Crypto contagion spreads after FTX collapse

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Bitcoin has fallen to two-year lows against the US dollar, fetching about $US16,000 a coin, and ether is sliding towards $US1100.

Mr Bankman-Fried, alongside his executive team Gary Wang and Nishad Singh, are under the supervision of authorities in the Bahamas, where FTX was headquartered.

Hong Kongs AAX exchange has suspended trading for 10 days, citing the failure of an unidentified third-party partner.

The FTX situation has put immense pressure in exchanges everywhere with users nervous about exchange holdings, Ben Caselin, vice president at AAX, said.

Its my observation this can be resolved in a few days, although rebuilding market confidence may take months.

The crypto industry has suffered several high-profile and damaging events this year.

Most notably, the collapse of a crypto-bank called Celsius triggered a savage selloff in May, with investors reeling from the discovery that Celsius had used customer deposits to fund its own risky trades.

When investors caught wind of their money being tied up in complex, high-risk trades, they began to withdraw en masse. The resulting bank run left Celsius bankrupt, and triggered the collapse of a widely used algorithmic stablecoin called Terra/Luna.

Collapse of inter-linked businesses

Signage for the FTX Arena, where the Miami Heat basketball team plays, is visible Saturday

With Terra/Luna supposedly worth $US1 on balance sheets, hedge funds such as Singapore-based Three Arrows Capital struggled to plug the hold left by an asset that had tumbled to $0.

Mr Bankman-Frieds quant firm Alameda Research is understood to have been heavily exposed to Three Arrows Capital and Celsius.

The collapse of these inter-linked businesses is said to have blown up much of the Alamedas balance sheet and prompted the eventual resignation of then co-chief executive Sam Trabucco.

It is then that Mr Bankman-Fried is understood to have supported Alamedas balance sheet using funds from the FTX exchange.

The failure of crypto businesses to hold enough assets in reserve to combat a run, and the knowledge that customer capital is used for for-profit trading, has prompted deep uncertainty across crypto markets.

Over the weekend, bosses of crypto exchanges tried to tackle the skepticism around their liquidity and began to share their proof of reserves.

Alongside many others, Crypto.com published its digital asset addresses, revealing how much and what digital assets it stored on behalf of its customers.

But many observers were quick to point out a suspicious transfer of 320,000 ETH ($US400 million) to a wallet address linked to another exchange called Gate.io in October. The transfer was repatriated back to Crypto.com, but chief executive Kris Marszalek said the transaction was a mistake.

It was supposed to be a move to a new cold storage address, but was sent to a whitelisted external exchange address, he said.

Cronos, the token underpinning the Crypto.com business, has fallen 25 per cent in the past 24 hours, and 98 per cent of all transactions made on the Cronos blockchain on Monday were withdrawals.

The sharp price fall followed a tweet on Sunday by Changpeng CZ Zhao, chief executive of Binance Global, who appeared to direct his comments at the Singapore exchange.

Second transfer mistake

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.

But this is the second transfer mistake Crypto.com has made.

In August, Crypto.com launched legal action against Melbourne-based investors Manivel and Thilagavathy Gangadory after the pair spent $10.5 million that had been transferred to them in error.

Instead of a $67 refund, Crypto.com mistakenly sent them $US10.5 million, which they then spent on buying property in Victoria.

Investors were not only spooked by the $US400 million error on Monday but they are also questioning how much exposure Crypto.com has to FTX.

Within Crypto.coms proof of reserves, analysts spotted that it holds about $3 billion in stablecoins in its wallets. A stablecoin is a digital asset supposedly pegged to another asset, such as the US dollar.

But on Monday, those analysts revealed that Crypto.com had sent more than $US1 billion ($1.5 billion) worth of stablecoins to FTX over the past 12 months.

In addition to being an exchange where users can trade digital assets, FTX offered bridging services. A crypto bridge connects two disparate blockchains.

Crypto.coms Mr Marszalek said the funds were used to hedge orders and the total exposure to FTX was less than $US10 million.

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