Regulators Begin Cracking Down on FTX

The noose tightens for FTX

Sam Bankman-Fried, the founder of the embattled crypto exchange FTX, may be racing to raise as much as $8 billion to save his imploding empire. But regulators are already moving to freeze parts of FTX’s business, while other divisions file for insolvency or prepare to halt operations.

And the contagion from FTX is spreading: Changpeng Zhao, a founder of the giant exchange Binance and FTX’s onetime savior, warned attendees of a conference in Indonesia on Friday that the crypto industry was facing a reckoning on the scale of the 2008 global financial crisis. “With FTX going down, we will see cascading effects,” he said.

Crypto investors, executives and others are raising more questions about what’s next. What will the fallout be for venture-capital backers who took money from Bankman-Fried? And will other companies in the crypto world fold?

The Bahamas’ securities regulator has frozen some FTX assets, and appointed a provisional liquidator to assess whether the exchange’s Bahamian operations — the company is headquartered there — should be wound down. The regulator said it was driven by reports that FTX client money was improperly used to prop up a trading affiliate, Alameda Research. That comes as regulators like the S.E.C. and the Justice Department are also investigating, and as FTX operations in Australia and Japan were shut or suspended.

Meanwhile, Bankman-Fried has hired Martin Flumenbaum, the Paul Weiss litigator who represented Michael Milken in the bond mogul’s fight against insider-trading charges, according to The Financial Times.

FTX investors are facing more tough questions. Entities tied to FTX or Bankman-Fried pledged millions to venture firms that also invested in FTX, as Silicon Valley investors and others flocked to pour money into the company at increasingly astronomical valuations. Sequoia alone received $200 million in commitments from FTX entities, and had invested $214 million in the exchange, according to The Information.

Questions are also arising about the due diligence investors conducted on FTX before putting in money, as well as the failure of any outside backers to gain a seat on the exchange’s board to provide additional oversight.

More FTX backers also began to tally their losses after Sequoia publicly wrote off its stake in the exchange. Canada’s Ontario Teachers’ Pension Plan said it had invested $95 million in the company and that any losses would be limited. SoftBank reportedly expects to lose $100 million on its FTX stake.

A rebound in some token prices over the past 24 hours belies the turmoil in crypto market. On Thursday, BlockFi, a crypto lender that FTX bailed out this year, said the FTX liquidity crunch had spread to its business. “We are not able to operate business as usual,” the company said in announcing it was pausing customers withdrawals.

The volatility is also hitting the market for stablecoins, fairly steady cryptocurrencies that are often pegged to the dollar, which traders favor to settle trades more expeditiously. With crypto markets in free-fall in recent days, investors dumped their holdings in stablecoins. One that is issued by Tether, USDT, briefly lost its 1-to1 peg to the dollar, a worrying sign of instability, and net redemptions soared to $1.7 billion at one point in the past two days, according to CoinMarketCap.

“People see holding Tether as a potential risk,” Zachary Friedman, the co-founder of Secure Digital Markets, a crypto brokerage based in Toronto, told DealBook.

Hedge funds could see a reckoning as well. Mike Novogratz of Galaxy Digital said on Thursday that his firm had $77 million in funds tied up with FTX, which he expects to recover.

Josh Gnaizda of Crypto Fund Research told DealBook that he expected many crypto-focused funds to “temporarily suspend or limit redemptions until they have clarity on whether these assets can be withdrawn, or will need to be marked to zero.”

HERE’S WHAT’S HAPPENING

Amazon reportedly embarks on a cost-cutting review. The e-commerce giant will scrutinize all of its unprofitable businesses, including its Alexa voice-assistant division, according to The Wall Street Journal. That could lead to job cuts.

Britain is on the brink of recession. Already rocked by its highest annual inflation rate in 40 years, the British economy is also contracting. G.D.P. fell by 0.2 percent in the third quarter, and economic output remains below prepandemic levels. The pound gained, but stocks fell on the news.

The latest mail-in results give Democrats hope in Nevada. Fewer than 9,000 votes separate Senator Catherine Cortez Masto, the Democratic incumbent, and Adam Laxalt, her Republican challenger. Democrats increasingly see the Nevada Senate race as winnable, and feel optimistic that they will keep control of the chamber.

SoftBank’s Vision Fund loses another $7 billion. Although the Japanese tech giant reported a more than $21 billion third-quarter profit — largely from selling shares in China’s Alibaba — its vast investment arm lost $7.2 billion after writing down more of its holdings.

What is Elon Musk doing at Twitter?

It’s tough to fathom, but things have gotten more chaotic at Twitter. In just 24 hours, Elon Musk floated the idea that the social network he has owned for two weeks could file for bankruptcy; been warned by the F.T.C. about potentially violating a consent decree; and lost more top executives, including the head of trust and safety he has backed publicly. (For an in-depth look at the beginnings of the Musk era, read this Times account.)

