Federal prosecutors are investigating whether FTX’s founder, Sam Bankman-Fried, manipulated the marketplace for two cryptocurrencies this past spring, resulting in their collapse and making a domino effect that eventually caused the implosion of his own cryptocurrency exchange last month, in accordance with two individuals with knowledge of the matter.
U.S. prosecutors in Manhattan are examining the likelihood that Mr. Bankman-Fried steered the costs of two interlinked currencies, TerraUSD and Luna, to learn the entities he controlled, including FTX and Alameda Research, a hedge fund he co-founded and owned, the people said.
The investigation is in its early stages, and it will not be clear whether prosecutors have determined any wrongdoing by Mr. Bankman-Fried, or once they began taking a look at the TerraUSD and Luna trades. The matter is an element of a broadening inquiry into the collapse of Mr. Bankman-Fried’s Bahamas-based cryptocurrency empire, and the potential misappropriation of billions of dollars in customer funds.
Federal prosecutors and the Securities and Exchange Commission have been examining whether FTX broke the law by transferring its customer funds to Alameda. Last month, a run on deposits exposed an $8 billion hole within the exchange’s accounts, causing the corporate to collapse. Mr. Bankman-Fried stepped down as FTX’s chief executive when the corporate filed for bankruptcy on Nov. 11.
FTX can also be under investigation for violating U.S. money-laundering laws that require money transfer businesses to know who their customers are and flag any potentially criminality to law enforcement authorities, three people accustomed to the investigation said. That investigation, first reported by Bloomberg News, began several months before the bankruptcy of FTX. Investigators are also looking into the activities of other offshore cryptocurrency trading platforms.
The Aftermath of FTX’s Downfall
The sudden collapse of the crypto exchange has left the industry stunned.
In an announcement, Mr. Bankman Fried said he was “not aware of any market manipulation and positively never intended to have interaction in market manipulation.”
“To the perfect of my knowledge, all transactions were for investment or for hedging,” he added.
Representatives of the U.S. attorney for the Southern District of Latest York declined to comment. Representatives of FTX didn’t immediately reply to requests for comment.
The deal with possible market manipulation adds to the legal storm brewing around Mr. Bankman-Fried. It is prohibited for a person to knowingly stage market activity designed to maneuver the value of an asset up or down.
TerraUSD was a so-called stablecoin, but unlike other stablecoins, its value wasn’t backed directly by the U.S. dollar. Somewhat, it maintained its value from a second coin called Luna through a posh set of algorithms. Traders throughout the digital ecosystem could mint these coins, the costs of which might fluctuate based on what number of were in circulation. Anytime the value of TerraUSD fell, the availability of Luna would increase, as traders created more Luna to attempt to capitalize on the difference.
In May, major cryptocurrency market makers — exchanges or individuals who arrange for buyers and sellers to be matched — noticed a flood of “sell” orders coming in for TerraUSD, said one person with knowledge of the market activity. The orders were in small denominations, but they were placed in a short time, the person said.
The sudden jump in sell orders for TerraUSD overwhelmed the system, making it hard to search out matching “buy” orders for them. Under normal conditions, any sell orders that remained unfulfilled for too long could be matched with buy orders at a cheaper price. The longer the orders lingered without being matched, the more they forced down the value of TerraUSD and caused a corresponding drop in Luna prices due to the best way the 2 coins were linked.
The precise causes of the collapse of the 2 cryptocurrencies remain unclear. Nevertheless, the majority of the sell orders for TerraUSD seemed to be coming from one place: Sam Bankman-Fried’s cryptocurrency trading firm, which also placed an enormous bet on the value of Luna falling, in accordance with the person with knowledge of the market activity.
Had the trade gone as expected, the value declines in Luna could have yielded a fat profit. As an alternative, the underside fell out of your complete TerraUSD-Luna ecosystem. The collapse caused more trouble within the cryptocurrency industry, sending several distinguished corporations out of business and erasing about $1 trillion in value from the crypto market.
The ripple effects from the Luna crash ultimately contributed to the collapse of Mr. Bankman-Fried’s business empire. In November, Caroline Ellison, the chief executive of Alameda, told staff that loans to Alameda were recalled in consequence of the market chaos unleashed by the crash, in accordance with an individual accustomed to the matter. However the funds that Alameda had borrowed were not easily available, Ms. Ellison told the staff, so the corporate used FTX customer funds to make the payments.
An attorney for Ms. Ellison didn’t return requests for comment.