Crypto News, Nov. 18: Proof-of-Reserves and a Battle in the Bahamas

Revelations that FTX used billions in customers’ funds to shore up his teetering trading firm have shaken crypto investors. Many have pulled their tokens off centralized exchanges as a result. Now, those exchanges are scrambling to improve industry transparency. Their tool of choice is the proof-of-reserves audit, which combines blockchain data accuracy with the trust an outside auditor brings.

The sudden failure of the FTX exchange was really just the latest and largest of the string of crypto companies that went under as a result of the Terra/LUNA stablecoin collapse, a new analysis argues. Blockchain analytics firm Nansen found that  the FTT tokens that FTX created and that Alameda profited from and eventually used to prop up a multi-billion-dollar hole in its balance sheet when the stablecoin failure slammed markets. When it was revealed how much of Alameda’s balance sheet was in FTT, spooked customers ran for the exit. With FTT’s price collapsing, liquidity dried up and it couldn;t meet withdrawal requests.

The Securities Commission of The Bahamas said it has seized a huge chunk of bankrupt crypto exchange FTX’s funds. It is apparently seeking to take partial if not total control of the proceedings from U.S. courts. This has outraged FTX’s newly appointed restructuring management team, which accused it of violating a U.S. Bankruptcy Court order freezing all assets of Sam Bankman-Fried’s bankrupt crypto trading empire. It also accused bankman-Fried of complicity.

For the past couple of days, there has been a lot of hand wringing about the spike in cryptocurrency outflows from centralized exchanges. “Where are those funds going when they leave centralized exchanges? Mostly to other centralized exchanges,” blockchain intelligence firm Chainalysis said. As the spike falls back to normal, BTC flowing to decentralized exchanges is more about a spike in trading follows growing market volatility. One big factor? The FTX collapse is proving to be about one firm’s malfeasance, not market factors.

The crypto industry is waiting for the other shoe to drop as a number of large exchanges have suspended withdrawals of USDC and USDT stablecoins — but only the ones on the Solana blockchain. The simultaneous but unexplained actions by top exchanges Binance, OKX and ByBit have confused even USDC-issuer Circle. It revealed that in a tweet that emphasized that all its stablecoins were 100% backed by reserves. The only news was that Binance released the freeze on Solana USDT after several hours.