Coin Market, Main Cause of Liquidity Risk Spread... What Is the 'FTX Incident'?

Binance Withdraws FTX Acquisition, FTT Price Drop Widens
Domestic Crypto Exchanges Announce "No Insolvency, Rest Assured"
"Credit Risk Contagion Similar to Lehman Crisis"

[Asia Economy Reporter Ji Yeon-jin] Liquidity risk is increasing in the virtual asset market. A bank run occurred at FTX, the world's second-largest virtual asset exchange, highlighting a liquidity crisis, and concerns are emerging that the ripple effects of Binance, the world's largest virtual asset exchange, withdrawing its acquisition of FTX could spread throughout the financial market.

According to virtual asset information site CoinMarketCap as of 3 p.m. on the 10th, FTT was trading at $2.36, down 48.83% from the previous day. Compared to this year's peak of $51.96 (March 28), it has plummeted by 95.46%. FTT is a token issued by the virtual asset exchange FTX, supporting leveraged trading and considered the driving force behind FTX becoming the world's second-largest exchange. However, FTT, which was trading around $22 on the 8th, sharply declined, and FTX faced a liquidity shortage of up to $8 billion (approximately 11 trillion KRW) as customers demanded withdrawals, triggering a bank run.

Liquidity Crisis Started from Twitter Feud Between Virtual Asset Exchange CEOs

The beginning was when Changpeng Zhao, CEO of Binance, the world's largest virtual asset exchange, tweeted on the 7th that Binance would sell FTT as a risk management measure. Binance had invested in FTX, a derivatives exchange, in December 2019, transferring its stake last year in exchange for $2.1 billion worth of BUSD and FTT.

However, earlier this month, when the crypto-specialized media CoinDesk pointed out the opaque financial structure of Alameda Research, a virtual asset investment company founded by FTX CEO Sam Bankman-Fried, Changpeng Zhao announced plans to sell FTT. Immediately after this tweet, Sam Bankman-Fried offered to buy the FTT tokens that Changpeng Zhao was selling at $22 each, but when Changpeng Zhao rejected the offer and showed intent to liquidate, investors began withdrawing funds from the FTX exchange, triggering a bank run.

As the FTT price fell sharply below $22, coins related to Alameda Research and Sam Bankman-Fried plummeted, and the liquidity-strapped FTX exchange blocked withdrawals and requested acquisition by Binance. When Binance signed a non-binding letter of intent (LOI) to review the acquisition, the coin price decline appeared to stabilize, but in the early hours of the day, Binance announced the withdrawal of the acquisition, causing most virtual assets to fall sharply.

In the afternoon, virtual assets including Bitcoin narrowed their losses but volatility remains high. With Binance's acquisition of FTX falling through, disappointment selling surged, and concerns are rising that if FTX goes bankrupt, the impact could be greater than the Luna incident in May.

On the same day, domestic virtual asset exchanges simultaneously posted notices stating, "Investors' cash and assets are safely stored, and there is no risk of insolvency, so please rest assured." The notice, issued under the name of the Digital Asset Exchange Association (DAXA), explained, "We are reviewing the virtual assets supported by member companies and monitoring market conditions. In the event of a crisis requiring investor caution, we will continue to provide prompt information and implement investor protection measures through joint responses." DAXA is a council consisting of the five major Korean won market exchanges: Upbit, Bithumb, Coinone, Korbit, and Gopax.

The Revenge of Leverage Strikes the World's Second-Largest Virtual Exchange

The problem is that the FTX incident has become an opportunity to undermine trust in the virtual asset market again. Sam Bankman-Fried, founder and CEO of FTX exchange, established a virtual asset investment company called Alameda Research in January 2017, and then began developing the FTX exchange using investment funds channeled through Alameda Research. In 2019, after establishing the FTX exchange in Antigua and Barbuda, FTX issued its own token, FTT, at $1.7 and started trading.

The FTX exchange minted FTT tokens and lent them to its parent company Alameda, which used the borrowed FTT tokens from FTX to obtain dollar-collateralized loans. The borrowed dollars were then deposited back into the FTX exchange, and with the deposited dollars, FTT tokens were repurchased. Through this process, when the FTT token price rose significantly, Alameda recorded the increase in FTT value as profit on its balance sheet and attracted investments. Repeating this gap investment method, leverage was greatly increased, but with tightening liquidity in various countries this year, it turned into a vicious cycle and backfired.

Han Dae-hoon, a researcher at SK Securities, said, "Since this is a contagion triggered by 'credit risk,' it is similar to the Lehman Brothers incident," adding, "The liquidity crunch caused by the Luna incident and the fact that FTX supported bailout funds then, compared to now receiving bailout funds, contrasts sharply, increasing overall market skepticism about the industry. Risks could spread to venture capital (VC) and funds, so caution is needed."

This content was produced with the assistance of AI translation services.