Chinese investors scramble to recoup their losses in FTX
Customers left with little chance of remedies for unprotected investments in bankrupt exchange
FTX customers in China are seeking remedies to lost funds after losing thousands of dollars in unprotected investments on the bankrupt cryptocurrency exchange, which had 8 per cent of its users in the country although local laws ban the trade.
One investor who declined to be named said he joined three WeChat groups last month, each consisting of more than 400 victims searching for possible solutions, but all the groups were dissolved within days as discussions of cryptocurrency-related topics are strictly censored on Chinese social media platforms.
Another FTX user turned to uncensored platforms such as Telegram, which is blocked in China, but he found only one inactive group with just eight members. He has US$15,000 stuck in FTX and does not expect to see his money again.
Both investors have long engaged in cryptocurrency trades on their own because letting others know could result in legal investigations or even charges under Chinese regulations.
FTX suspended withdrawals last month following a liquidity crisis, and the platform declared bankruptcy on November 11.
The filing said founder and former chief executive Sam Bankman-Fried had put the exchange’s user base at 1 million as of August. With 8 per cent in China, as specified in a separate filing, that would mean 80,000 FTX customers were in the country.
Beijing cracked down on cryptocurrency for years before intensifying efforts last year. In September 2021, the central bank suggested foreign exchanges serving Chinese citizens were engaging in illegal activity. It reiterated that individuals and organisations trading cryptocurrencies should “bear the losses themselves”.
Harsher rules have made investment more difficult for Chinese traders, who use tools such as virtual private networks to connect to foreign exchanges for buying and selling cryptocurrencies.
China was the third-largest market for FTX by user base, tied with Britain, after the Cayman Islands and the Virgin Islands, according to a bankruptcy filing.
Major exchanges like Huobi and Binance, both founded in China but which relocated overseas after a 2017 crackdown, started to kick out Chinese customers last year after the September policy. FTX, however, continued to accept Chinese passports for know-yourcustomer identity verification.
Local propaganda outlets have used FTX’s collapse as a justification for Beijing’s strict cryptocurrency ban.
“Fortunately, Chinese regulators have taken a hard line on cryptocurrencies, avoiding the flow of many resources into this area and avoiding losses for many people,” the Securities Times said in a November 17 article. The newspaper is overseen by People’s Daily, the Communist Party’s mouthpiece.
Two years ago, Zhao Dong, founder of cryptocurrency lender RenrenBit and shareholder of exchange Bitfinex, warned Bankman-Fried had a floating loss of US$12 million on Bitfinex. Zhao questioned whether Bankman-Fried “used his own money or the clients’ from FTX”.
Bankman-Fried said at the time the fund was “personal” and the losses on Bitfinex were “a hedge against shorts elsewhere”. FTX also said “user funds will never be embezzled to participate in any transactions”.
However, FTX reportedly lent US$10 billion from customer accounts to its affiliated derivatives trading platform, Alameda Research, and FTX executives including Bankman-Fried were aware of the decision, according to The Wall Street Journal.