FTX Collapse Sparks Contagion Fears as Crypto.com Withdrawals Jump

The FTX logo and mobile app adverts are displayed on screens in London on Nov. 10, 2022. Leon Neal/Getty Images

The collapse of the crypto exchange FTX has triggered fears of a potential contagion spreading in the market, with withdrawals at another exchange, Crypto.com, jumping after it admitted to making a transaction mistake.

FTX, one of the largest crypto exchanges, filed for bankruptcy last week following a report by CoinDesk which revealed that the balance sheet of FTX’s affiliate trading company, Alameda Research, was largely composed of the exchange-issued FTT token.

“There was a balance sheet issue, and it became known to many depositors all at once … And because it was a surprise, there was a bank run that led to insolvency,” Sergey Nazarov, co-founder of Chainlink, said to TechCrunch.

The fear in the markets led to crypto exchanges publishing their “proof of reserves” (PoR) in a bid to calm down investor panic. PoR refers to independent audits which seek to affirm that a custodian possesses the assets it claims to own on behalf of its clients. Singapore-based Crypto.com was among the exchanges that published their PoR.

People quickly raised skepticism over a transaction done in October which saw 320,000 ETH ($400 million) being transferred from Crypto.com to a wallet address linked to another exchange, Gate.io. The amount represented around 82 percent of Crypto.com’s Ethereum (ETH) reserves.

Crypto.com CEO Kris Marszalek later clarified that the transaction was a mistake. It was originally intended to be moved to a “cold storage address,” but got accidentally sent to the Gate.io wallet. The ETH funds have been repatriated and sent into cold storage, he stated. (Cold storage refers to the practice of keeping a cryptocurrency offline in order to prevent unauthorized access.)

However, Marszalek’s explanation did little to calm fears. Between 7:00 p.m. EST, Saturday, and 5:30 a.m. EST, Sunday, users withdrew a net $14 million worth of ETH and $39 million worth of other tokens tied to the Ethereum network, according to a report by The Wall Street Journal, citing an investigation by blockchain analysis firm Argus.

Transaction Error

In a series of tweets on Nov. 13, Marszalek explained that fund movements from Crypto.com custody systems are only possible between approved and whitelisted addresses (i.e, an approved senders list) attached to the company’s cold wallets, hot wallets, and corporate accounts held at other exchanges.

The transfer of 320,000 ETH was done to a whitelisted address belonging to one of Crypto.com’s corporate accounts at Gate.io. “That’s all there is to it. All our systems are operating normally,” he said.

The value of Cronos, the digital token issued by Crypto.com, sank 20 percent on Sunday compared to the previous 24 hours. On Monday, roughly 98 percent of all transactions conducted on the Cronos blockchain were withdrawals, according to The Australian Financial Review.

Adam Cochran, founder of venture capital company Cinneamhain Ventures, raised concerns about Crypto.com in a tweet on Nov. 13.

“For what it’s worth, given the move of accidentally sending cold wallet funds to the wrong address, the weird balances on their CRO chain, the ‘partial’ cold wallet release, it’s not looking good for these guys in general,” he said.