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Crypto.com CEO says will prove naysayers mistaken amid FTX contagion fears

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Kris Marszalek, CEO of Crypto.com, speaking at a 2018 Bloomberg event in Hong Kong, China.

Paul Yeung | Bloomberg | Getty Images

The boss of cryptocurrency exchange Crypto.com took to YouTube Monday to reassure users of his platform after the stunning collapse of rival firm FTX sparked fears of a market contagion.

In an “AMA” (ask me anything) on YouTube, the platform’s CEO Kris Marszalek said that his company had a “tremendously strong balance sheet” and that it wasn’t engaged within the sorts of practices that led to the downfall of Sam Bankman-Fried’s FTX last week.

“Our platform is performing business as usual,” Marszalek said within the AMA. “Persons are depositing, persons are withdrawing, persons are trading, there’s just about normal activity just at a heightened level.”

FTX filed for Chapter 11 bankruptcy protection on Friday after concerns over the corporate’s financial health resulted in a run on the exchange and a plunge in the worth of its native FTT token. FTX tried to achieve a deal to be acquired by Binance, the most important venue for trading digital assets, but this fell apart after Binance backed out citing reports of mishandled customer funds and alleged U.S. government investigations into FTX.

Alameda Research, FTX’s sister company, borrowed billions in customer funds from the exchange to make sure it had enough funds available to process withdrawals, CNBC reported Sunday. Bankman-Fried declined to comment on allegations of misappropriating customer funds but said its recent bankruptcy filing was the results of issues with a leveraged trading position.

“We never engage as an organization in any irresponsible lending practices, we never took any third-party risks,” Marszalek said Monday. “We don’t run a hedge fund, we don’t trade customers’ assets. We all the time had 1-to-1 reserves,” he added.

His comments come after the revelation Sunday that Crypto.com mistakenly sent $400 million price of the ether cryptocurrency to Gate.io, one other crypto exchange, in October, a mishap that raised fears Crypto.com users’ funds could also be in danger.

Crypto.com and Gate.io said they were sent by mistake and were quickly returned to Crypto.com after the error was identified. Marszalek tweeted Sunday that the firm had meant to send the funds to its “cold wallet” — meaning an offline cryptocurrency wallet — but were as a substitute moved to a whitelisted corporate account with Gate.io. In its own statement, Gate.io said the transactions were the results of an “operation error transfer” and that every one assets have since been returned to Crypto.com.

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“On this particular case the whitelisted address belonged to one in every of our corporate accounts in a third party exchange as a substitute of our cold wallet,” he added. “Now we have since strengthened our process and systems to higher manage these internal transfers.”

That did little to assuage investor concerns, nonetheless, with traders speculating Crypto.com could also be facing liquidity problems with its own and dipping into customer funds after the FTX collapse. Marszalek pushed back on claims it was misappropriating users’ funds Monday, stating within the AMA that “we don’t trade customers’ assets.”

“We’ll just proceed with our business as usual, and we’ll prove all of the naysayers – and there’s lots of these at once on Twitter within the last couple of days – we’ll prove all of them mistaken with our actions,” Marszalek said.

“We’ll proceed operating as we have now all the time operated to proceed being a secure and secure place where everybody can access crypto.”

Evaluation of public blockchain data shared with CNBC by data firm Argus shows that, from 7 p.m. ET Saturday through 6.30 a.m. ET Monday, a net $68 million in ether and $120 million in other Ethereum-based tokens was withdrawn from Crypto.com by its users.

Over that very same timeframe, Crypto.com added $62 million in ether and $140 million of other digital assets to fulfill the withdrawals, based on Argus.

“To its credit, Crypto.com continues to have the funds to fulfill these withdrawals, lending further credence to its CEO’s claims that their assets are backed 1:1,” Owen Rapaport, co-founder and CEO of Argus, told CNBC via email.

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Crypto.com is one in every of quite a few exchanges which have committed to providing a breakdown of the reserves that back customer assets to reassure users after the bankruptcy of FTX.

Marszalek said he expects Crypto.com to publish an audited “proof of reserves” inside the subsequent 30 days. He said he understands users’ want to see the audit released sooner, but that auditing firms “don’t operate on crypto speed.”

“The target of the audit is to confirm independently that each single coin on the platform is matched by our reserves,” he said.

Last week, an unaudited proof of reserves handled by blockchain evaluation firm Nansen showed that Crypto.com held 20% of its assets in shiba inu, a so-called “meme token.” Asked about this Monday, Marszalek said this was just a mirrored image of the assets Crypto.com customers were buying.

“We store whatever our customers buy and it so happens that last yr doge and shib were two extremely hot meme coins,” he said. “So long as our users are holding it, we will likely be holding it. Now we have no control over what you guys buy.”

He added that Crypto.com has never used its CRO token as collateral for any loans in its history. A source told CNBC previously that Bankman-Fried’s Alameda was borrowing from FTX and using the exchange’s FTT token to back those loans.

Marszalek admitted that Crypto.com had transferred $1 billion to FTX over a yr but that this was geared toward “hedging” customers’ orders. Crypto.com “only had exposure of under $10 million when FTX shut down,” he added.

“The best way the brokerage a part of our business works is that, each time a customer places an order to purchase or sell, we have now multiple venues where we could hedge this order and we pick probably the most cost efficient one with [the] best liquidity, lowest cost so we will pass on these savings to our customers,” Crypto.com‘s CEO said.

“Because of this we will not be taking any market risk, we’re all the time market neutral. However it also means there have to be fund flows between our venue and other venues within the industry and FTX was one in every of them.”

Crypto.com has 70 million users globally and made revenues of $1 billion annually in each 2021 and 2022, based on Marszalek. The corporate made headlines in 2021 for some mega marketing deals, including the rebranding of the Staples Center sports stadium to Crypto.com Arena and a business featuring celebrity actor Matt Damon.

– CNBC’s Kate Rooney and Paige Tortorelli

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