A dramatic day passed over the crypto world on Tuesday, when the largest exchange in the field, Binance, announced that it had signed an agreement to purchase the competing exchange FTX, from its founder Sam Bankman-Fried. A day later she already did a U-turn.
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● The world’s largest crypto exchange will buy competitor FTX to save it from liquidity problems
Bankman-Fried and the founder of Binance, Changfeng Zhao, tweeted about this on Twitter in relatively dry messages: “Hey guys, we have reached a purchase agreement subject to various procedures that will be carried out in the coming days,” they wrote.
But these announcements were only a final chord to the war that has been going on between the two bodies in recent days, a war in which FTX and Bankman-Fried have turned from the role of the savior hero of the crypto market, to another victim in the process of cleaning the market forced by the crisis in the markets during 2022.
Here are five comments on the looming crisis in the crypto market, which may lead to a chain of “contagion” and other company collapses.
The story of the rise of Sam Bankman-Fried
2022 has actually been excellent for Bankman-Fried so far. He reached the crisis when he was very liquid, which allowed him to go on a buying spree and strengthen.
This is one of the figures who lead and shape the crypto market in recent years. In 2013 he started working for an ETF company on Wall Street. Very quickly he left his job as an employee and founded the company Alameda Research, which specializes in quantitative trading and exploiting arbitrage gaps.
Almeda Research plays a rather significant role in the crisis of the last days, and we will return to it later.
In 2019, he founded FTX, a cryptocurrency derivatives exchange, which became one of the largest exchanges in the crypto world (and a sister company of Alameda). In 2021, it raised 900 million dollars, according to a value of 18 billion dollars. At the beginning of 2022, this exchange raised an additional 400 million dollars, this time according to a value of 32 billion dollars.
Sam Bankman-Fried, founder and CEO of the FTX crypto exchange / Photo: Reuters, CNBC
Accordingly, Bankman-Fried also became a leading figure in the field – he is also very involved in the politics of the industry, in the attempts to regulate and regulate crypto and even in American politics.
In the crisis of 2022, Bankman-Fried became the official rescuer of the industry, and purchased entities that were in trouble or in liquidity distress, both through FTX and through Alameda. Thus, he acquired 7.6% of the online trading platform Robin Hood, the Japanese stock exchange Liquid, whose condition was undermined after a cyber attack, and the Canadian company Bitvo. On top of that, he acquired the crypto lending platforms BlockFi – which he bailed out in a $680 million credit deal, and Voyager Capital, which went bankrupt after being hit by the collapse of hedge fund 3AC.
Bankman-Fried even offered to be involved in the rescue of Celsius, but this did not materialize. He spoke a lot about how he sees FTX’s role in stabilizing the crypto world, and that he has “a billion dollars to invest in this.”
The fall of Bankman-Fried
The first sign of cracks in FTX can perhaps be found in the resignation of Almeda’s co-CEO at the end of August. But after the collapses in the crypto world were accompanied by so many resignations in the various companies, this did not attract much attention at the time.
Last week, CoinDesk magazine published an extensive article on Almeda’s balance sheet, revealing that although FTX and Almeda are two separate businesses, Almeda’s balance sheet consists mainly of the coins issued by FTX – and especially the FTT coin, which is a token issued by the exchange and grants Holders get a discount on trading fees in its market.
In other words, Alameda’s capital rests on a base consisting mostly of a currency that its sister company invented, and not on a base of independent assets. According to CoinDesk, Alameda’s main asset is $3.66 billion of “unlocked FTT” (free to trade), and it also has $2.16 billion of “FTT collateral,” and $300 million of “locked FTT” tokens. “This shows that Almeda relies mainly on a coin that its sister company invented out of thin air,” Coindesk concluded.
We note that this capital was for Almeda a basis for collateral in order to obtain credit for its activities. Almeda itself is a liquidity provider to other entities in the crypto market.
The disclosure caused waves in the crypto world, and above all started a cold war between Binance and FTX – “We all want more transparency in our crypto assets,” tweeted the founder of Binance last Sunday, “There are many questions regarding the FTT coin, and we are going to sell it and close the Our position amounts to 580 million dollars.”
This tweet dragged the currency down, and with it the entire crypto market: the FTT has since lost 75% of its value, and Bitcoin has completed a 15% drop to a price of $17.9 thousand per Bitcoin. Tweets by FTX customers that they are having difficulty withdrawing funds, created a “run on the bank” effect on the FTX exchange, and this despite the responses of the exchange’s representatives that the withdrawals from it have not stopped.
The FTX crypto exchange / Photo: Reuters, CNBC
On Tuesday evening, when FTX was facing a liquidity crisis, Nekman-Fried feared a similar fate to that of the companies he had bailed out over the past year, and closed the deal with Binance. Then he tweeted: “FTX withdrawals were and will continue to be active, fully backed 1:1 and operating as usual. The circle is complete and the first and last investors of FTX are the same – we have agreed on a strategic deal with Binance.”
The bailout deal collapsed
So Binance and FTX effectively stopped the spin with a notice of “deal review” (subject to due diligence). Is the market buying it? Not sure at all. As evidence, even after the announcement of the bailout, the FTT currency continues to lose its value, completing as mentioned a 75% drop in two days.
Yesterday (Wednesday) in the evening it was already published in several media outlets that Binance is expected to withdraw from the deal to purchase FTX after reviewing the company’s data, its library and its obligations as part of the due diligence. A source quoted in the Wall Street Journal noted that Binance was “surprised by the big hole it found in FTX’s finances” and an interviewee on CoinDesk said that several hours into the process of reviewing FTX’s internal data “Binance’s inclination was already against completing the deal.” A few hours later, the official announcement came from Binance – the deal fell through.
And there is another thing: Binance does not have a significant regulated activity in the US, and the regulators there are not satisfied with its amorphous holding structure and its level of compliance with regulation. A deal in which Binance receives front-door entry to US operations is expected to draw objections.
What is the chance of another spin?
Running to the bank is a tremendous force, and it is very difficult to stop a spiral that starts with a small tweet, especially in a world where trust is already broken. The difference between FTX and the other cases is that Bankman-Fried admittedly did not wait for the deepening of the crisis to put him in a position where he cannot return money to his clients, but quickly separated from his company and sold it.
It will be interesting to see if this will be enough to stop the storm, before it infects more bodies. Binance may bail out FTX, but it won’t bail out Almeda, which in turn provides liquidity to other crypto entities, and on its balance sheet – there are skeletons.
A hint that the crypto market is in a spin can be seen in the fall of the SOL coin of the Solana project – a successful project to improve speed and reduce transaction costs. The SOL has lost about 35% in the last two days, and in Almeda’s balance sheet there is significant exposure to the currency.
The challenge of the crypto market – to return to the basics
The case of FTX joins the lessons we received from Luna, Maccelius and the AC3 projector. The major failures we see now concern the foundation, and are taught in accounting class A: how to record assets on the balance sheet, how to determine their value, how to present a balance sheet that also corresponds with reality. Any beginning banker will also understand why decentralized finance companies are collapsing – innovation comes at the expense of managing liquidity risks and matching liabilities to assets.
All of these are also a lesson for the regulator regarding the field: the need to keep appropriate reserves, and also – complete separation between customer funds and company funds. So if the company doesn’t survive, the customers just move on.