Here’s How Binance Orchestrated the FTX Deal

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Last Updated on November 9, 2022 by Bitfinsider

The world of cryptocurrencies was rattled on Tuesday when one of the top exchanges for digital currencies was bailed out by a major competitor in a move that highlighted the dangers of the industry’s volatility.

The tweet that started it all

Binance, the largest cryptocurrency exchange in the world, announced that it has reached an agreement to acquire its rival FTX, which had failed to handle a spike of withdrawals in recent days as the cryptocurrency market teetered on the brink of another disaster. The acquisition’s worth could not be determined immediately, but privately held FTX was originally valued at $32 billion.

The impromptu negotiations emphasized the continued fragility of the crypto business, which was rocked this spring by a $2 trillion crisis that devastated the funds of numerous amateur investors. This decline destabilized some of the crypto industry’s largest enterprises, with FTX suffering the most. It was largely considered as one of the most agile and well-managed crypto firms until its finances began to crumble almost immediately.

If the transaction goes through, it will join two of the largest crypto companies and solidify Binance’s founder Changpeng Zhao’s position as one of the most influential players influencing the future of the loosely regulated cryptocurrency industry.

The agreement was announced as crypto markets, which have suffered catastrophic losses this year, were on the verge of further panic. There were rumors circulating that FTX’s financial roots were unstable. Customers who use FTX to purchase and hold digital currencies hurried to withdraw their funds. Monday evening, the crypto research firm Nansen revealed that over half a billion dollars had left the platform in the preceding day.

FTX reportedly stopped processing withdrawals entirely, on Tuesday, The exchange appeared to have experienced a “liquidity crisis,” in which it lacked sufficient money to meet withdrawal requests.

“This afternoon, FTX requested our assistance,” Mr. Zhao tweeted on Tuesday, outlining how Binance reached an agreement to acquire FTX. He stated that Binance intended to “completely buy” in order to alleviate the burden on the exchange, but added that the arrangement was “nonbinding.”

In an internal note to FTX employees, Sam Bankman-Fried, the exchange’s chief executive, apologized for not being communicative recently and reported that the company had experienced approximately $6 billion in net withdrawals over the previous 72 hours, compared to tens of millions of dollars on an average day.

Mr. Bankman-Fried noted in the note acquired by The New York Times that he had made mistakes. “I apologize,” he added, saying that the majority of the transaction’s details with Binance “have not yet been worked out.”

Mr. Bankman-Fried thanked Mr. Zhao on Twitter for making a transaction, which he said would help FTX to “eliminate liquidity shortages.” FTX is situated in the Bahamas, where it provides unlicensed trading services in the United States. In his tweets, Mr. Bankman-Fried stated that the company’s smaller U.S. operation, FTX.US, was processing withdrawals and would not be a part of the transaction with Binance.

A spokesperson for FTX stated that the company had no comment beyond the tweets. A representative of Binance did not respond to a request for comment.

The deal was a humiliating setback for Mr. Bankman-Fried, 30, who had become one of the crypto industry’s most influential personalities during the past two years. As part of an aggressive marketing strategy, he bought the naming rights to the Miami Heat’s arena and launched a lobbying campaign to influence crypto regulation in Washington. In addition to being a prominent political donor, he contributed $5,6 million to Joseph R. Biden’s 2020 election campaign.

When the cryptocurrency market fell in May, Mr. Bankman-Fried orchestrated deals to support struggling enterprises. He made an offer to acquire Voyager Digital, a publicly traded cryptocurrency lender that declared bankruptcy in July.

Last week, however, that was a leaked balance sheet looked to indicate that FTX’s sibling business, Alameda Research, was on unstable ground. Before establishing FTX, Mr. Bankman-Fried launched the hedge fund Alameda. The two businesses have substantial financial relationships.

The study revealed that the majority of Alameda’s assets were of FTT, a cryptocurrency that FTX created for traders to use on its platform. The revelation fueled concerns that a sudden decline in the price of FTT could precipitate a catastrophe for Alameda and FTX.

Mr. Zhao was an early investor in FTX, earning him a stake in the business. Later, Mr. Bankman-Fried repurchased the stock, partially with FTT. Mr. Zhao indicated over the weekend that Binance would be selling its FTT holdings, citing “new developments.”

The announcement sparked an argument between Mr. Zhao and Mr. Bankman-Fried in public. “A competitor is spreading false information about us,” Mr. Bankman-Fried tweeted on Monday. “FTX is perfect. “Assets are in good shape.”

But Binance’s actions also caused the price of FTT to skyrocket. On Tuesday, the price had plunged almost 63% in 24 hours. The remainder of the cryptocurrency market took a hit, with Bitcoin and Ether prices also tumbling.

Traders rushed to remove their coins off FTX’s platform as concerns increased that the company would be the next in a string of prominent crypto firms to fail. On Monday, more over $1.2 billion was taken from the FTX, Nansen reported that evening.

“There is a crisis of confidence here,” said Ed Moya, a crypto analyst at the trading firm OANDA. “Whenever a key token or coin that is related to a prominent crypto personality is unstable, there is always the possibility of spread and a far more serious moment of crisis.”

In addition to Mr. Zhao, Sequoia Capital, Lightspeed Venture Partners, and SoftBank were among the other big investors who supported FTX. According to PitchBook, which tracks private finance, FTX has secured over $2 billion in fundraising. Three investors in FTX described their astonishment at the Binance acquisition and its implications for bitcoin start-ups.

According to a copy of the email acquired by The Times, Mr. Bankman-Fried emailed investors at 11 a.m. Pacific time with news of the transaction. In it, he stated that FTX’s shareholders were the company’s “second priority” and that he was more concerned with protecting consumers and “the industry” as the company’s “first priority.”

“I regret not performing better,” he concluded. The Newcomer newsletter reported the letter earlier.

The transaction boosts Binance, which operates primarily outside the United States but lacks a central office. Binance has established its business by providing a vast selection of cryptocurrencies on its platform, in addition to trading choices that are illegal in the United States. Forbes has long placed Mr. Zhao as the world’s wealthiest crypto billionaire, with a net worth of $17.4 billion.

However, Binance, which also operates a smaller U.S. operation, has been subject to regulatory scrutiny from the Securities and Exchange Commission, and much of its business practices are kept secret. According to CoinMarketCap, an industry data collector, Binance conducts up to $76 billion per day in crypto exchanges, while its exact valuation is unknown.

A few days earlier, Mr. Bankman-Fried deleted a tweet in which he joked that Mr. Zhao would not be permitted to visit Washington, an apparent reference to regulatory monitoring. Mr. Zhao is now set to assume control of his company.

In a note he sent to FTX employees on Tuesday, Mr. Bankman-Fried indicated further details regarding the purchase would be forthcoming. He said, “Let’s live to fight another day.”

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