Musk didn’t rule out Twitter going bankrupt. In a meeting with employees on Thursday, the billionaire said the company didn’t have the necessary cash to survive, and had several billion dollars in negative cash flow. (It isn’t clear how Musk arrived at that figure, but DealBook previously calculated Twitter’s cash burn at $1 million a day, or a pretax annual loss of $1.4 billion.) That’s on top of his warning of a “dire” economic picture and his selling Tesla stock to “save” Twitter.

A reminder: Musk’s lenders for his Twitter takeover are holding $12.5 billion in debt they can’t easily resell without taking a steep hit. (Sources have told DealBook that selling the debt now could lead to a $1 billion loss; Bloomberg reports that the banks are currently receiving offers of 60 cents on the dollar for the debt.)

Some are gaming out Musk’s next move. Is he trying to drive down the debt prices to buy it up himself, or planning to miss any interest payments, given that he owes $1 billion a year?

And the F.T.C. has fired a warning shot amid concerns that Twitter may breach a 2011 settlement with the agency over data privacy violations:

• Among the big defections this week: Twitter’s chief compliance officer.

• An employee reportedly suggested that Twitter may run afoul of the F.T.C. agreement by making engineers “self-certify” their projects’ compliance — and potentially put those employees at personal legal risk. (A company lawyer’s note included a telephone number for the F.T.C. and a link to a whistle-blower website.)

• The employee also claimed that Musk’s personal lawyer, who is overseeing Twitter’s legal affairs, has said, “Elon puts rockets into space, he’s not afraid of the F.T.C.”

An F.T.C. spokesman also weighed in. “We are tracking recent developments at Twitter with deep concern,” the spokesman said on Thursday, adding that “no C.E.O. or company is above the law.” Musk later told employees that the company would abide by the F.T.C. settlement.

Stocks rally goes global

Markets from Tokyo to Paris are in the green this morning, extending Thursday’s gains in the United States. Encouraged by Thursday’s consumer inflation report, investors bought and bought as every sector on the S&P 500 rose. At the same time, the Nasdaq jumped 7.35 percent, its best one-day rally since March 2020.

Bulls hope peak inflation is over, which could persuade the Fed to abandon jumbo interest rate increases. They also see reassuring signs that the global energy crisis is weakening, noting that European countries appear set to survive the winter without having to ration gas and electricity further.

China and Russia added firepower to Friday’s rally. Beijing slightly eased its Covid-19 quarantine rules, raising hopes that the world’s second-biggest economy would reopen for business, while the Hang Seng in Hong Kong closed up 7.7 percent on Friday. Separately, some view the Russian military’s announced retreat from the key Ukrainian city of Kherson as a potential turning point in that war.

Bears note we’ve been here before. In July, Consumer Price Index data showed that inflation was moderating, only to perk up again in the late summer. John Lynch, the chief investment officer at Comerica Wealth Management, told clients not to be fooled by Thursday’s rally, adding that “sustained price pressures in housing, wages and energy indicate a prolonged battle against inflation.”

Weekend reading: Grit or quit?

Mike Evans was bored at an office job when he started listing restaurants that do delivery on a website. His plans were modest, but the site grew into Grubhub. The company went public in 2014. Drained by the start-up grind, he left Grubhub and biked across the country. A few years later, he was back in business, with a new start-up, Fixer, an on-demand handyman service.

Evans discusses his new book, “Hangry: A Startup Journey.” with DealBook as well as the lessons he’s learned along the way. This interview has been edited for clarity.

Who is this book for?

It’s for people who want active control over their work. My ideal reader is in the professional world and wondering, “Is this it?” It speaks to a sentiment that we saw underlying the Great Resignation, with people questioning career paths and saying to themselves, “Don’t settle.” Life is too short to be stuck at a job you don’t want — so don’t.

What start-up myth do you want to debunk?

There’s a narrative in start-ups in Silicon Valley that says you go to business school, write a business plan and get some seed money to start a company. That formula doesn’t work. There can’t be innovation if there is a formula.

Is success accidental then?

I’d say it’s experimental. Early on, everybody told me Grubhub was a terrible idea. It’s important to try things you think might or might not work because the path to success can be a random struggle. But you can’t just experiment. You need grit.

Any regrets?

Early on, my goal was just to pay off student loans. I regret not thinking bigger. It’s very hard to think about doing good for the world around you when you’re in crisis, but that doesn’t preclude thinking about it. Startups are levers for social change, so it’s important to be intentional about the change you make in the world with your work. There’s a paradox in creating a startup. You need to think “I can change the world” and have the humility to listen. Those two things don’t always play well together.

THE SPEED READ

Deals

Policy

• A federal judge in Texas struck down the Biden administration’s move to cancel hundreds of billions of dollars in student loan debt. (NYT)

• Mr. Biden plans to name a former Obama and Bush official to lead the $80 billion overhaul of the I.R.S. (NYT)

Best of the rest

Thanks for reading! We’ll see you tomorrow.

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