Popular cryptocurrency exchange FTX was formerly thought to be the main power broker in the digital currency industry. It received high-profile celebrity endorsements, had its name on a Miami Heat arena and a chess tournament, has stepped in to attempt to save failed crypto enterprises, and its CEO, Sam Bankman-Fried, has grown to be one of Washington’s most significant contributors and lobbyists.
Given that it is now Election Day and FTX and its chairman suddenly don’t appear to be as wealthy as they once did, perhaps that should have been a bigger warning sign. Tuesday morning, the biggest cryptocurrency exchange in the world, Binance, announced it was going to “fully acquire” FTX.com in response to reports that the company’s internal token, FTX, was losing value, users were mass-withdrawing their investments from the company, and major cryptocurrencies like ETH were being negatively impacted.
FTX had “called for our support” owing to a “severe liquidity shortage,” according to Changpeng Zhao, CEO of Binance, who also appeared to confirm this in a different thread. Now that the entire crypto market is in chaos, speculation over what’s happening on maxis is out of control. Given that Bankman-Fried dismissed worries about FTX’s balance sheets as “false rumors” in a since deleted tweet only a day ago and now stands to lose approximately 94 percent of his enormous wealth it is undeniably strange.
So what is happening?
Thus, two of the biggest cryptocurrency exchanges in the world are FTX and Binance. These platforms are used by millions of traders worldwide to trade their holdings in digital assets like Bitcoin or NFTs. Users can also trade the proprietary tokens of these exchanges, FTT and BNB, which can provide them with exclusive trading perks and essentially serve as a symbol of their trust in the exchanges.
Both organizations are led by well-known figures in the cryptocurrency world: Bankman-Fried rose to prominence in the late 2010s as a supporter of the “effective altruism” and “longtermism” ideologies, both of which were very popular in Silicon Valley, and Zhao began as an early blockchain developer before becoming one of the world’s wealthiest billionaires in part because of his commitment to Bitcoin.
The two exchanges were formerly seen as competitors in the race to rule cryptocurrency. FTX and Binance each had distinctive advantages in the market, despite not being the only significant participants in the space: While the latter has had record-breaking funding rounds and has become one of the United States’ most culturally and politically ubiquitous crypto companies, the former boasts enormous worldwide trading volume that much exceeds that of other exchanges.
Additionally, FTX and Binance both seemed to have fared reasonably well during this year’s crypto difficulties. Ironically, Binance was one of the first significant investors in FTX when it began in late 2019 and acquired an equity share along with a long position in FTT. Binance made a total investment of “tens of millions,” according to Bankman-account Fried’s to Bloomberg at the time; Changpeng Zhao viewed it as a strategic investment to “help many initiatives to build the crypto sector”.
However, issues started to arise in March 2020, when Binance stopped permitting FTT trading on its platforms because its “users did not grasp the products” and were not using the token in the proper manner, according to the cryptocurrency website Cointelegraph. The regulatory crackdowns that were affecting Binance in nations including the United Kingdom, Italy, and its home country of Japan were the reason Bankman-Fried purchased all of Binance’s FTX shares the next year. SBF told onlookers that the companies’ breakup was “cordial,” nonetheless.
But this month, things once more took a bad turn. On Sunday, Zhao disclosed that his company had recovered around $2.1 billion in tokens equivalent to Binance and FTT after selling off Binance’s ownership stake in FTX. Zhao also stated that he intended to “liquidate” Binance’s remaining FTT holdings.
But the question is why?
Zhao didn’t provide any specifics in his first Twitter thread, only mentioning “new revelations that have come to light.” In another tweet, he did remark that “we won’t assist persons who campaign against other industry players behind their backs,” however he added that this was not “a move against a competitor.”
The claimed “revelations,” according to observers, were conclusions from a Nov. 2 piece by the cryptocurrency publication CoinDesk, which had access to a stolen balance sheet from one of Sam Bankman-separate Fried’s businesses, the cryptocurrency trading company Alameda Research. According to CoinDesk, a significant portion of Alameda’s claimed assets, which came to around $14.6 billion, consisted of FTT tokens.
In other words, Alameda didn’t store a large portion of its assets in fiat money or in a widely used digital currency like Bitcoin, but rather in an unstable token that is governed by the other business managed by Bankman-Fried. Furthermore, the FTT holdings were equal to around $6.1 billion in Alameda assets, which is strange given that the FTX website claimed that there were only about $5.1 billion worth of FTT in circulation overall.
This, together with Zhao’s declaration, led to speculation that FTX was genuinely insolvent financially. One Alameda employee stated that the balance sheet only provided a partial picture of the company’s financial situation, while Bankman-Fried personally addressed the accusations and referred to them as “unfounded.” As the conversation in the cryptocurrency community heated up on Monday, Zhao took to Twitter to dispel rumors that Binance was engaging in a complex plot to harm FTX, while Bankman-Fried reiterated that FTX is fine and assets are in good shape.
Seems like he was wrong
Although we cannot be certain, the following is a simple theory to explain a very complex event: Whether traders pool their resources on a single blockchain or place their digital assets on certain exchanges, their aggregate speculation and investor confidence are what drive the values of different cryptocurrencies. Since cryptocurrency exchanges act a lot like traditional banks, it is in Bankman-financial Fried’s interest to keep FTX users satisfied, to reassure them that their virtual money is safe and retains value, and to ensure they trust FTX to provide a solid return on investment.
Bankman-Fried would have likely realized the only thing left to do was give his customers the money they wanted from FTX’s funds which he had promised them through FTX’s advertised yields once other significant cryptocurrencies started to collapse and the world’s largest crypto exchange effectively gave FTX a no confidence vote. And doing so required obtaining a bailout at a price that the corporation may not have preferred.
So what’s next?
It’s important to keep in mind that the Binance and FTX U.S. offices are “currently” untouched by the larger corporate concerns, which mostly affect overseas traders, as Bankman-Fried noted in his Tuesday post. Both exchanges have independent American branches that are situated domestically and follow certain American financial and crypto legislation. However, the Bankman-Fried endorsement may have suddenly made American FTX dealers leery.
Reminder: “Not your keys – not your coins”