FTX on the verge of collapse after Binance abandons rescue

FTX is on the verge of collapse as Chief Sam Bankman-Fried tries to secure billions of dollars to save his empire after Binance dropped an eleventh-hour rescue of one of the world's largest crypto exchanges.

Venture capital firm Sequoia Capital said it would reduce its $214 million investment in FTX to zero after a run on the exchange in recent days blew a massive hole in its balance sheet and raised serious doubts about its survival.

“In recent days, a liquidity crisis has created solvency risk for FTX,” Sequoia said in a note to investors in its fund on Wednesday.

The abrupt turnaround in the fortunes of FTX and its sister trading firm Alameda Research marks a spectacular fall for Bankman-Fried, a 30-year-old trader and entrepreneur who is among the industry's most prominent figures. Bankman-Fried was one of the richest people in the world just a few months ago, but large parts of his $24 billion fortune will evaporate if FTX and Alameda Research go bankrupt.

A collapse would also deal a blow to FTX's blue-chip backers, which include BlackRock, Canada's Ontario Teachers' Pension Plan, SoftBank and hedge fund billionaires Paul Tudor Jones and Izzy Englander.

In recent days, Bankman-Fried has appealed to investors for support to shore up the stock market as customers demanded their money back amid fears for their financial health. FTX needs $8 billion to steady the ship, according to people familiar with the matter.

Bankman-Fried also turned to rival crypto exchanges, including OKX and Binance, for a bailout, leading to a short-lived plan by Binance CEO Changpeng Zhao to buy FTX and secure customers' funds.

Zhao left the table after less than 48 hours of careful consideration after realizing the extent of financial problems and possible misconduct at FTX, which made the deal impossible.

“As a result of corporate due diligence, as well as recent news reports of mishandled customer funds and alleged U.S. regulatory investigations, we have decided that we will not pursue the potential acquisition of FTX.com,” Binance said.

The U.S. Securities and Exchange Commission has expanded an investigation into FTX that includes examining the platform's cryptocurrency lending products and its management of customer funds, according to a person familiar with the matter.

Wall Street regulators launched the investigation months ago, but sought additional information following Tuesday's announcement of Binance's acquisition plans, the person added. The agency is also investigating FTX’s relationship with a US company, FTX US.

Bitcoin, the largest cryptocurrency and a barometer of confidence in the industry, fell as low as $15,700 before stabilizing at $16,600, down 10 percent from Wednesday morning. Investors and traders fear that the collapse of FTX and Alameda will trigger another wave of market panic and losses for those exposed to the companies through lending and trading relationships.

"Given FTX and Alameda Research's size and interconnections with other entities in the crypto ecosystem. . . It looks likely that a new cascade of margin calls, deleveraging, and crypto companies will emerge [and] platform outages will begin similar to last May [and] June following the Terra collapse," analysts at JPMorgan wrote.

Analysts at Moody’s said the impact of the crypto sector turmoil on traditional finance would likely be limited.

Fadi Massih, vice president of Moody's Investors Service, said: "The lack of regulatory oversight and the sector's general opacity facilitate risky financial strategies and expose companies to an environment where rumors of illiquidity can become self-fulfilling prophecies."