What is next for the FTX fallout?

Sam Bankman-Fried’s crypto empire, FTX, was an epic mess, and the unwinding is likely to last longer than the empire itself.

Crypto companies, investors and government officials who heard policy pitches and pocketed political donations from the FTX founder, known as SBF, are reeling. The Ontario Teachers’ Pension Plan said Thursday that it was writing down a $95 million investment in FTX. Coinbase, the only publicly listed crypto exchange in the United States, has seen stock and bond prices descend as the digital asset industry struggles. And crypto values, which fell dramatically over the summer, dropped further.

FTX is not your average failed company. John Ray, who handled Enron’s bankruptcy and was named CEO of FTX when it filed for Chapter 11 protection, said that he had found very little documentation of finances and that what did exist couldn’t be trusted. He told the Bankruptcy Court that he had never seen a situation as chaotic as what he was running into at FTX.

More than 100 affiliated companies are filing for bankruptcy with FTX. A million or more creditors could line up. The situation is so dire that FTX has said it doesn’t know who its top creditors are or where many assets can be found.

At this stage, there are many more questions than there are answers about what the reverberations of FTX’s collapse will look like. Here are three of the biggest.

Who is next?

Crypto companies are deeply intertwined — they invest in one another, buy one another’s tokens and lend tokens and capital to one another — which means the collapse of FTX could topple others.

“Many trading firms will be wiped out and shut down,” crypto venture firm Multicoin Capital told investors in a letter Thursday, explaining that it had put too much money and trust in FTX.

Crypto lender BlockFi, which signed a deal to be rescued by FTX when crypto prices nose-dived over the summer, paused withdrawals last week and is preparing for a possible bankruptcy. BlockFi said it had “significant exposure” to the failed exchange and FTX’s trading arm, Alameda Research.

Industry insiders expect more firms to follow.

Two restructuring advisers told DealBook that Oxygen, a decentralized finance lending and borrowing platform backed by Alameda, was on their watch lists. Oxygen’s token is OXY; its total market capitalization, which was about $395 million in January, has fallen to about $2.6 million.

Genesis Global Capital, one of the largest lenders in the crypto space, suspended withdrawals and new loans Wednesday. Genesis, which may have lost as much as $175 million in the FTX collapse, is struggling to pay back creditors who have asked for their money back. A spokesperson for Genesis said that its nonlending businesses were operating without problems and that it was “shoring up the necessary liquidity” it needed to operate.

Genesis is connected to many other firms. Its parent, Digital Currency Group, owns the publication CoinDesk and the investment firm Grayscale, a substantial crypto holder, among other entities.

Is SBF going to prison?

“That’s the million-dollar question. Everything is on the table,” said Joe Rotunda, director of the enforcement division of the Texas State Securities Board, which began investigating FTX before its collapse.

The complexity of the international FTX empire, messy record-keeping, unreliable statements and the anonymous nature of transactions on the blockchain complicate matters for investigators and prosecutors building cases. They need to do forensic audits and resolve jurisdictional issues.

“Bad investments don’t necessarily mean prison. The big one is fraud. That’s the big hammer,” Rotunda said. “Concealing or lying. Words and conduct. There’s a duty to truthfully disclose.”

Bankman-Fried also faces civil litigation from big backers and venture capitalists, who began developing strategy with lawyers before the bankruptcy (and expect to face claims themselves from their limited partners), as well as small investors.

Prosecutors will have to establish a physical tie between the company and harm in the United States for each charge; to the extent investors in the United States were defrauded, that would establish jurisdiction, Rotunda said. In Texas, the most severe securities law frauds are subject to a life term in prison, and his agency works with prosecutors to pursue those charges, just as the Department of Justice and Securities and Exchange Commission jointly prosecute and are investigating Bankman-Fried now.

“The civil suits will come before the criminal suits,” said Paul Foley, a securities law expert at the law firm Akerman. “Anyone who invested in FTX would have a lawsuit. But it’s a lot more difficult to make a criminal case than a civil case.”

This article originally appeared in The New York Times