How Binance and FTX sent shockwaves through the crypto world
(Bloomberg) — It’s been a tumultuous few days in the largely unregulated cryptocurrency world, with mudslinging on Twitter, a shock exchange takeover bid and falling token values.
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The world’s largest exchange, Binance Holdings Ltd., is now set to buy troubled rival FTX.com in what would be a radical consolidation of power in the crypto world. However, the letter of intent is non-binding, which sent jitters through the market and triggered a further fall in values. While crypto may seem like a niche corner of finance, the saga between two of the top players has changed the crypto ecosystem and is likely to have far-reaching consequences.
What is Binance and FTX?
They are two of the largest crypto exchanges, which are the marketplaces where investors buy, sell and store tokens. Binance is by far the largest crypto exchange by volume – and FTX is in the top five, according to crypto data provider CoinMarketCap (which is owned by Binance).
Who runs them?
They have also been led by two of the most visible and charismatic people in the crypto world: Binance by Changpeng Zhao (or CZ, as he is known), and FTX by Sam Bankman-Fried (or SBF).
Formerly a trader on Jane Street, until just a few weeks ago the curly-haired 30-year-old was all over the crypto industry – backing flailing projects including BlockFi, Voyager Digital and Celsius. He counted the likes of Softbank Vision Fund, Singapore wealth fund Temasek and the Ontario Teachers’ Pension Plan as investors.
Zhao is a Chinese-born Canadian citizen who emigrated to Vancouver at the age of 12 and graduated with a degree in computer science from McGill University in Montreal. He started Binance in 2017 in Shanghai – but the Chinese government banned the crypto exchange that same year. He is now based in Dubai.
Read more: Crypto’s richest man faces regulatory crackdown, brutal winter
Why did they fall out?
Back in 2019, Binance invested in FTX, then a derivatives exchange. The following year, Binance launched its own crypto derivatives, quickly becoming a leader in the field.
Tensions increased as the two companies took increasingly divergent approaches to regulators. Bankman-Fried testified in the US Congress, while Binance was said to be facing regulatory investigations around the world.
The two companies have also competed for assets, with both bidding for assets of Voyager Digital – an auction that FTX.US won.
Zhao and Bankman-Fried have been trading barbs on Twitter for months, sparring over issues ranging from lobbying US politicians to claims of front-running.
So what exactly happened in the crypto world?
Over the weekend, Zhao tweeted that Binance would liquidate its holdings of a token known as FTT, which is issued by FTX.
The tweet followed a story from crypto news outlet CoinDesk that said Alameda Research, a trading house owned by FTX founder Bankman-Fried, had many of its holdings in the FTT token.
This led to wider concerns about FTX’s health and investors started pulling out. The FTT token plunged 72% on Tuesday and fell again on Wednesday. A day before the deal was struck, Bankman-Fried said on Twitter that assets at FTX were “fine” and that “a competitor is trying to go after us with false rumors.”
What does this mean for the markets?
This creates a lot of uncertainty for investors. Even with the announcement of the deal, crypto price movements can make things difficult. Bitcoin briefly fell to its lowest level since 2020, leaving many owners underwater.
And then there’s Solana, which is backed by Bankman-Fried and fell 23% on Tuesday.
What does this mean for Binance and FTX users?
Both CZ and SBF said on Twitter that the agreement was made to protect users, although the exact terms are unclear. There have been no announcements from Binance about what will happen to FTX accounts. Customers are unlikely to be happy about the drop in token prices.
Read more: Retail crypto investors rattled as Binance moves to acquire FTX
FTX.US is not part of the agreement.
How does this affect CZ and SBF?
This deal makes CZ the best person in the crypto world – if he wasn’t already. And it’s a big comedown for SBF, who had previously been seen as one of the most accomplished people in the business.
It plays out in fortunes too. Bankman-Fried’s 53% stake in FTX was worth about $6.2 billion before Tuesday’s takeover, according to the Bloomberg Billionaires Index, based on that fundraising round and the subsequent performance of publicly traded crypto companies. His crypto trading house, Alameda Research, contributed $7.4 billion to his personal fortune.
Bloomberg’s Wealth Index assumes that existing FTX investors, including Bankman-Fried, will be completely wiped out by Binance’s bailout, and that the root of the exchange’s problems stemmed from Alameda. As a result, both FTX and Alameda gain a value of $1. That leaves SBF’s net worth at about $1 billion, down from $15.6 billion entering Tuesday. The 94% loss is the biggest one-day collapse ever among billionaires tracked by Bloomberg.
CZ has also had a rough time, with his fortune down 83% so far this year according to the Billionaires Index – but he’s still estimated to be worth $16.4 billion.
What does this mean in terms of regulation?
This episode and how quickly it unfolded sets a stark example for regulators who have been concerned about the lack of guardrails in the freewheeling crypto space. Jurisdictions that have considered looser rules may be less likely to do so — especially in light of the implosions of the Terra/Luna ecosystem a few months ago and hedge fund Three Arrows Capital.
In addition to general crypto regulation, the deal itself could draw scrutiny given it is between two of the top players in the space and could trigger concerns about the market dominance of a combined entity.
What will be next?
It’s a bit unclear. Since the Binance agreement to buy FTX is non-binding, many different things can happen. Binance may take over FTX, go away entirely, or perhaps acquire parts of it. And it is not even clear whether FTX will continue to exist as a separate entity. Some of this may depend on what Binance actually finds as it also works on due diligence.
–With assistance from Tom Maloney.
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