Rival cryptocurrency exchanges FTX and Binance have rattled the industry with their announcement that Binance will officially acquire FTX in a deal expected to close in the upcoming weeks, which will make FTX a subsidiary of Binance.
FTX was founded in 2019 by Sam Bankman-Fried, a former trader at Jane Street Capital, a quantitative trading firm. The exchange quickly became popular with traders for its innovative products, like tokens that track the performance of real-world assets like the S&P 500 stock index. FTX was on an uphill climb as it became one of the leading exchanges in both size and recognition until Bankman-Fried and Zhao erupted into open warfare on Twitter over the weekend, transfixing much of the digital-currency world; a series of events that would effectively harm the confidence of his investors.
The feud sparked after Binance announced it was planning to sell all of its holdings of FTX’s token following a recent CoinDesk report about Alameda, the trading firm founded by FTX Chief Executive Sam Bankman-Fried. CoinDesk contended much of Alameda's balance sheet was made up of FTX's token, known as FTT, a relatively illiquid token with a market capitalization of about $3 billion as of Monday (as reported by CoinGecko.)
In a weekend tweet, Binance CEO Changpeng Zhao (@cz_binance) said his exchange would liquidate its FTT holdings, stating “as part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books” Mr. Zhao later said the move was simply risk management, reflecting lessons learned from Luna, a cryptocurrency which collapsed in value earlier this year. The tweet read: “Liquidating our FTT is just post-exit risk management, learning from LUNA. We gave support before, but we won't pretend to make love after divorce. We are not against anyone. But we won't support people who lobby against other industry players behind their backs. Onwards.”
Binance is a former equity investor in FTX and acquired the tokens when it exited that position. The value of those tokens has since surged, with FTT trading above $30 Monday, up from about $2 at the start of the year. Binance’s move to sell its FTT holdings comes amid growing scrutiny of exchanges that engage in token sales. In recent months, investors have become increasingly concerned about so-called “token dumps,” in which exchanges sell large amounts of tokens often driving down prices and hurting investors.
Bankman-Fried (@SBF_FTX) responded with subsequent tweets saying “a competitor is trying to go after us with false rumors. FTX is fine. Assets are fine” and claimed that Zhao's comments were "irresponsible."
Regardless of FTX’s denial of Zhao’s concerns, the company experienced a bank run with $1.4 billion in withdrawals over the previous 24 hours; the Wall Street Journal reported, “the announcement prompted other customers to yank their money from FTX, and the run was under way.” Nexo, a large crypto-lending platform, also withdrew about $110 million worth of cryptocurrency from FTX. FTX's own token, FTT, plunged Tuesday before partly recovering following the announcement of the deal.
"The situation between CZ and SBF has definitely spooked the market," said Justin Sun, founder of Tron Foundation and CEO of BitTorrent. "It's a reminder of how centralized this industry still is."
The ripple effects of this online turf war can be seen throughout the industry as the price of Bitcoin, the world's best-known digital currency, fell more than 11% to $18,531.80 in the last 24 hours, and Ethereum, the second-largest digital coin by market value, also slid more than 26% to $1,327.54 [as of Nov. 8, 2022]. As of Tuesday November 8th, Robinhood Markets Inc., of which Mr. Bankman-Fried is an investor, is down 19% and crypto exchange Coinbase Global Inc. is down 11%. Brian Armstrong, Coinbase CEO (@brian_armstrong) responded swiftly with a Twitter thread in which he expressed his sympathy for “everyone involved in the current situation with FTX” and stressed the non-relationship between Coinbase and FTX, FTT or Alameda. He continued to say, “I think it's important to reinforce what differentiates Coinbase in a moment like this. This event appears to be the result of risky business practices, including conflicts of interest between deeply intertwined entities, and misuse of customer funds (lending user assets).”
Zhao takes a home run victory as this deal ends an ever-escalating game of chicken, with each making moves to try to poach the other’s customers. Binance has been trying to lure FTX users with discounts and giveaways, while FTX has been trying to entice Binance users with lower fees. But the real prize was always liquidity: Whoever could offer the most attractive prices would be able to attract the most trading volume, and with it, the most fees.
Coindesk published an article immediately following the Binance – FTX Deal announcement, reporting that the deal could possibly be in violation of Antitrust laws, a concern of many industry players. The article states, “in the U.S., antitrust laws such as the Sherman Act outlaw direct competitors from acting to protect each other. CZ said that he had stepped in to protect users after FTX, faced with a significant liquidity crunch, had asked for help.” They also quote Thibault Schrepel, an Associate Professor at Amsterdam University who specializes in blockchain and antitrust issues, who believes the deal represents an illegal agreement, responding to Binance’s announcement with a tweet that read “next time, check the compliance of your tweet with antitrust laws before you post. At this stage, I wouldn’t be surprised to find this tweet in a forthcoming court document/antitrust litigation.”
Coindesk closed the article with “CZ characterized the deal as a non-binding intention, that would be the subject of due diligence investigations in the coming days. Spokespeople for FTX, Binance and the European Commission did not immediately respond to a request for comment.”
This is a huge move for both firms, and one that will surely have more snowball effects throughout the cryptocurrency industry. It remains to be seen how other exchanges will react, but one thing is for sure: Binance is now the undisputed king of crypto.
By John Montague