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 Twitter bashing, a shock exchange takeover bid and plummeting token values.

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The world’s largest exchange, Binance Holdings Ltd., is now poised to acquire struggling rival in what would be a sweeping consolidation of power in the crypto world. However, the letter of intent is not binding, which has caused nervousness in the market and caused a further drop in values. While crypto may seem like a niche corner of finance, the saga between two of its major players has turned the crypto ecosystem upside down and is likely to have far-reaching repercussions.

What are Binance and FTX?

These 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 directs them?

They were also led by two of the most visible and charismatic people in the crypto world: Changpeng Zhao’s Binance (or CZ, as it’s known) and Sam Bankman-Fried’s FTX (or SBF).

Formerly a trader at Jane Street, just a few weeks ago, the curly-haired 30-something was all over the crypto industry, supporting struggling projects such as BlockFi, Voyager Digital and Celsius. It has counted investors like the Softbank Vision Fund, Singapore Wealth Fund Temasek and the Ontario Teachers’ Pension Plan.

Zhao is a Chinese-born Canadian citizen who emigrated to Vancouver at the age of 12 and earned a degree in computer science from McGill University in Montreal. He launched Binance in 2017 in Shanghai – but the Chinese government banned crypto exchanges the same year. He is now based in Dubai.

Read more: Crypto’s richest man faces regulatory crackdown and brutal winter

Why did they fall?

In 2019, Binance invested in FTX, then a derivatives exchange. The following year, Binance launched its own crypto derivatives, quickly becoming the leader in the field.

Tensions rose as the two companies increasingly took divergent approaches with regulators. Bankman-Fried was testifying in the US Congress, while Binance faced regulatory investigations around the world.

The two companies also fought over assets, with both bidding for Voyager Digital’s assets – an auction won by FTX.US.

Zhao and Bankman-Fried have been trading barbs on Twitter for months, sparring over issues ranging from lobbying US politicians to high profile dealing allegations.

So what 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 saying that Alameda Research, a trading house owned by FTX founder Bankman-Fried, had a large portion of its assets in the FTT token.

This fueled wider concerns about the health of FTX and investors began to cash in. The FTT token plunged 72% on Tuesday and was falling again on Wednesday. A day before reaching an agreement, Bankman-Fried said on Twitter that the assets on FTX were “good” and that “a competitor is trying to sue us with false rumors”.

What does this mean for the markets?

It injected 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, which leaves many holders 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?

CZ and SBF said on Twitter that the agreement was made to protect users, although the exact terms are unclear. There has been no announcement from Binance about what will happen to FTX accounts. Customers are unlikely to be happy with the token price drop.

Read more: Retail Crypto Investors Shaken as Binance Set 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 huge comeback for SBF, who was previously considered one of the most accomplished people in the industry.

This is also played in the fortunes. 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 and the subsequent performance of listed crypto companies. in stock exchange. His crypto trading house, Alameda Research, contributed $7.4 billion to his personal fortune.

The Bloomberg 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 come from Alameda. As a result, FTX and Alameda receive a value of $1. That leaves SBF’s net worth at around $1 billion, up from $15.6 billion on Tuesday. The 94% loss is the biggest one-day slump on record among billionaires tracked by Bloomberg.

CZ has also fallen on hard times, with his fortune down 83% year-to-date according to the Billionaires Index – but his worth is still estimated at $16.4 billion.

What does this mean in terms of regulations?

This episode and the speed with which it unfolded provides a stark example for regulators concerned about the lack of safeguards in the freewheeling crypto space. Jurisdictions that have considered looser rules may be less likely to do so, especially following the implosions of the Terra/Luna ecosystem and hedge fund Three Arrows Capital a few months ago.

In addition to general crypto regulation, the deal itself may come under scrutiny given that it sits between two of the major players in the space and could raise concerns about the market dominance of a combined entity.

And after?

It’s a bit blurry. Since Binance’s agreement to buy FTX is non-binding, a lot of different things could happen. Binance could take control of FTX, exit it entirely, or perhaps acquire parts of it. And it’s not even clear if FTX would 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 help from Tom Maloney.

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