Binance and FTX lead the way — but which crypto exchange will come out on top?

A spat between Changpeng Zhao and Sam Bankman-Fried could trigger a cold crypto war between the world’s two largest exchanges.

Binance plans to remove FTT exposure

There is conflict between two of crypto’s biggest whales.

Binance founder and CEO Changpeng “CZ” Zhao revealed on Sunday that his company would liquidate its exposure to FTX’s FTT token, received as part of Binance’s exit from FTX stock last year.

On Twitter, Zhao teased that the liquidation was due to “recent revelations,” and assured his followers that removing Binance’s FTT token exposure was not done as a move against the competitor. However, FTX CEO Sam Bankman-Fried didn’t see it that way. “A competitor is trying to go after us with false rumours. FTX is fine. Assets are fine,” he claimedand explained that his exchange did not invest its clients’ assets, that it had processed all withdrawals, and that it would continue to do so.

Although the value of the FTT tokens held by Binance is unknown, the exchange received a total of $2.1 billion in Binance USD (BUSD) and FTT from its FTX exit last year. Yesterday, Zhao confirmed that a transaction of 22.9 million FTT tokens, valued at $584 million, was only part of the exchange’s total FTT holdings. This alone corresponds to 17.2% of the total FTT in circulation.

There are several possible reasons why Zhao decided to cut Binance’s FTT exposure. Most prominent is the recent revelation that FTX-affiliated trading company Alameda Research may be facing financial difficulties, according to a leaked balance sheet from CoinDesk. The document showed that as of June 30, Alameda had more than $14.6 billion in assets against $7.4 billion in debt. However, since most of the firm’s assets consisted of highly illiquid tokens such as FTT, SRM, MAPS and OXY, doubts arose as to whether Alameda could pay off the debt.

In addition, observers such as Dirty Bubble Media have alleged that the FTT token, which makes up a significant portion of both Alameda’s and FTX’s balance sheets, has a highly inflated value. They explain that by means of a flywheel arrangement, Alameda and FTX have created an illusion of demand, pumped up FTT’s price and allowed both parties to take out large loans against their FTT holdings. But now that Alameda Research appears to have run out of cash, evidenced by its recently leaked balance sheet, the FTT flywheel is coming under pressure.

In response to these allegations, Alameda Research CEO Caroline Ellison denied that her trading firm was in such dire straits. On Twitter, hun claimed that the leaked balance sheet was for only a subset of Alameda’s corporate units, adding that the firm had another $10 billion in assets.

In addition, Ellison black to Zhao’s intention to sell Binance’s FTT exposure by offering to buy all of the company’s tokens at $22 apiece. This begs the question: Why doesn’t Alameda want the FTT to drop below $22? Many have speculated that it is because a good portion of Alameda’s liabilities are secured against FTT. The firm may begin to face margin calls on its loans if FTT falls much below $22. On the other hand, Ellison could have simply chosen $22 for her buyout offer because that’s what the token was trading too close to the time of her tweet.

Regardless, Zhao seems to believe that the risks of holding FTT now outweigh the potential rewards. Whether Zhao intended it or not, his actions have been perceived by Bankman-Fried and the wider crypto community as Binance kicking FTX while it is down. Whether or not these two crypto whales can put their differences aside and find a solution to their current feud is likely to significantly impact the crypto space going forward.

A cold crypto war

If Bankman-Fried and Zhao cannot resolve their differences soon, it could result in a prolonged conflict between two of crypto’s biggest exchanges.

Zhao made it clear in his initial announcement that he wants to eliminate Binance’s FTT exposure in a way that “minimizes market impact.” If he really has no ulterior motive for the move, it would make sense to accept Ellison’s offer to buy out his FTT position at $22 per token. Whether or not Zhao decides to sell FTT over-the-counter rather than directly on the market will give a good indication of his true intentions.

But since the ball is well and truly in Zhao’s court, he has no obligation to accept the most favorable outcome for Alameda and FTX. From the start, Binance is undoubtedly in a stronger position – the exchange has the most liquid crypto markets in the world, as well as the most users. Despite past controversies, Zhao’s public opinion is much better than Bankman-Fried’s today. Recent discussions surrounding crypto regulation, including poor performance in a Bankless debate with ShapeShift CEO Erik Voorhees, has weighed on the FTX CEO’s image.

If Zhao decided to sell Binance’s FTT in the market, it would likely cause some short-term volatility and force FTX or Alameda to buy back the amount to prop up the token’s price. However, with the current information at hand, this in itself seems unlikely to cause serious harm. A bigger concern for FTX is the market’s perception of such an event. If enough FTT holders and FTX customers lose faith in the exchange and its token, it could lead to a bank run, resulting in a much more serious situation.

But what FTX and its affiliates have that Binance lacks are government and regulatory connections. Bankman-Fried has a much better relationship with regulators and US government officials than Binance, having previously testified before Congress and led efforts to draft crypto regulation in Washington, DC. most of his fortune to charity. This image has played well with wealthy elites, earning him a spot on several magazine covers and even an audience with the well-connected Bill Clinton and Tony Blair at FTX’s Bahamas-based crypto conference earlier this year.

Conversely, Binance has struggled with regulators in the US and abroad until recently. Throughout 2021, the firm had to remove products from its exchanges in several jurisdictions when it fell foul of local regulations. In Malaysia, the government even ordered a total ban on Binance, asking the exchange to disable its website in the country. Elsewhere, the US Justice Department requested documents from Zhao and other Binance executives related to the exchange’s anti-money laundering checks and communications handling issues. Earlier this year, a Reuters report alleged that Binance had allowed $2.35 billion worth of criminal funds to process through the exchange between 2017 and 2021.

While Zhao may have the upper hand at the moment, Bankman-Fried’s connections could turn the tables if the current feud develops into a full-blown conflict. While both parties have expressed a desire to work together, it is not yet clear whether they will be able to put their differences aside for the sake of the broader crypto ecosystem.

Disclosure: At the time of writing this piece, the author held FTT and several other cryptocurrencies.