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Crypto Price Check: FTX Collapse Puts Exchanges Under the Microscope

The arrest of FTX founder Sam Bankman-Fried has put pressure on cryptocurrency exchanges as investors keep an eye on Binance.
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It is probably impossible to talk about cryptocurrency without mentioning the name Sam Bankman-Fried.

The founder of the bankrupt cryptocurrency exchange FTX has been confined to a Bahamian prison after U.S. federal officials requested his arrest on Dec. 12.

American authorities are trying to piece together the Nov. 11 implosion of his multibillion-dollar crypto empire. 

"It is worth noting that even thought there is an extradition treaty between the Bahamas and the U.S., extradition is a long and complicated process," said David Lesperance, managing partner of immigration and tax adviser Lesperance & Associate

"A simpler and faster way to get SBF into the U.S. would be to ask the Bahamian government to deport him since SBF no longer fulfills the underlying condition of possessing a valid current passport," he added.

Lesperance said that "this is such a tried-and-true method to end-around extradition that it is actually described in the State Department’s Foreign Affairs Manual." 

Bitcoin was off slightly to $17,406.74 on Dec. 15, according to data firm CoinGecko. Ether, the native currency of the ethereum blockchain, was off modestly to $1,273.12, while dogecoin lost 1.1% to $0.086007. 

The FTX collapse continues to affect other players in the sector.

Winston Ma, a New York University Law School adjunct professor, noted that Binance, the world’s largest cryptocurrency exchange, paused withdrawals of the stablecoin USDC.

FTX Bankruptcy Puts Focus on Crypto Exchanges

Circle, the issuer of the USDC stablecoin, had just terminated its plan to merge with Concord Acquisition, a publicly traded special-purpose-acquisition company, by mutual consent. 

Ma said this comes as investor concerns about Binance’s stability grow following the collapse of FTX, as well as a report of a potential criminal investigation from the U.S. government.

"This illustrates that FTX’s bankruptcy has put the focus on crypto exchanges, the primary hubs for individual investors that offer broad services such as crypto sales, capital lending, and the safekeeping of virtual assets," said Ma, who is the author of "Blockchain and Web3: Building the Cryptocurrency, Privacy, and Security Foundations of the Metaverse."

U.S. prosecutors are considering filing money-laundering charges against Binance and some of its executives, including CEO Changpeng Zhao, according to Reuters.

Ma said that U.S. regulators, especially the Securities and Exchange Commission, are under pressure to step up enforcement of key hubs of the crypto industry after FTX collapsed.

"Despite investigating parts of the industry for over six years, the SEC has yet to sue a major crypto exchange," Ma said. "In the context of Reuters's report on the same day that U.S. Justice Department is [investigating] Binance for potential money laundering charges, it remains to be seen whether the SEC will accelerate its enforcement actions on crypto exchanges."

Frank Corva, senior analyst for digital assets at Finder, sees a lot of FUD -- fear, uncertainty and doubt -- around the solvency of Binance.

Binance Is Reportedly Under Investigation

"It almost goes without saying that if Binance goes under, digital-asset markets and the crypto industry as a whole will be set back almost irreparably," he said. 

"It’s difficult to know whether people are panicking and spreading rumors about exchanges like Binance due to a PTSD response from FTX’s implosion or whether the issue of Binance’s solvency is a credible threat."

Regardless, Corva said, data show that many are moving their crypto assets from the custody of exchanges to noncustodial wallets, which give users the private keys to their assets.

"This is good in that holding digital assets in self-custody is one true way to actually own the assets," Corva said. "When you leave them in the custody of an exchange, the assets are only IOUs that are as good as the solvency of the exchange."

"And if we’ve learned anything from the FTX debacle," he added, "it’s that even exchanges that seem the most solvent may just be putting up a front."

Separately, Corva noted that crypto firm Genesis -- a major player in market making and borrowing and lending services in the crypto industry -- was the engine for crypto exchange Gemini’s Earn function, which last month halted $900 million of customer redemptions.

"Many are waiting with bated breath to see whether Genesis declares bankruptcy or whether it finds the liquidity it needs to make Gemini customers whole and to stay afloat as a company," he said. 

"If Genesis goes under, digital-asset markets will likely see another leg down."