FTX creditors may number over 1 million as regulators seek answers

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By Akriti Sharma and Daniel Leussink

(Reuters) - Collapsed crypto exchange FTX outlined a "severe liquidity crisis" in U.S. bankruptcy filings, which said the group could have more than 1 million creditors, as regulators opened probes and the crypto pain spread with the Wall Street Journal reporting BlockFi was planning layoffs and a possible bankruptcy filing.

FTX's late Monday filing to a U.S. bankruptcy court said it was in contact with dozens of global regulators and had appointed five new independent directors at each of its main companies, including its sibling trading firm Alameda Research.

The exchange, which had been among the world's largest, filed for bankruptcy protection on Friday in one of the highest-profile crypto blowups after traders pulled $6 billion from the platform in three days and rival exchange Binance abandoned a rescue deal.

Top crypto exchanges by volume https://graphics.reuters.com/FINTECH-CRYPTO/zdpxdyzzgpx/index

"FTX faced a severe liquidity crisis that necessitated the filing of these cases on an emergency basis last Friday," the court filing stated.

FTX's bankruptcy case includes more than 100,000 creditors, and this number could surpass 1 million, the filings said. The numbers were disclosed as FTX requested that multiple FTX group companies file one consolidated list of major creditors, rather than separate ones.

The documents also confirmed that FTX had responded to a cyber attack on Nov. 11, after saying on Saturday it had seen "unauthorized transactions" on its platform.

FTX engaged Alvarez & Marsal as financial adviser, and said it has been in contact with the U.S. Attorney's Office, the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and dozens of federal, state and international regulatory agencies over the past 72 hours.

The fallout has so far been limited to crypto exchanges and traders, but is featuring in mainstream policy discussions too.

Michael Barr, the Federal Reserve's top Wall Street cop, on Tuesday said he is concerned about risks from the nonbank sector for which the U.S. central bank and other regulators have poor visibility.

"That includes obviously crypto activity, but more broadly risks in parts of the financial system where we don't have good visibility, we don't have good transparency, we don't have good data. That can create risks that blow back to the financial system that we do regulate," he told the Senate Banking Committee.

Crypto industry peers and partners have been quick to distance themselves from FTX and tout their sound financials, though some, including U.S. cryptocurrency broker Genesis Trading, have disclosed they are exposed to FTX, either having held tokens on the exchange or by owning FTX's native token, FTT.

FTT plunged around 94% last week, while bitcoin lost 22%.

Crypto lender BlockFi, which previously acknowledged it has significant exposure to FTX, plans to lay off workers while preparing to file for bankruptcy, the Wall Street Journal reported. The newspaper reported that BlockFi was recently working with Kenric Kattner, a bankruptcy partner at Haynes & Boone, citing people familiar with the situation. BlockFi and Kattner did not immediately respond to a request for comment.

Separately, bankrupt crypto lender Voyager Digital no longer plans to sell itself to FTX, Bloomberg reported, while Canadian crypto exchange Bitvo said it terminated its deal to be bought by FTX.

FTX founder and former chief executive Sam Bankman-Fried said his main goal is "to do right by customers," in a tweet on Tuesday.

"I'm contributing what I can to doing so. I'm meeting in-person with regulators and working with the teams to do what we can for customers," he said on Twitter.

Bloomberg reported that American and Bahamian authorities had been talking about bringing Bankman-Fried to the United States for questioning.

Bankman-Fried tried to raise cash from investors over the weekend to repay FTX clients even after the company had sought bankruptcy protection and he had resigned as CEO, the Wall Street Journal reported.

Bankman-Fried said he expanded his business too fast and failed to notice red flags at the exchange, in an interview with the New York Times published late on Monday.

REGULATORY SCRUTINY

The sudden collapse of FTX, once a seen as a mainstay of the crypto industry with a $32 billion valuation as of January, has sparked investigations by financial regulators and other supervisory bodies around the world.

The Securities Commission of the Bahamas, in a statement dated Monday, said two PwC partners had been approved by the Supreme Court as joint provisional liquidators for FTX.

Several global regulators have removed licenses from local FTX units, and are looking into the company, and investigations by the U.S. Justice Department, the SEC and CFTC are also under way, a source with knowledge of the investigations told Reuters.

Some argued regulators should have taken action earlier.

Ken Griffin, founder and CEO of hedge fund Citadel, told the Bloomberg New Economy Forum in Singapore: "FTX is one of these absolute travesties in the history of financial markets. People will lose billions of dollars collectively and that undermines trust in all financial markets."