BILLIONAIRE Changpeng “CZ” Zhao became the undisputed king of the crypto world on Tuesday, shocking the industry with a move to take over FTX.com, the troubled firm led by his chief rival and onetime disciple, Sam Bankman-Fried.
The letter of acquisition intent by Zhao’s Binance Holdings came after a bitter feud between the two men spilled into the open, with Zhao actively undermining confidence in FTX’s finances and helping spark an exodus of users from the three-year-old FTX.com exchange. A day before accepting the deal from Binance, Bankman-Fried said on Twitter that assets on FTX were “fine.” By Tuesday, he had changed his messaging.
Such moves would be prohibited on Wall Street but aren’t uncommon in this rough-and-tumble corner of finance, which remains largely devoid of regulation about a decade after its founding. Ironically, it was Bankman-Fried who was pushing for greater regulation, something that Zhao has largely opposed.
“I’m sorry I didn’t do better, and am going to do what I can to protect customer assets, and your investment,” Bankman-Fried wrote in a letter to investors. “I wish I had more details for you guys right now; I don’t yet,” the letter said.
After initially rising on the news, prices of cryptocurrencies tumbled, with terms of the deal scant and uncertainty swirling over whether it will even get done. Binance said the agreement came after “a significant liquidity crunch” befell FTX and the firm asked for its help. The takeover is a startling twist for FTX, whose 30-year-old founder had emerged in recent years as the ready-for-prime-time face of crypto and amassed a fortune approaching US$20 billion.
The acquisition — which doesn’t involve FTX.US, a separate exchange also founded by Bankman-Fried — will reshape the more than US$1 trillion industry that is already dealing with a prolonged market downturn. The two founders made the announcement on Twitter concurrently. “To protect users, we signed a non-binding LOI, intending to fully acquire FTX.com and help cover the liquidity crunch,” Zhao said in a tweet.
FTX was hit with about US$6 billion in withdrawals in the 72 hours before Tuesday morning, Reuters reported, citing a message sent to staff by Bankman-Fried.
“Our teams are working on clearing out the withdrawal backlog,” Bankman-Fried said on Twitter. “This will clear out liquidity crunches; all assets will be covered 1:1. This is one of the main reasons we’ve asked Binance to come in.”
It’s fast comeuppance for Bankman-Fried, no stranger to bare-knuckled exploits in his role as founder of Alameda Research, the crypto trading firm whose fate was left unmentioned in the tweets announcing the bailout. The former Jane Street trader has been unapologetic about Alameda’s willingness to pounce on profit opportunities in the wild-west crypto space, framing it as part of a long-term plan to give away billions to charity.
FTX.com was valued as recently as January at US$32 billion in a fundraising round from investors including Temasek, Paradigm, Ontario Teachers’ Pension Plan Board and SoftBank Vision Fund 2.
Bitcoin swung between gains and losses, dropped below US$19,000 for the first time since Oct 21. BNB, the native token of the Binance blockchain, did the same and was down about 5% after initially jumping as much as 15%.
This afternoon, FTX asked for our help. There is a significant liquidity crunch. To protect users, we signed a non-binding LOI, intending to fully acquire https://t.co/BGtFlCmLXB and help cover the liquidity crunch. We will be conducting a full DD in the coming days.
— CZ 🔶 Binance (@cz_binance) November 8, 2022
For the crypto industry broadly, FTX’s demise is another example of a once-towering player laid low when a crisis of confidence forced a run on its assets. Like others before it, including lenders Celsius Networks and hedge fund Three Arrows Capital, reserves proved inadequate when market sentiment turned against it, even as top executives said nothing was amiss.
The tension between Bankman-Fried and Zhao has been brewing almost since the start. Back in 2019, Binance invested into FTX, then a derivatives exchange. The next year, Binance launched its own crypto derivatives, quickly becoming the leader in this space.
Tensions rose as the two companies increasingly had been seen as different by regulators. Bankman-Fried was testifying in Congress, while Binance was said to be facing regulatory probes around the world and emphasised that it’s not headquartered anywhere.
The two companies have also been competing for assets, with both bidding for assets of Voyager Digital. FTX won the auction of Voyager.
The drama reached fever pitch on Sunday, when Zhao announced he would sell all of his FTT holdings, the native token of FTX exchange, worth US$529 million at the time due to “recent revelations that came to light.” The tweet followed a story from CoinDesk saying that Alameda Research, a trading house owned by Bankman-Fried, had a lot of its assets in FTT token. FTT tumbled by more than 70% to around US$6, according to prices on CoinMarketCap.
Binance is the largest crypto exchange by far, with trading volume of about US$40 billion so far today. FTX is second in spot trading, with volume of about US$4 billion, according to CoinMarketCap data. CoinMarketCap is owned by Binance. – BLOOMBERG