Binance has pulled out of a plan to buy out its struggling rival, FTX, pushing the smaller company to the verge of bankruptcy following a spike in withdrawals.
FTX was formerly believed to be in good shape and was led by Sam Bankman-Fried, one of the most well-known individuals in the cryptocurrency business. The business raised $400 million from Softbank and others in January to value itself at $32 billion, and as recently as last month, it was discussing its own aggressive acquisition intentions.
However, FTX abruptly stopped allowing customer withdrawals yesterday (a sign of many crypto collapses to come), and Changpeng Zhao, the CEO of Binance, who goes by CZ, tweeted that FTX had “called for our help” and a rescue agreement had been made.
In his own thread, Bankman-Fried said that customers’ money was now safe and withdrawals would be processed in time. “A *huge* thank you to CZ, Binance, and all of our supporters,” he wrote. “CZ has done, and will continue to do, an incredible job of building out the global crypto ecosystem, and creating a freer economic world.”
Another high-profile failure was the last thing the industry needed after a year in which trust in cryptocurrency enterprises had already been shattered by the demise of the Terra-Luna stablecoin, lender Celsius, and hedge fund Three Arrows Capital. FTX appeared to have survived its own problem.
Today, however, Binance announced that the acquisition had fallen through, citing the findings of corporate due diligence and news articles about FTX’s improper management of user assets.
Genesis of the problem for FTX
When Binance, an early investor in the exchange, sold its investment in its competitor for $2.1 billion worth of FTT, a token developed by FTX, it was the beginning of FTX’s problems. At the time, the decision was viewed as a reasonable parting of ways because Bankman-Fried and CZ had developed a gap over how to regulate cryptocurrency.
The issues for FTX didn’t arise until last week, when a CoinDesk investigation seemed to indicate that the sibling business of FTX, Alameda Research, had billions of dollars in FTT clogging up its bank sheet.
The finding led to concerns regarding FTX and Alameda’s exposure to FTT, which cannot be easily converted back into cash. (For a long time, it was unclear exactly how Alameda and FTX were connected.)
In response, CZ dropped a bombshell on Twitter: Binance would sell off its entire FTT holding. He claimed the intention was to sell “in a way that minimizes market impact,”. However, the news resulted in a sharp decline in the price of FTT (the token has lost approximately 90% of its value), as well as an increase in withdrawals at FTX as users became frightened about the security of their cryptocurrency.
On November 7, Bankman-Fried first refuted reports of insolvency by asserting that “FTX is fine” and that “a competitor is trying to go after us with false rumors.” (These tweets were later removed.) Later, it became evident that the corporation was rushing to get a bailout.
CZ has denied claims that he deliberately created a liquidity crisis at FTX—“I spend my energy building, not fighting,” he tweeted on November 7—but Tim Mangnall, whose company Capital Block has consulted for both Binance and FTX, says this was a “shrewd” business maneuver by CZ, one that allowed him to “buy one of his biggest competitors for pennies on the dollar.”