Binance’s Rescue of FTX Shows No Crypto Company Is ‘Too Big to Fail’

Binance’s deal to save rival cryptocurrency exchange FTX from collapse shows how no one is safe from the cold of crypto winter, according to industry experts.

Before this week, FTX was the fourth largest exchange, processing billions of dollars in daily trading volume, according to CoinMarketCap data. CEO Sam Bankman-Fried had a high profile in Washington, DC, appearing in Congress to testify about the future of the crypto industry and pledging millions in political donations.

Despite this, not even FTX was immune to the decline in digital assets. It’s something even Bankman-Fried had recognized, telling CNBC earlier: “I don’t think we’re immune to it.”

And sure enough, his firm on Tuesday signed off on an offer from Binance to be acquired by the company for an undisclosed amount after facing what it called a “liquidity crisis.”

“It shows that no one is too big to fail,” said Pascal Gauthier, CEO of crypto wallet firm Ledger. “FTX seemed untouchable.”

The phrase “too big to fail” was used during the 2007–2008 financial crisis, referring to regulators’ decision that certain institutions could not be allowed to fail, due to the danger such an outcome would pose to the wider financial system.

Several financial institutions received taxpayer bailouts in the wake of the collapse of Lehman Brothers that year.

A lot can change in a day – especially in crypto.

On Monday, CEO of cryptocurrency exchange FTX Sam Bankman-Fried took to Twitter in since-deleted tweets to downplay concerns his crypto trading empire was in danger of collapsing.

FTX is “fine,” Bankman-Fried had said, and the exchange had enough assets to cover its customers’ holdings should they try to take their money off the platform.

His comments came after a report by CoinDesk that Alameda Research, Bankman-Fried’s quant trading firm, had liabilities that exceeded its assets, most of which were reportedly in FTT, FTX’s native token.

A day later, the 32-year-old entrepreneur, who had positioned himself as a “lender of last resort” figure in the struggling crypto sector, announced that he would sell the exchange he co-founded three years ago to Binance, the world’s largest crypto exchange .

The debacle highlights something economists have long warned about when it comes to crypto: While the industry may be worth billions of dollars — it was once valued at $3 trillion by CoinGecko — in reality, its size is not yet of a “systemic” scale where regulators will feel the need to intervene if a company fails.

And, unlike the heavily regulated banking industry, crypto is not yet subject to regulation in the US or other major countries, although that is expected to change soon as jurisdictions such as the European Union come up with new rules.

While the countries in the 2008 financial crisis felt compelled to intervene to prevent the collapse of the banking system, with cryptographic that duty has been left to private companies.

“Most of the activity in crypto continues to remain trading and speculation, and therefore the impact of any downside in crypto is also quite limited in a way, compared to banking and financial services in 2008 where the impact was much more entrenched and widely spread.”, Vijay Ayyar, head of international crypto exchange Luno, told CNBC via email.

Asked if this was crypto’s “Lehman moment,” Ledger’s Gauthier said it had played out earlier with the collapse of players like Three Arrows Capital and Celsius: “I think what we’re witnessing right now is a little bit of the ripple effects of what happened in [the first half] in our industry.”

The debacle highlights how the crypto industry is becoming more centralized and deviating from its decentralized roots, according to Gauthier. Bitcoin and other digital coins are “designed to be decentralized and not rely on an intermediary,” he said.

“FTX is a very big warning for everyone,” Gauthier said in an interview on CNBC’s Squawk Box Europe on Wednesday. “You can’t just wait for the next value proposition to fail.”

FTX was not the first company to come under financial stress, and it is expected that it will not be the last.

Earlier this year, Celsius, the crypto lending company, filed for bankruptcy after a drop in the value of its tokens terra and luna left it unable to process customer withdrawals.

Crypto fund manager Three Arrows Capital and broker Voyager Digital also later went bankrupt, highlighting the connection between various players who owed each other money.

Some traders are concerned that Solana, a blockchain platform that competes with Ethereum, could be the next crypto player to be tested by the market selloff. Solana’s stock plunged more than 30% Wednesday on fears about its connection with Alameda Research. Alameda owns more than $1 billion in solar, according to CoinDesk.

“Is this the end of [the crypto contagion] or will there be a few more dominoes to fall? That’s anybody’s best guess,” Gauthier said. “People shouldn’t wait to find out.”

As for whether Binance itself could be vulnerable to collapse one day, Gauthier said he thinks people should be “reasonably concerned,” but added that the firm has a “relatively solid value proposition.”

Ayyar said the FTX situation is likely to provide greater impetus for the largely unregulated crypto to be regulated.

“Crypto has grown in terms of use and utility, and regulators will continue to be forced to take a more active stance to ensure that platforms follow some rules and structure,” he told CNBC.