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Trouble at AAX Exchange! May Collapse Next

According to a former executive, most of the employees of Hong Kong's AAX cryptocurrency exchange have left, and the company is not likely to reopen.

Photo by Micah Williams / Unsplash

According to a former executive, most of the employees of Hong Kong's AAX cryptocurrency exchange have left, and the company is not likely to reopen.

Former vice president and head of research Ben Caselin said that the Hong Kong cryptocurrency market Atom Asset Exchange (AAX) is unlikely to restart operations after freezing assets on the platform on November 13.

After the FTX exchange filed for bankruptcy on November 11, a number of cryptocurrency-related firms felt the effects. AAX was one of these enterprises, with as many as 121 staffers based on its LinkedIn profile (1), while Caselin indicated the figure was closer to 3X that.

Investors all over the world have begun removing their cryptocurrency from exchanges due to the widespread fear of further hacks. However, many investors' assets have been frozen as platforms suspended their services due to limited liquidity, leading to a downward spiral of investor wrath and distrust.

AAX claimed (2) on the day of FTX's bankruptcy that it had no significant ties to the company or its subsidiaries. A large portion of AAX's digital assets are kept in cold wallets, and user money is never put at risk due to counterparty risk in connection with any financing or venture activity, the statement reads.

Caselin resigned on Monday and claimed that the company's higher management had become uncommunicative and "opaque and messy."

Caselin stated that it took him several days after AAX's services were suspended on November 13 to realize the full extent of the company's troubles. At the time, AAX said that the freezing (3) was a security step in reaction to a spate of harmful attacks on the platform.

However, days later, staff were invited into crisis meetings to address AAX’s need for more funding, Caselin claimed, adding that different groups inside AAX began pressing to restore operations by either selling shares, a merger or acquisition, or issuing debt.

“Then everything ran into a wall,” he said, adding that “basically, all of the staff” were terminated or quietly resigned, as investor talks became buried in non-disclosure agreements, and communication with management froze." He said he didn’t know the whereabouts of other executives.

What's Next?

"To replace the money required to continue all our activities, AAX will have to seek new capital," the company announced in a press release (4) dated November 15. "While it is evident that this is a very tough climate in which to raise new capital, the amount is not enormous relative to market norms," the statement stated.

"Over the past week, we have received cash contributions from existing shareholders and have garnered interest on new investments. We now believe that thanks to our cash and other resources, we can launch our operations and services in full."

On the other hand, the Hong Kong-based South China Morning Post claimed on November 30 that AAX's market maker, 10kM Trading, had experienced financial difficulties previous to FTX's bankruptcy due to ineffective risk management methods.

According to an unsigned email the Post (5) claims to have received from 10kM Trading, the company claims it is "not suffering from major trading losses" and has no bearing on AAX. According to the Post, the company failed to provide a name or phone number. The 10kM Trading website boasts of the company as a "leading liquidity provider in the digital asset market."

Ben Caselin said he was unaware of the precise operation of 10kM Trading but noted that a few brokerage houses offered liquidity to AAX’s exchange.

In light of the recent asset freeze and rumors around possible connections to 10kM Trading, analogies have been made between AAX and the demise of FTX, which is said to have utilized client funds to support trading at its sister brokerage, Alameda Research.

There is concern that a large portion of FTX customer cash contributed to the US$8 billion hole in Alameda's balance sheet when it collapsed.

Users who have funds trapped in AAX have organized information-sharing groups like the "AAX Rights Protection Group" on Telegram, which has more than 2,000 members, in anticipation of a potential legal struggle. Users are looking for updates on the location of the AAX crew and the status of their frozen assets.

The worries concerning user money, according to Caselin, are warranted. The best case scenario, in my opinion, is to start the formal process of dissolving the corporation, with money being returned to users' cold wallets.

If a liquidation occurs and it is discovered that user funds are missing, the question of "where did that loss come from?" will become central.