Binance Global Inc.’s move to acquire the rival FTX.com cryptocurrency exchange happened real fast, like most developments in the crypto world.
The world’s biggest cryptocurrency exchange, valued at a reported US$300 billion and led by Changpeng Zhao, is stepping in as a backstop just days after reports of solvency problems at FTX.com – one of the world’s most prominent cryptocurrency businesses, valued at more than US$30 billion and led by 30-year-old billionaire Sam Bankman-Fried.
Changpeng Zhao, or CZ as the 45-year-old chief executive officer is known, said the deal will be conducted “in the coming days” while adding that Binance has the right to withdraw from the acquisition at any time, citing the “highly dynamic situation.”
How much CZ will pay for FTX.com, which runs crypto exchanges for non-U.S. residents, isn’t immediately available. However, FTX is reportedly seeking financing of as much US$6 billion to address a hole in its balance sheet, according to the Semafor news site, citing people familiar with the talks.
Bankman-Fried went to Silicon Valley and Wall Street for funding, before turning to Binance, Semafor said.
The FTX saga is another lesson about risk management, said Henry Liu, the CEO of the BTSE crypto exchange based in the British Virgin Islands.
“Risk management is key to sustainability in this fast-moving industry, and FTX’s situation proved the firm had grown too quickly,” said Liu.
“As for the acquisition, I see a low chance that it’ll happen cleanly. We expect there to be more fallout in the short term, as there are so many investors and counterparties to take into account. Ultimately, it’ll be down to Binance’s ability to maintain control of all these moving parts,” he added.
“This is a wake up call to exchanges everywhere to get their house in order.”
The quick escalation of the insolvency concerns at FTX also triggered worries about whether the crypto industry was facing another version of the Terra-Luna debacle in May this year, when a US$40 billion stablecoin project imploded.
That collapse caused losses for hundreds of thousands of investors and bankrupted a raft of companies with exposure to the project.
Concerns about a liquidity crisis at FTX got serious on Sunday when Binance said it would sell all its holdings of FTX’s native crypto token FTT, citing “recent revelations.”
CZ did not elaborate further, but many investors took this as a reference to an earlier leaked balance sheet from Sam Bankman-Fried’s crypto brokerage Alameda Research.
The leaked document reported by crypto news outlet Coindesk indicated that of Alameda’s estimated US$14.6 billion in assets, around 40% were made up of FTT tokens.
As Alameda is the largest market-maker on the FTX platform, having more than a third of the company’s assets made up the native token raised concerns among some investors about potential manipulation of FTT prices, said Justin D’Anethan, the institutional sales director at Amber Group, a Hong Kong-based digital asset platform.
“If FTX and Alameda are under the same control in terms of information, priority trading, setup visibility, or even potential market manipulation, they could play a lot of games on the platform that favors different coins, push prices in a certain way, and use insider information,” said D’Anethan.
Whatever the reason for Binance to announce the sale of its FTT, once the news broke, the token’s price plunged, falling more than 75% since Sunday. FTX internal data shows the exchange saw US$6 billion in withdrawals 72 hours after the announcement.
While it seems that the Binance announcement sparked the liquidity crisis that it has now stepped in to alleviate, CZ took to Twitter on Tuesday to say he had no malicious intent against FTX.
“There were a lot of theories going around, but the more obvious explanation is simply that these are two competing platforms, and so one is trying to get the upper hand over the other,” said D’Anethan.
As the price of FTT spiraled lower and holders began withdrawing funds from FTX following Binance’s Sunday statement, Alameda CEO Caroline Ellison tweeted the same day that the company would happily buy Binance’s FTT tokens for US$22 each.
But as the price of FTT dropped well below US$22, investors doubted whether the company had enough reserves to back that commitment.
While Binance representatives and Bankman-Fried did engage in some Twitter sparring as the FTT token price skidded this week, the FTX chief executive officer said in a Wednesday tweet all is seemingly forgiven.
“A *huge* thank you to CZ, Binance, and all of our supporters,” said Bankman-Fried. “CZ has done, and will continue to do, an incredible job of building out the global crypto ecosystem and creating a freer economic world.”
“Binance has shown time and again that they are committed to a more decentralized global economy while working to improve industry relations with regulators. We are in the best of hands,” said Bankman-Fried.
The deal with Binace will clear a liquidity crunch that began Tuesday night, with users unable to withdraw assets, he said. All assets will be restored, Bankman-Fried added.
The FTT token had a price bump after the acquisition announcement, but is trading at around US$4.6, down over 70% in 24 hours, according to CoinMarketCap. The 24-hour trading volume surged over 200%, as of 12:50 p.m. Hong Kong time
“FTX reaching out to Binance highlights the fact that they were not okay financially, and that the jitters in the market, and suspicions about their inability to fulfill obligations were correct,” said D’Anethan.
The issue now is one of containing the contagion.
Solana, which was the second largest token holding on Almedia’s balance sheet, has dropped around 30% over the past 7 days.
“When a player of that size goes bust, it means its lenders are not getting repaid… and all the token projects that Alameda was invested in will also suffer as Alameda does whatever it takes to cash out,” said D’Anethan.