Binance Bails On FTX Acquisition — Here’s What Led To The FTX Crypto Crash

Forbes
Published 2 months ago
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TOPLINE

Binance will back out of its agreement to buy rival cryptocurrency exchange FTX, Binance said Wednesday afternoon, the latest in the sudden unraveling of billionaire Sam Bankman-Fried’s crypto titan FTX once valued at $32 billion, taking down the value of digital assets with it.

KEY FACTS

FTX’s liquidity “issues are beyond our control or ability to help,” Binance tweeted hours after sources told the Wall Street Journal and Coindesk that the world’s largest crypto exchange is unlikely to move forward with its bailout of FTX after scrutinizing the latter’s books.

The scrap comes only a day after Binance announced a nonbinding agreement to purchase FTX’s non-U.S. operations as FTX suffered a liquidity crisis akin to a bank run as users attempted to withdraw billions from the platform, partially spurred by Binance’s billionaire CEO Changpeng Zhao.

Zhao tweeted early Sunday that his firm would sell all of its holdings in the FTX crypto token due to “recent revelations,” an apparent reference to a Coindesk report last Wednesday that Alameda Research, Bankman-Fried’s crypto trading firm closely linked to FTX, largely held its assets in FTX’s coin.

Though Bankman-Fried called concerns about his companies’ finances “unfounded rumors” Monday, users flooded FTX with withdrawal requests and piled out of the FTX coin, with the token falling some 86% since Sunday, and falling from its $14 billion market capitalization in March to a mere $825 million.

Crypto assets broadly crashed as the industry mourned the loss of their “white knight” Bankman-Fried, with bitcoin, ethereum and shares of exchange Coinbase each falling 20% or more since Sunday.

FTX did not immediately respond to Forbes’ request for comment.

BIG NUMBER

$176 billion. That’s how much market cap the world’s 15 largest cryptocurrencies have shed over the last 72 hours according to Forbes’ tracker. The FTX-fueled crash sent the industry from $903 billion to $727 billion.

WHAT WE DON’T KNOW

How FTX would fix its withdrawal pileup without Binance’s help. Bankman-Fried tweeted Tuesday Binance will help to “clear out liquidity crunches” and cover withdrawals “1:1,” and his firm will likely need outside help. Federal financial regulators and the Department of Justice are investigating FTX’s behavior during the liquidity crisis, according to Bloomberg. FTX isn’t legally required to cover withdrawals in the same way a FDIC-insured bank would be, setting up a potentially dire scenario for customers. GlobalBlock analyst Marcus Sotiriou told Forbes in July bankrupt crypto firms are “in a really sticky situation because they’ve been irresponsible with clients’ funds, somehow lost out and are now unable to pay back their clients—and there’s no guarantee they’ll pay the money back.” Bankman-Fried told investors Wednesday that the firm faced a shortfall of $8 billion and would need $4 billion to stay solvent, Bloomberg reported. Without the funding, he said the company would need to file for bankruptcy, the outlet added, citing an unnamed person with direct knowledge of the matter. 

CRUCIAL QUOTE

“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 http://FTX.com,” Binance tweeted.

KEY BACKGROUND

Bankman-Fried once referred to himself as a modern-day J.P. Morgan for his knack for buying up struggling rivals, making FTX’s bailout all the more dramatic and ironic. It’s been a year to forget for the nascent industry, with several notable crypto exchanges and lenders going under and the top assets shedding roughly 70% in value year-to-date.