruptcy bound exchange,” he said.

“Until we see which players were impacted by FTX and if we see other exchanges vulnerable to a liquidity crunch, any crypto rebound might be faded. More details about the actions of FTX will lead to harsher regulatory guidelines for all crypto exchanges.”

Mr Moya added that reports FTX had used customer assets for risky trades meant it “seems unlikely anyone will want to rescue this company”.

Originally published as Collapsed crypto exchange FTX reportedly used $10 billion in customer funds for risky bets