FTX discloses ‘substantial shortfall’ of customer assets

The bankrupt cryptocurrency exchange says it hasn’t found enough cash and cryptocurrency assets to make customers whole, suggesting a long road ahead.

Former FTX boss Sam Bankman-Fried at a Manhattan federal court earlier this month. Picture: Ed Jones/AFP

FTX said on Tuesday that a probe of its balance sheet showed holdings of customer funds were lower than the exchange’s internal accounts had indicated, acknowledging for the first time there was a shortfall of funds at the US exchange.

It also disclosed that a hack two days after the company’s bankruptcy filing in November led to the theft of around half of the crypto assets stored on the US-based exchange, valued at about $US90m ($A128.9m) before the company’s collapse. The same hacker took about $US323m of crypto from FTX’s international exchange, representing about 20 per cent of that exchange’s total crypto assets.

FTX also said it found that a small group of individuals at the company had the ability to remove digital assets from the exchange without any record-keeping.

“It has taken a herculean investigative effort from our team to uncover this preliminary information,” said FTX Chief Executive John J. Ray III, who has been leading the company since its bankruptcy filing. “We ask our stakeholders to understand that this information is still preliminary and subject to change. We will provide additional information as soon as we are able to do so.” The company said on Tuesday it identified $US5.5bn of liquid assets across its businesses, including $US265m of unrestricted cash — money that isn’t pledged as collateral or kept in custody for customers — at its US businesses and around $US273m of unrestricted cash at the international exchange. It also identified around $US3.5bn of crypto assets as of November 11, the day it filed for bankruptcy.

However, it added that “based on current estimates of the amount of digital assets associated with the FTX.com and FTX US exchanges … there is a substantial shortfall of digital assets at both exchanges,” the company said.

The newly disclosed balances at the US exchange appear to contradict some statements made last year by FTX co-founder Sam Bankman-Fried that US customers should be able to recover all the assets they had in custody on the platform.

The US attorney’s office for the Southern District of New York has charged Mr Bankman-Fried with eight counts of fraud, and the Securities and Exchange Commission has filed a lawsuit alleging misconduct from the start of his cryptocurrency exchange to support his hedge fund.

Mr Bankman-Fried has said he bore responsibility for FTX’s collapse but denied he committed any fraud.

The available crypto holdings as of November 11 included tokens equivalent to $US685m of Solana, $US529m of FTX’s own token FTT, and $US268m of bitcoin. FTX has also identified mixed tokens with an approximate value of $US1.3bn held on third-party exchanges, but it hasn’t been able to identify the composition of the assets.

FTX also gave more detail about corporate assets under its control that it intends to sell to help plug its shortfall to creditors.

The company said it plans to market real estate it owns in the Bahamas valued at about $US253m, including several condominium units and a penthouse apartment, a beachside shack and a corporate centre in Nassau.

FTX also identified investments in a number of crypto ventures, as well as fund and token investments, with a book value of $US4.6bn, although it warned their “recoverable value is likely to be materially lower than [the] acquisition value.”

FTX, once one of the largest crypto exchanges in the world, collapsed in November after allegations surfaced that an affiliated hedge fund founded by Mr Bankman-Fried had misused FTX customer funds. He resigned from his role and was extradited from the Bahamas in December after the US Justice Department unsealed charges against him.

A trial is scheduled for October.

The Wall Street Journal