Crypto exchange FTX faces a turbulent week as it seeks judicial approval for a $3.4 billion asset liquidation strategy. This move has invited scrutiny from U.S. regulators, primarily the U.S. Trustee, the bankruptcy branch of the Department of Justice. The proposal is set to be examined on Wednesday by Delaware Bankruptcy Court officials.
The U.S. Trustee initially raised objections to FTX’s liquidation strategy, asserting that FTX must publicly announce any intention to offload substantial assets like bitcoin (BTC) or ether (ETH). This concern stems from the potential market disruption that could ensue from selling off such significant amounts.
In a compromise, FTX has promised to maintain a backchannel with the U.S. Trustee and committees representing its creditors, updating them privately on the proposed transactions. This arrangement intends to limit the proposal’s market-impacting revelations, considering that even the hint of a massive sale could send crypto markets into a downward spiral.
The Multibillion-Dollar Portfolio
As of early 2023, FTX’s holdings include $685 million in locked Solana tokens, $529 million in FTT tokens, $268 million in Bitcoin, $90 million in Ethereum, and hundreds of millions in other cryptocurrencies like Aptos, Dogecoin, Polygon, XRP, and stablecoins. An additional $1.2 billion is held in crypto on third-party exchanges. The stakes are high: FTX aims to sell up to $100 million worth of tokens weekly, a limit that could climb to $200 million on a token-to-token basis.
If the court approves the asset sale, analysts predict a substantial market downturn, particularly for Solana, one of FTX’s largest holdings. However, some market watchers argue that most of the Solana tokens are locked under a vesting schedule until 2025, reducing immediate liquidation fears.
The LayerZero Lawsuit
Complicating matters further is a $21 million lawsuit filed against LayerZero, an on-chain interoperability protocol. FTX accuses LayerZero of acting in bad faith and has leveled multiple charges, including fraudulent transfers and property recovery. The exchange seeks to recover assets transferred to wallets controlled by LayerZero’s former COO and a subsidiary, potentially affecting the exchange’s financial standing and its liquidation plan.
As Evgen Verzun, the Founder of Kaizen.Finance, aptly pointed out, market history has shown that significant asset sales can trigger declines. This time appears to be no exception, and anticipation lingers that the crypto market may experience a downturn once the selling begins.
