Crypto chaos increased after Binance walks away from the deal to acquire FTX; An earlier pledge to rescue FTX fell through, in part due to regulatory issues.
On Wednesday, Binance shocked the crypto market as it reversed its decision to rescue rival FTX, leaving the well-known crypto exchange with a bleak future as it confronts a shortfall of up to $8 billion. Binance pulled out from its pledge to acquire FTX as “the deal did not make sense from a number of fronts,” said Changpeng “CZ” Zhao, chief of the world’s largest cryptocurrency exchange.
Before the grand explosion, The largest cryptocurrency by market value, Bitcoin, was down 1% at $18,400 on Wednesday following a 10pc decline on Tuesday, which was its worst day since mid-August. The next largest cryptocurrency, generated by Ethereum, Ether, has decreased by about 18% since early Tuesday.
The following day the cryptocurrency exchange FTX abruptly collapsed, giving the sensation of an economic explosion. The collapse of FTX, formerly regarded as a stellar survivor in a faltering market, has shocked everyone.
Founder and CEO Sam Bankman-Fried of FTX announced in a call with investors on Wednesday that he requires emergency funding due to client withdrawal requests that have been received lately. These requests brought in a crippling liquidity crunch. FTX alerted investors that it hoped to raise $4 billion in equity to cover the shortfall.
In a long thread on Twitter on Thursday morning, Bankman-Fried apologized for FTX’s implosion and gave an update on the company’s viability. “I’m sorry. That’s the biggest thing,” he began.
He apologized for not “communicating more” while the deal to bail out FTX was being worked out. “I wasn’t particularly allowed to say much publicly. But of course, it’s on me that we ended up there in the first place,” he added, saying that he “should have been on top of everything. I clearly failed in that. I’m sorry.”
Binance came to rescue
After less than 24 hours, Binance signed a rescue deal to buy the exchange amid the crisis.
Disregarding that Zhao and Bankman-Fried had been feuding on social media for months over regulatory difficulties and other disagreements. After Zhao announced that the cryptocurrency exchange would be liquidating its holdings in FTT, which it had acquired through its involvement as an early backer of FTX, as a “post-exit risk management” strategy.
The world’s largest crypto exchange platform still agreed on a non-binding letter of intent, which allowed it to end the agreement at any time. After examining FTX’s management and financial records, the company withdrew from the agreement, declaring media claims of mishandling of customer funds and suspected US agency investigations.
The largest cryptocurrency exchange scrapped its letter of intent to buy rival FTX due to concerns raised during report examinations, according to a spokesperson of the exchange.
“As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged U.S. agency investigations, we have decided that we will not pursue the potential acquisition of FTX.com,” the spokesperson told CoinDesk.
“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. Every time a major player in an industry fails, retail consumers will suffer. We have seen over the last several years that the crypto ecosystem is becoming more resilient and we believe in time that outliers that misuse user funds will be weeded out by the free market”.
In an internal FTX slack channel, Mr. Bankman-Fried on Wednesday wrote, “We obviously just saw Binance’s statement; they relayed that to the media first, not to us, and had not previously informed us or expressed those reservations,” based on a copy of the communication that The Wall Street Journal verified.
Views of Changpeng “CZ” Zhao
On Friday, at the Indonesia Fintech Summit, Zhao said, there’s a “big hole” to fill from a financial perspective, and also pointed to an overlap in user demographics. “We cover all the regions they cover, and they have much less users than us”.
“From a technology or product perspective, I think we have a superior product,” he added. “So our original intention was, ‘let’s save the users’.”
When news emerged that FTX could be misappropriating users’ funds with U.S. regulatory agencies reportedly stepping in to probe the exchange, “we’re like, okay, we can’t touch that anymore,” Zhao said.
Results of investment in FTX
Along with the company and Mr. Bankman-Fried, reputable institutions that made investments in the FTX exchange are also responsible for any potential significant losses. In a $900 million financing last year, investors included tech-focused private equity company Thoma Bravo, hedge fund Third Point, hedge fund Sequoia Capital, and SoftBank Group Corp.
Sequoia said it is writing down the $150 million that one of its funds put in FTX due to “solvency risk” for the cryptocurrency company in a letter to FTX investors. The letter stated that “the full nature and degree of this danger is not known at this time.” “We are marking out investment down to zero based on what we now understand.”
A trader’s funds could also be lost. A pinned post on FTX’s official Telegram channel states that the exchange has stopped allowing withdrawals of both crypto and fiat money.
Losses from FTX extended beyond the company itself. Shares of publicly traded firms having ties to cryptocurrencies and ownership of them as well as those that make money from trading them were dumped by stock investors.
Despite claims made on Twitter by Coinbase Global Inc.’s CEO that the business has enough assets for customer withdrawals and has no noticeable exposure to FTX, shares of the company plunged about 10%. Since coming public, when it received an $85 billion last year’s valuation, Coinbase has closed at its lowest point. On Wednesday, it had a market worth almost $10 billion.
The shares of Silvergate Capital Corp., the American bank with the closest ties to the industry, fell 12% and have lost over 75% of their value this year.
Although the exact reason for the FTX liquidity problem is unknown, several investors and crypto holders are wondering whether connections between the exchange and a connected business, Hong Kong-based crypto-trading firm Alameda Research, may have had a role in the crisis. Mr. Bankman-Fried created both FTX and Alameda, and he currently owns a majority stake in the latter.
Following the publication of a story by CoinDesk last week that suggested a considerable share of Alameda’s balance sheet was made up of FTT, a cryptocurrency produced by FTX, questions regarding the range and scope of FTX and Alameda’s financial relationship grew.
In February, Mr. Bankman-Fried told the Journal that none of FTX’s market makers have access to any nonpublic market data, refuting the notion that Alameda and FTX are connected. In addition, he noted that although Alameda trades on FTX, “their volume is a very minor part of overall exchange volume, and their account’s access is the same as others.”
During the pandemic, the value of cryptocurrencies surged, making a number of people overnight billionaires. However, investors abandoned riskier investments like cryptocurrency when the Federal Reserve hinted a year ago that it might start hiking interest rates to combat inflation, and prices fell precipitously.
In May, a project called Terra and its companion token, Luna, fell, setting off a cascade of failures that made the market devastation much worse. Even though Terra and FTX are quite distinct entities, they both depend on volatile digital tokens.
The crisis was brought on by a sell-off of FTT tokens issued by FTX, which in turn triggered panic among its users.