By John McCrank and Alun John
NEW YORK (Reuters) -Regulators opened probes following last week's spectacular collapse of crypto exchange FTX and rival exchanges sought to reassure jittery investors of their own stability, weighing on cryptocurrencies on Monday.
The implosion of FTX, once a darling of the crypto industry with a $32 billion valuation as of January, has spurred investigations by the U.S. Justice Department, the Securities and Exchange Commission and Commodity Futures Trading Commission, a source with knowledge of the investigations said.
The SEC probe is also targeting FTX executives, their knowledge of the handling of customer funds and any potential breaking of securities laws, a second source with knowledge of the investigation said.
While the crypto industry has touted digital assets as fundamentally different from traditional finance, the sector has proven to be susceptible to the same risks and should be subject to the same rules, Federal Reserve Vice Chair Lael Brainard said on Monday.
"Crypto finance, because it is no different than traditional finance in the risks that it exposes, needs to be under the regulatory perimeter," she told Bloomberg in an interview, repeating a long-held view.
Separately, Michael Barr, the Fed's top regulatory official, signaled on Monday that stiffer oversight of cryptocurrencies are coming. This includes "safeguards" to ensure crypto companies are subject to similar rules as other financial firms, Barr said in written testimony released before an appearance at the Senate Banking committee on Tuesday.
U.S. Senator Sherrod Brown, a Democrat who chairs the committee, also weighed in.
"My focus has always been on the fraud, scams, volatility, and outright theft in the crypto industry," he said. "FTX’s bankruptcy and the many other recent instances of instability have proved why we need a comprehensive regulatory approach that protects consumers."
FTX filed for bankruptcy protection on Friday in one of the highest-profile crypto blowups after frenzied traders withdrew $6 billion from the platform in just 72 hours and rival exchange Binance abandoned a rescue deal.
Sam Bankman-Fried, FTX's former CEO, said his company had expanded too fast, according to an interview with the New York Times published on Monday.
Bitcoin, which hit a record high of $69,000 a year ago, slid back below $16,000 early on Monday before recovering to trade at $16,401, up 0.56% at 5:56 p.m. EST (2256 GMT).
CASCADING EFFECT
The rapid downfall of FTX, once a white knight for struggling crypto firms, sent shock waves through the crypto industry, which is bracing for further fallout.
LedgerX LLC, an FTX subsidiary, on Monday withdrew its request from last December with the U.S. Commodity Futures Trading Commission to allow it to offer products that are not fully collateralized.
Cryptocurrency lender BlockFi, which signed a deal with FTX to provide it with a $400 million revolving credit facility with an option to buy it for up to $240 million, said it has significant exposure to FTX.
Other crypto exchanges have been publishing details of their reserves and promising further disclosures in an attempt to soothe investor nerves amid unverified rumors.
Kris Marszalek, chief executive of Singapore-based crypto exchange Crypto.com, which made headlines in 2021 with a $700 million deal to rename the Staples Center in Los Angeles the Crypto.com Arena, rebutted suggestions it was in trouble.
In an "ask-me-anything" YouTube livestream, Marszalek said the exchange always maintained reserves to match every coin customers held on its platform and that an audited proof of Crypto.com's reserves will be published within weeks.
The move came after investors took to Twitter over the weekend to question a transfer of $400 million worth of ether tokens to the Gate.io exchange on Oct. 21.
Marszalek tweeted on Sunday that the ether was recovered and returned to the exchange, but the Wall Street Journal reported withdrawals at Crypto.com rose over the weekend.
A Crypto.com spokesperson did not respond to a request for comment on whether the platform's outflows continued on Monday.
Crypto.com is among the top 10 such exchanges by turnover globally, but smaller than FTX and market leader Binance.
Another crypto exchange, Kraken, said on Twitter on Sunday that it froze the accounts of FTX, affiliated crypto trading firm Alameda Research, and their executives.
"We have actively monitored recent developments with the FTX estate, are in contact with law enforcement, and have frozen Kraken account access to certain funds we suspect to be associated with 'fraud, negligence or misconduct' related to FTX," a Kraken spokesperson said.
Changpeng Zhao, CEO of Binance, the world's largest crypto exchange, said he would look to create an industry recovery fund to help projects that were "otherwise strong but in a liquidity crisis."
Binance last week signed a nonbinding letter of intent to buy FTX’s non-U.S. assets but later abandoned the deal, precipitating its bankruptcy. Zhao has since warned of a "cascading" crypto crisis.