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Investing.com – Troubled exchange FTX might have more than 1 million creditors, according to a new bankruptcy filing, indicating the massive impact of its collapse on crypto traders.
Last week, when the platform filed for Chapter 11 bankruptcy protection, FTX indicated that it had more than 100,000 creditors with claims in the case.
But in a filing updated Tuesday, the firm’s lawyers said: “In fact, there might be more than one million creditors in Chapter 11 cases.”
In such cases, the lawyers said, debtors are required to provide a list of the names and addresses of the 20 largest unsecured creditors. However, given the size of its debt, the group instead intends to provide a list of the 50 largest creditors on or before Friday.
Five new independent directors have been appointed to each of the major FTX-owning companies, according to the case file, including former Delaware District Judge Joseph J. Farnan, who will serve as the lead independent director.
Over the past 72 hours, FTX’s lawyers wrote, FTX has been in contact with “dozens” of regulators in the US and abroad. Including the US Attorney’s Office, the Securities and Exchange Commission, and the Commodity Futures Trading Commission.
This year saw the failure of a slew of crypto companies, including Celsius and Voyager Digital, as they continued to struggle with plummeting digital asset prices and the ensuing liquidity issues.
In past bankruptcies, traders on these platforms have been categorized as “unsecured creditors,” meaning they will likely be behind a long line of entities seeking repayment, from suppliers to employees.
Before its collapse, FTX offered amateur and professional traders to invest in cryptocurrencies as well as trade more complex derivatives. At its peak, the platform was valued by investors at 32 billion and had more than 1 million users. The company’s failure had a chilling effect on the industry, as investors sold their positions and moved money from other platforms.
On Monday, the CEOs of Binance and Crypto.com sought to reassure investors regarding the financial health of their businesses. Binance’s Zhang Peng Zhao said his platform saw only a slight increase in withdrawals, while Crypto.com head Chris Marsalec said his company had a “very strong balance sheet”.
Confused customer money
FTX entered bankruptcy on Friday as concerns regarding its financial health led to an increase in withdrawals and a drop in the value of its original FTT token. Sam Bankman-Fried, founder of FTX, has stepped down as CEO and was replaced by John J. Ray.
FTX initially turned to Binance for a bailout, but the deal was not completed when Binance backed down citing reports of mismanagement of client funds and alleged US government investigations into FTX. Over the weekend, FTX was hit by a cyber attack that resulted in the theft of more than $400 million in tokens.
“FTX faced an acute liquidity crunch that necessitated the filing of these cases on an emergency basis last Friday,” lawyers wrote in the filing on Tuesday. “Questions arose regarding Mr. Bankman-Fried’s leadership and how to handle FTX’s complex array of assets and the companies under his management,” they added.
CNBC reported Sunday that Alameda Research, sister company to FTX, has borrowed billions of client money from the platform in order to have enough cash on hand to process withdrawals.
In general, mixing and trading client funds with third parties without explicit consent is illegal, according to US Securities Act. It also violates FTX’s Terms of Service.
Bankman Fried declined to comment on the allegations but said the company’s latest bankruptcy filing was the result of problems with leveraged trading positions.
“I think it’s increasingly clear, even on a basic level, that this kind of conflict of interest between the market maker and the platform is something that’s a big deal,” Jimmy Burke, CEO and founder of venture capital firm Outlayer Ventures, which focuses on Web 3, told CNBC. Very unethical.”
In a series of digital tweets this week, Bankman-Fried wrote the word “what” followed by the letters “h”, “d” and “th” in intermittent tweets.
He ended the topic Tuesday with: “10) Illegal advice. Non-financial advice. That’s all I remember, but my memory may have gotten some parts wrong.”
