The price of Bitcoin has touched a two-year low after the world’s biggest cryptocurrency exchange pulled out of a deal to rescue its smaller rival.
The price of other digital coins also fell after Binance scrapped its deal to buy FTX, citing due diligence concerns.
It has left FTX customers unable to make withdrawals from the exchange, which is used to buy and sell various digital tokens.
There are also fears of further crypto market volatility if FTX goes bust.
On Thursday Bitcoin fell below $16,000 (£14,049) for the first time since 2020 as investor confidence was hit by the news.
Ethereum, another popular digital coin, also tumbled before regaining ground.
Concerns about FTX’s financial health reportedly triggered $6bn (£5.2bn) of withdrawals in just three days.
“I thought FTX was safe” one customer told the BBC.
“I’ve got about $3,000 (£2,630) worth of coins in my own crypto wallet but more worrying is that I invested $33,000 (£28,900) for my mum and step dad through the app. I don’t yet have the heart to tell them what’s happened.”
Binance said reports of “mishandled customer funds and alleged US agency investigations” had swayed its decision not to buy FTX.
The Reuters news agency reported that the US Securities and Exchange Commission (SEC) was investigating FTX’s handling of customer funds and its crypto-lending activities.
The markets regulator is also examining whether the platform has broken securities laws with regards to how it has used customer assets.
Binance said in a statement posted on Twitter that the issues facing FTX were “beyond our control or ability to help”.
“Every time a major player in an industry fails, retail consumers will suffer. We have seen over the last several years that the crypto ecosystem is becoming more resilient and we believe in time that outliers that misuse user funds will be weeded out by the free market.”
The exchange added that “as regulatory frameworks are developed and as the industry continues to evolve toward greater decentralisation, the ecosystem will grow stronger”.
FTX’s founder Sam Bankman-Fried and Binance’s chief executive Changpeng “CZ” Zhao are two of the most powerful people in the cryptocurrency market and high-profile rivals.
FTX was approached for comment.
A notice on its website said: “FTX is currently unable to process withdrawals. We strongly advise against depositing.”
The pressure on FTX came in part from Mr Zhao, who had tweeted on Sunday that Binance would sell its holdings of FTX’s digital token, known as FTT. The token has lost around 90% of its value this week.
Binance stepped in on Tuesday, saying it had signed a letter of intent to buy FTX’s non-US unit. But it added it had “the discretion to pull out from the deal at any time”.
Mr Zhao tweeted on Wednesday: “Sad day. Tried, but [crying emoji]”.
Bitcoin dropped below $16,000 after Binance pulled out of the deal before regaining some ground, while shares in cryptocurrency exchange Coinbase fell by more than 9.5%.
Meanwhile, venture capital firm Sequoia Capital said it will completely write off its more than $210m investment in FTX, as the cryptocurrency exchange is at risk of bankruptcy.
“Based on our current understanding, we are marking our investment down to $0,” the company said in a statement posted on Twitter.
April Joyner, a correspondent at Business Insider in New York, told the BBC’s Today programme the problems at FTX could be quite serious.
“If FTX were to go under a lot of people could potentially lose their money depending on what’s going on there,” she said.
“It’s also led to a lot of turmoil on crypto markets – we’ve seen prices of Bitcoin, Etherium etc fall and so there’s a lot of distress and worries about the crypto markets right now.”
Ms Joyner said the “different players” in cryptocurrency firms were “very enmeshed” with each other which meant “if one entity has some sort of weakness it can bring down a lot of other players”.
There is a growing list of cryptocurrency businesses that have failed because of a lack of cash reserves.
Adding to the pressure, the SEC and other regulators have been ratcheting up scrutiny of the industry as concerns grow about how crypto platforms are trading.
Earlier this year, a subsidiary of crypto firm BlockFi agreed to pay a record penalty to settle charges related to its retail lending product.(BBC)
