holding no currency

Crypto exchanges are desperate to show they’re not the next FTX

The spiraling FTX crisis heightened calls for transparency
In the eye of the storm.
In the eye of the storm.
Photo: Michael M. Santiago (Getty Images)
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FTX’s implosion has been a learning lesson for its fellow crypto exchanges.

The cryptocurrency exchange went from being one of the biggest players to being bankrupt in a week marked by a chaotic series of events, included unaccounted funds, a hack, and a lost corporate partner.

The spiraling FTX crisis has laid bare the need for transparency in crypto. One obvious solution is to provide audited proof of reserves, and some companies are making that offer in a bid to calm customers and investors’ nerves.

The continuing damage in the aftermath of FTX’s crumble

Here’s a summary of all the alarm bells that have gone off around FTX in the last few days:

💻 Hours after FTX declared Chapter 11 bankruptcy in the US and founder and former CEO Samuel Bankman-Fried resigned on Nov. 11, over $663 million worth of coins, including Ethereum, Binance Smart Chain (BSC) and Avalanche, was moved off the exchange, of which $447 million was likely stolen, according to crypto compliance company Elliptic. An FTX admin pinned a post admitting to the hack and instructing users to delete the app and steer clear of the website on its official Telegram channel.

The embattled firm’s general counsel Ryne Miller didn’t quite use the word hack but he admitted to “unclear” movements on the exchange. Miller also said that the firm had “initiated precautionary steps to move all digital assets to cold storage” after the bankruptcy filing, and the process was “expedited this evening—to mitigate damage upon observing unauthorized transactions.”

Given the timing of the transfers, some observers suspect it could be insiders, not hackers, who’re behind the drain.

👛 Many users started seeing a $0 balance in the FTX.com and FTX US wallets—likely a result of the API being down, but unnerving nevertheless.

🇧🇸 FTX had barred customer withdrawals Nov. 9 onwards, but allowed “withdrawals of Bahamian funds” as per local regulations in the island nation the crypto firm is headquartered in. Since then, customers have been finding novel ways to access their funds through the Bahamas—the island nation where FTX is based—including by purchasing non-fungible tokens (NFTs).

On Nov. 12, the Bahamas Securities Commission, which is investigating FTX, denied asking the company to release these funds at all.

🚫 In another mark of lost confidence, Visa, the world’s largest payments processor, terminated its global credit card agreements with collapsed crypto exchange FTX on Nov. 13. The partnership that sought to release a crypto debit card in 40 countries was barely a month old.

A Nov. 14 Reuters report revealed that, of the $10 billion Bankman-Fried secretly moved from FTX to his trading firm Alameda, over $1 billion of customer money is unaccounted for.

Crypto exchanges release proof of reserves

Binance, the world’s biggest crypto trading venue, published proof of reserves disclosing $69 billion in assets. Smaller competitors including OKX and KuCoin have vowed to publish the same in coming weeks.

Crypto.com’s proof backfired

Over the weekend, Singapore-based Crypto.com publicly posted the company’s cold wallet addresses in the name of transparency. Scouring through the database, a Twitter user called Conor Grogan found that the exchange sent 320,000 in Ethereum—82% of Crypto.com’s total Ethereum holdings—to another exchange Gate.io on Oct. 21. The transfer was worth around $416 million.

Kris Marszalek, chief at Singapore-based Crypto.com, confirmed the incident but said the whole amount was recovered and put back in cold storage.

But the red flags were up and waving violently in the brewing cryptocurrency storm sparked by FTX’s collapse. The fact that Gate.io showed “proof of funds” on Oct. 28, and Crypto.com released its own on Nov. 12, raised speculations of possible fudging.

The combination of Marszalek claiming that “all our systems are operating normally” and Gate.io sharing a clarification did little to calm nerves in this skeptical climate. Users have been rapidly pulling out funds from the exchange. Between Nov. 12 and 13, $14 million worth of the cryptocurrency ether and $39 million worth of other tokens tied to the Ethereum network were withdrawn.

“If an exchange have to move large amounts of crypto before or after they demonstrate their wallet addresses, it is a clear sign of problems. Stay away,” Binance CEO Changpeng Zhao tweeted without naming names.

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