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Changpeng Zhao, founder, and chief executive of Binance. “This afternoon, FTX asked for our help,” Mr. Zhao said on Twitter on Tuesday. |
The world of cryptocurrencies was rattled on Tuesday when one of the biggest exchanges for digital currencies, which appeared to be on the point of collapsing, was saved by a significant rival in a move that highlighted the dangers of the volatile market.
The largest cryptocurrency exchange in the world, Binance, announced that it has reached a deal to acquire rival FTX. FTX had been struggling to keep up with a recent rise in withdrawals as the cryptocurrency market teetered on the brink of another collapse. It was not immediately possible to estimate the size of the acquisition, but the privately held FTX was originally valued at $32 billion.
The last-minute deals showed the industry's ongoing instability, which was brought to a halt last spring by a $2 trillion crash that wiped out many novice investors' cash. Some of the top cryptocurrency companies were destabilized by that collapse, but FTX was by far the biggest victim. Up until its finances started to fall apart almost immediately, it was largely considered one of the most agile and well-run cryptocurrency startups.
Comparisons between the unexpected catastrophe and the fall of Lehman Brothers, the investment bank whose demise contributed to the start of the 2008 financial crisis, were made.
According to Cory Klippsten, a Bitcoin entrepreneur who is critical of the rest of the crypto business, many of the large crypto companies "are inherently weak, susceptible to a Lehman-like collapse at any time." "When under siege, the only option is for another player to save them."
If the purchase is approved, it will bring together two of the biggest cryptocurrency businesses and solidify Changpeng Zhao, the founder of Binance, as one of the most important players influencing the direction of the unregulated cryptocurrency sector.
The agreement was made as the cryptocurrency markets, which have suffered terrible losses this year, were about to see further panic. There were rumors that FTX's financial stability was precarious. Numerous users of its FTX service, who use it to purchase and store their digital currencies, hurried to withdraw their money. The cryptocurrency analysis company Nansen announced on Monday night that over $500 million had left the network the previous day.
According to the Block, a crypto research company, FTX briefly stopped handling withdrawals on Tuesday. The exchange appeared to be in a "liquidity crisis," meaning it lacked the funds to process all of the withdrawal requests that were made.
Mr. Zhao described how Binance had reached the agreement to purchase FTX on Twitter on Tuesday, writing, "This afternoon, FTX requested our support." To assist relieve the burden on the exchange, he said Binance planned to "completely buy FTX.com," although he stressed that the arrangement was "nonbinding."
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
Sam Bankman-Fried, the exchange's CEO, apologized for not communicating with staff members recently and noted that the company has experienced $6 billion in net withdrawals during the preceding 72 hours as opposed to tens of millions of dollars in inflows and outflows on an average day.
The New York Times was able to secure a copy of the note that Mr. Bankman-Fried included, in which he acknowledged making errors. He apologized and said that many of the specifics of the deal with Binance "still aren't worked out."
Mr. Bankman-Fried expressed his gratitude to Mr. Zhao for striking a deal on Twitter, saying that it would enable FTX to "clear out liquidity bottlenecks." FTX is situated in the Bahamas and provides trading services there that are not permitted in the US. The business also has a more modest operation in the United States; according to Mr. Bankman-tweets, Fried's FTX.US was handling withdrawals and wouldn't be included in the agreement with Binance.
The corporation had no more comments on the tweets, according to an FTX representative. Requests for comment from a spokesperson for Binance were not answered.
The deal was a humiliating setback for Mr. Bankman-Fried, 30, who had become one of the most influential leaders in the cryptocurrency business during the previous two years. He began a lobbying effort to influence crypto regulation in Washington and, as part of an aggressive marketing strategy, purchased the naming rights to the Miami Heat's arena. He has also made significant political contributions, including $5.6 million to Joseph R. Biden's 2020 campaign.
In May, when the cryptocurrency market fell, Mr. Bankman-Fried arranged contracts to support faltering businesses. He made an offer to purchase publicly traded cryptocurrency lender Voyager Digital, which declared bankruptcy in July.
But last week, when the cryptocurrency publication CoinDesk reported on a leaked balance sheet that seemed to indicate that FTX's sibling business, Alameda Research, was operating on unstable ground, cracks began to surface. Before launching FTX, Mr. Bankman-Fried launched the hedge fund Alameda. The two businesses are closely related financially.
A significant percentage of Alameda's assets were revealed in the report to be a cryptocurrency called FTT that FTX created for traders to use on its platform. The information increased worries that a sharp decline in the price of FTT would result in a catastrophe for FTX and Alameda.
Mr. Zhao acquired an interest in FTX as a result of his early investment in the business. Later, Mr. Bankman-Fried purchased that stock again, partially with FTT. Mr. Zhao indicated over the weekend that Binance will sell its stakes in FTT, citing "new developments."
A public argument between Mr. Zhao and Mr. Bankman-Fried was sparked by the announcement. On Monday, Mr. Bankman-Fried said on Twitter that "a rival is attacking us with false rumors." FTX is good. The assets are good.
However, Binance's actions also caused the price of FTT to skyrocket. By Tuesday, it had decreased by around 63 percent in a single day. The values of Bitcoin and Ether also decreased, hurting the remainder of the cryptocurrency market.
As concerns increased that FTX would be the latest well-known cryptocurrency startup to fail, traders hurried to remove their cryptocurrency holdings from the company's platform. On Monday, more than $1.2 billion was taken out of FTX, according to Nansen's report that evening.
According to Ed Moya, a cryptocurrency analyst at the trading company OANDA, "there is a confidence problem here." "There is always the risk that you may see contagion and a much bigger moment of crisis if you have the instability of a key token or currency that is related to one of the important crypto characters."
A number of other significant investors, including Sequoia Capital, Lightspeed Venture Partners, and SoftBank, supported FTX in addition to Mr. Zhao. According to PitchBook, a company that analyses private financing, FTX has raised close to $2 billion. Three FTX investors spoke about how the Binance takeover and what it meant for emerging bitcoin businesses left them shellshocked.
According to a copy of the letter that The Times was able to get, Mr. Bankman-Fried sent an email to investors at 11 a.m. Pacific time to inform them of the deal. In it, he stated that safeguarding consumers and "the industry" came above protecting FTX's shareholders, who were the company's "second priority."
He concluded, "I'm sorry I didn't do better. The newsletter Newcomer previously reported on the letter.
The agreement benefits Binance, which operates primarily outside of the United States but doesn't have a central office. By providing a wide variety of cryptocurrencies on its platform and riskier trading alternatives that aren't permitted in the United States, Binance has grown its business. With a net worth of $17.4 billion, Mr. Zhao has long been considered the richest crypto millionaire in the world, according to Forbes.
However, Binance, which also has a minor operation in the United States, has come under regulatory scrutiny from the Securities and Exchange Commission, and a lot of information about its operations is kept under wraps. According to CoinMarketCap, the industry data tracker, Binance processes as much as $76 billion in cryptocurrency deals every day, even though its exact valuation is unknown.
A few days earlier, Mr. Bankman-Fried made light of the regulatory investigation in a since-deleted tweet in which he joked that Mr. Zhao would not be permitted to visit Washington. Mr. Zhao is now prepared to take over his business.
Mr. Bankman-Fried promised more details regarding the deal will be released soon in a note he sent to the FTX personnel on Tuesday. Let's continue the fight tomorrow, he urged.
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