Image: Bloomberg / Contributor via Getty Images
Binance, the world’s largest cryptocurrency exchange, has backed out of a tentative deal to rescue its second-place competitor FTX from money problems that Binance CEO Changpeng Zhao described as a “significant liquidity crunch.”
The intent to merge, which was jointly announced by Zhao and FTX CEO Sam Bankman-Fried on Tuesday pending due diligence checks, lasted just over 24 hours.
“As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of FTX.com,” Binance said in a tweet on Wednesday afternoon. “In the beginning, our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help.”
FTX’s apparent cash problems came to light slowly, and then all at once.
First, reports circulated that Bankman-Fried’s sister hedge fund Alamada Research was holding a chunk of FTX’s own tokens, called FTT, on its books. Zhao then threatened to sell Binance’s own hoard of FTT that it received after exiting its equity position in FTX (it was an early investor) on the open market, which would likely impact its price. On Tuesday, withdrawals on FTX were halted without an announcement from the company, stoking panic, before the two CEOs announced the tentative rescue deal and the resumption of withdrawals. FTX.US—a separate company just for US-based investors—was not part of the deal and was said to be running normally.
The announcement confirmed that FTX was facing money problems, which sent shockwaves through the crypto industry. The FTT token price has almost totally collapsed, down to $2.56 from over $25 before FTX’s problems started this week. Bloomberg downgraded Bankman-Fried’s multi-billionaire status to being just shy of a billionaire after writing off FTX and Alameda Research completely. Much of FTX’s legal compliance staff quit the firm on Tuesday evening, Semafor reported.
Many speculated about the earnestness of Zhao’s bailout offer, and wondered whether he was really trying to kill off the competition. This was due to the fact that FTX is Binance’s competitor, that he seemingly threatened to tank its token, and that the exchange was obviously facing severe money issues. It’s not clear how due diligence checks would have rosied that dire picture, and now, we know that they haven’t. Zhao said in a note to employees that he “did not master plan this or anything related to it.”
The FTX debacle has been a spectacular fall from grace for Bankman-Fried, who was widely held up as an altruistic “savior” in crypto. During the market crash this year, he bailed out multiple collapsing firms and is credited with helping to stave off a wider implosion in crypto prices. That he now needed his own financial rescue—and failed to get it—is signaling even tougher times ahead for investors with money in FTX and the industry more widely.
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