By Angus Berwick, Georgina Lee and Tom Westbrook
HONG KONG/SINGAPORE/NEW YORK (Reuters) -FTX’s Chief Executive Sam Bankman-Fried on Thursday launched an urgent push to raise funds to save his firm as the crypto exchange looks to plug a reported $8 billion hole in its finances, according to tweets and a memo to employees.
Bankman-Fried said he was in talks with “a number of players” in the crypto sector, including Justin Sun who is the founder of crypto token Tron.
Larger rival Binance walked away from a bailout of FTX on Wednesday, sending cryptocurrency prices plunging as hopes for a rescue diminished. That left Bankman-Fried, 30, who had previously thrown lifelines to other faltering digital asset platforms, with dwindling options.
Sun, founder of cryptocurrency network Tron, said in a tweet on Thursday “we are putting together a solution together with #FTX to initiate a pathway forward,” without giving further details. Sun did not respond to a request for comment.
An FTX spokesperson declined to provide additional details on the talks.
In the memo, viewed by Reuters, Bankman-Fried said for the next week he would be “conducting a raise” to do right by customers and “possible new investors.”
Bankman-Fried, who is also winding down his crypto trading firm Alameda Research, pledged that every penny would go “straight to users” until “we’ve done right by them.”
Bankman-Fried, who is from California but lives in the Bahamas where FTX is based, told employees on Wednesday he was exploring all options for his firm after the Binance deal with collapsed.
Bloomberg reported that Bankman-Fried had told investors that FTX faced a shortfall of up to $8 billion and that the company would need to file for bankruptcy unless it received further funding.
Meanwhile, a message on the FTX website said that it was no longer processing withdrawals or accepting new users. FTX’s shortfall comes after users rushed to withdraw $6 billion in crypto tokens from FTX in just 72 hours.
The focus among investors is on the unknown size of customer losses and the hit to sentiment from the latest and possibly largest collapse in an industry that has turned into a minefield for investors.
Crypto asset manager Coinshares said it has $30.3 million total exposure to FTX.
FTX’s native token, FTT is down 90% this week and was attempting to steady around $2.90 – not far above its record low around $1.50. Bitcoin fell below $16,000 for the first time since late 2020 overnight and at 1210 GMT was trading at $16,310, showing little sign of recovery.
The seeds of FTX’s downfall were sown months earlier, in mistakes Bankman-Fried made after he stepped in to save other crypto firms, according to interviews with several people close to Bankman-Fried and communications from both FTX and Binance.
Another exchange, OKX, said it had been approached earlier in the week by Bankman-Fried, who described liabilities of $7 billion that needed covering fast.
“Even Elon Musk would not be able to commit to a deal with $7 billion liability within a few hours of negotiations. That was too much for us,” Lennix Lai, director of financial markets at OKX told Reuters.
“(It) is a big hole to plug,” he added. “The dagger will continue to hang over the crypto market, as long as the outlook of FTX’s fate remains unclear.”
Investors were watching for any signs of contagion spreading beyond the crypto sector. Fadi Massih, vice president at Moody’s Investors Service, said the losses have “largely remained contained within the crypto sphere.”
“However, should leverage again build substantially in the crypto finance system, it could unsettle the banking system, even if banks continue distancing themselves from direct interaction with the crypto economy,” Massih said in emailed comments.
“A top exchange failing – that’s on a different level,” said Danny Chong, CEO of decentralised finance firm Tranchess, with potentially wider ramifications than the failure of stablecoin TerraUSD and crypto hedge fund Three Arrows Capital this year.
“People’s funds, including market makers’, are still currently with FTX,” he said. “Just when people were thinking that crypto winter might probably not last … along comes another episode like this.”
The U.S. securities regulator is investigating FTX.com’s handling of customer funds and crypto-lending activities, according to a source with knowledge of the inquiry.
Bloomberg reported that the U.S. Department of Justice is also looking into the turmoil. A DOJ spokesperson declined to comment.
Investors are already writing off funds ploughed into FTX. Venture capital fund Sequoia Capital wrote down a $150 million exposure to zero on Wednesday. Canada’s Ontario Teachers Pension Plan, Tiger Global and Japan’s Softbank are also FTX investors.
Broker Robinhood said it has no direct exposure to FTX, but Bankman-Fried holds a stake in the firm and its shares fell heavily on Tuesday and Wednesday.
Most crypto players remain bullish about the long term, but are braced for further falls in the near future. Bitcoin’s 20%losses this week are comparable to the drop in June when Three Arrows Capital came under stress.
“What makes this new phase … problematic is that the number of entities with stronger balance sheets able to rescue those with low capital and high leverage is shrinking,” analysts at J.P. Morgan said in a note to clients.
“Now that the balance sheet strength of Alameda Research and FTX is under question only a few months after being perceived as strong balance sheet entities, it creates a confidence crisis.”
(Reporting by Angus Berwick in New York; Georgina Lee in Hong Kong and Tom Westbrook in Singapore; Elizabeth Howcroft in London; Editing by Megan Davies; Shri Navaratnam and Catherine Evans and Anna Driver)