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How Binance Played a Key Role in FTX’s Collapse | Cryptocurrencies

One of the world’s largest cryptocurrency exchanges, FTX, has collapsed, with what is believed to be an $8bn (£6.8bn) black hole in its balance sheet. Of its 1 million users, many are now unable to withdraw their funds. On Friday, FTX Group, run from offices in America but headquartered in the Bahamas, filed for bankruptcy protection in the United States.

FTX rival Binance played a key role in the saga. Here is a step-by-step account of how the disaster unfolded.

The protagonists

Known by the nicknames SBK and CZ, Sam Bankman-Fried and Changpeng Zhao could be seen as two sides of the same cryptocurrency. In a few years, they have built two of the largest digital currency exchanges: FTX and the largest, Binance. As former business partners and major players in a multi-billion dollar industry, their ups and downs are intertwined. But their backgrounds are very different.

Bankman-Fried, 30, is the son of Stanford University professors and a graduate of the Massachusetts Institute of Technology. He’s made multimillion-dollar political donations, appearing on Capitol Hill as part of a regulatory lobbying campaign, rubbing shoulders with Bill Clinton and Tony Blair at FTX talks, and paying to have his company’s name adorn the arena. Miami Heat basketball court in Florida. His fortune, which was worth around $16 billion at the start of the week, has now evaporated.

Zhao, 45, was born in the coastal province of Jiangsu, north of Shanghai, and followed his academic father to Canada when he was 12. Zhao is now a Canadian citizen. After earning a degree in computer science from McGill University in Montreal, he worked on programming systems for the Tokyo Stock Exchange and Bloomberg, before launching Binance in 2017. His fortunes also took a hit, dropping $79 billion. dollars this year at a still huge level. $16.4 billion, according to Bloomberg. He will likely remain under pressure as Bankman-Fried’s woes play out.

Wednesday, November 2

Zhao was in Lisbon last week when the fuse was lit on the FTX crisis. The Binance CEO was a keynote speaker at the annual Web Summit – a gathering of the big and the good in the tech world – and, as usual, he was championing the long-term future of digital assets.

“I think volatility will always be there. It’s a commercial market. It’s like a stock market. If stock markets don’t have volatility, who is going to invest?” he told the Guardian.

It turns out that a new episode of volatility was imminent.

As Zhao spoke, the crypto news service CoinDesk published complaints on the balance sheet of Alameda Research, a crypto hedge fund owned by FTX founder Sam Bankman-Fried. Alameda held billions of dollars of FTX’s own cryptocurrency, FTT, and used it as collateral in other loans. This meant that a decline in the value of FTT would hurt both companies, given their shared ownership.

friday november 4

Following the CoinDesk report, pseudonymous crypto researcher, Dirty Bubble Media, released further statements regarding Alameda on Substack, the newsletter platform. His bulletin asked if the company was insolvent. Referring to owning part of the assets in FTT, he added: “It’s almost as if SBF [Sam Bankman-Fried] found a way to hack into the financial system, printing billions of dollars out of thin air against which he was able to borrow massive sums from unknown counterparties.

sunday november 6

Zhao sparked alarm bells among investors when he tweeted “due to recent revelations that came to light ‘Binance would be “liquidating” its holding of FTT tokens. Its position was estimated at around 5% of the total, which was worth approximately $580 million before the currency collapses.

In 2019, Binance had invested as a shareholder in FTX. It exited that stake last year and received $2.1 billion in Binance’s own stablecoins (BUSD) and FTT tokens as part of the deal.

As part of Binance’s exit from FTX shares last year, Binance received approximately US$2.1 billion cash equivalent (BUSD and FTT). Due to recent revelations that have come to light, we have decided to liquidate any FTT remaining on our books. 1/4

— CZ 🔶 Binance (@cz_binance) November 6, 2022

As the consequences of this decision rippled through the crypto industry, Zhao tweeted “We are not against anyone”. But in the same post, he added, “But we will not support people who pressure against other industry players behind their backs.” A source close to Binance said there was no ill intention towards FTX in the FTT sale.

This separate lobbying seemed to be a reference to Bankman-Fried, who had spent millions of dollars funding US Democratic politicians and pushing for tighter regulation of crypto trading in Washington.

Sam Bankman-Fried has made multi-million dollar political donations. Photograph: Saul Loeb/AFP/Getty Images

monday november 7

Bankman-Fried reacted to the weekend turmoil on Monday with his own series of tweets, alleging, “A competitor is trying to sue us with false rumors. He added: “FTX is doing well. Assets are doing well.

He did not identify who he was referring to. But then he tagged Zhao, who pledged $500 million of Binance money to help Elon Musk buy Twitter, with a tweet in which he said, “Would love it @cz_binance if we could work together for the ecosystem”.

tuesday november 8

In an apparent cessation of hostilities, Zhao announced that Binance would buy FTX and save it.

“This afternoon, FTX asked for our help,” Zhao tweeted. “There is a major liquidity crisis. To protect users, we have signed a non-binding agreement [letter of intent]with the intention of fully acquiring FTX.com.

Bankman-Fried confirmed the deal on Twitter: “The circle is complete, and the first and last investors of FTX.com are the same: we have reached an agreement on a strategic transaction with Binance for FTX.com (pending of DD, etc.).”

DD – or due diligence – was going to be the most important phrase in this tweet.

Wednesday, November 9

As rumors swirled about a hole in FTX’s balance sheet, Zhao suddenly pulled the plug and tipped Bankman-Fried’s business into a full-blown crisis. After looking under the hood, Binance said it could no longer pursue the deal.

“At first, our hope was to be able to help FTX customers provide liquidity, but the issues are beyond our control or our ability to help,” Binance said in a statement.

Zhao tweeted that it was a “sad day”.

Thursday November 10

As FTX searched for a new White Knight, Bankman-Fried took to Twitter to say he had “screwed up and should have done better.” FTX’s future was now seriously in doubt.

friday november 11

FTX filed for Chapter 11 bankruptcy protection in the US, in a move that included its US platform and Alameda. Bankman-Fried was replaced as chief executive by John Ray III, a turnaround and restructuring lawyer who worked on the liquidation of collapsed energy giant Enron. Hours before the collapse was confirmed, Zhao warned that the crypto market was facing a 2008-style crisis with more failures to come. He told a conference in Indonesia that the global financial crisis was “probably an exact analogy” to the events of this week, the FinancialTimes reported.

For his part, Bankman-Fried tried to stay positive. Announcing the bankruptcy on Twitter, he again apologized saying, “Hopefully things can find a way to recover. Hopefully this can bring some transparency, trust and governance.”