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The World’s Largest Crypto Exchange Is Buying a Major Competitor. Here’s Why That Matters

7 minute read
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Binance, the world’s largest centralized crypto exchange, said on Tuesday that it reached a deal to buy its fastest-rising competitor, FTX. Binance’s co-founder and CEO Changpeng Zhao announced the move on Twitter, and immediately sent shockwaves through a crypto landscape already besieged by turbulence and falling prices. In the hours after, Bitcoin fell by more than 10%.

The exact terms of the transaction were not disclosed on Tuesday. (In January, FTX was valued at $32 billion.) But the deal exposes the vulnerability of even crypto’s most iron-clad dealmakers—and could draw the increased scrutiny from regulators across the world. It also delivers a blow to the public image of FTX founder Sam Bankman-Fried, one of crypto’s most well-known figures—who was widely acknowledged as an industry leader working to push crypto toward the mainstream.

Critics now argue that under Bankman-Fried’s leadership, FTX mismanaged its rapid growth and hid its financial shortcomings, which necessitated a bailout from one of its closest (and savviest) competitors. Bloomberg estimated that Bankman-Fried lost 94% of his wealth in a single day, marking the biggest one-day collapse among billionaires that the publication has ever tracked.

“It will probably go down in history as one of the greatest corporate raids of all time,” Alex Svanevik, the CEO of the blockchain analytics firm Nansen, tells TIME, noting that the deal greatly increases Zhao’s power and stature.

A spokesperson from FTX declined to comment beyond Bankman-Fried’s announcement of the deal on Twitter.

Zhao helped set off the turn of events on Sunday by publicly sowing doubt on Twitter about the amount of cash FTX had on hand. Zhao announced that Binance intended to sell off more than $500 million worth of FTX’s native token, FTT, creating a bank run in which crypto investors—jumpy from a year’s worth of financial disasters—rushed to pull their money out.

This caused an actual liquidity crisis for FTX, which reacted by temporarily pausing withdrawals. On Tuesday, Bankman-Fried tweeted that Binance was helping FTX to repay all of its users who were trying to withdraw their holdings. He said that all users would eventually be able to withdraw their money at a “1:1” ratio. Notably, Binance’s purchase does not include its FTX.US retail operation, which operates as a separate company.

History: FTX challenges Binance

Binance has long been the foremost crypto exchange. It facilitates billions of dollars in trading volume every day, and generated revenue of at least $20 billion last year, according to Bloomberg. Users turn to Binance to convert dollars into Bitcoin, Ether, or Dogecoin, and also trade Binance’s more risky financial products, including crypto derivatives, which allow them to make bets on future fluctuations in cryptocurrency prices.

In 2019, the rising crypto entrepreneur Sam Bankman-Fried founded the exchange FTX, seeking to onboard a new generation of curious investors into the crypto world. At the height of crypto’s recent bull run, from 2020 to 2021, FTX was one of the fastest-growing platforms of the ecosystem, with its revenue soaring more than 1000%.

Bankman-Fried himself became one of crypto’s leading celebrities. He held conferences with Bill Clinton and Tony Blair, poured millions into political campaigns and appeared regularly in Washington for congressional hearings and backroom meetings with lawmakers and regulators. He argued that crypto would democratize finance, graced the cover of FORTUNE magazine, and spent heavily on branding, including buying the naming rights to the Miami Heat’s arena, which is now FTX Arena, for $135 million.

In May, Bankman-Fried was named to the 2022 TIME100. And when the crypto world suffered one devastating crash after another, Bankman-Fried played the role of white knight, bailing out struggling businesses with huge loans, in the process building an enviable crypto empire. (His notable deals included taking a 30 percent stake in SkyBridge Capital, the hedge fund founded by Anthony Scaramucci.)

FTX unravels

But on Nov. 2, the crypto news outlet CoinDesk reported that the balance sheet of FTX’s sister company, Alameda Research, seemed to be built on a shaky foundation. On Nov. 6, Zhao announced on Twitter that Binance would sell off the $2 billion worth it owned in FTT, FTX’s token, due to “recent revelations that have came [sic] to light.” “Liquidating our FTT is just post-exit risk management, learning from LUNA,” Zhao wrote, referring to the failed stablecoin ecosystem whose demise played a huge role in deepening the overall crypto crash this May.

Zhao’s comparison of LUNA, a disastrous project, with FTX, one of the industry’s trusted power players, raised many eyebrows, including Bankman-Fried’s. “A competitor is trying to go after us with false rumors,” Bankman-Fried tweeted. “FTX is fine. Assets are fine.”

Read More: What Terra’s Crash Means For Crypto and Beyond

But Zhao’s actions unnerved many investors, and a growing number of crypto analysts began to support the idea that Alameda Research was secretly insolvent. So over the past two days, hundreds of millions of dollars worth of crypto was pulled out of FTX. Investors’ fears compounded upon themselves, and the overall market sank as well, with Bitcoin dropping 6%.

FTX suddenly faced a major cash shortage. On Tuesday morning, the platform stopped processing clients’ requests for withdrawals. Hours later, Zhao announced that Binance would be buying FTX, tweeting: “FTX asked for our help.” He stipulated that the agreement was “nonbinding.”

The move came as a major surprise to crypto insiders, especially given Bankman-Fried’s stature in the industry. “If you suggested something like this 48 or even 24 hours ago—I don’t think anyone saw this coming,” Kristin Smith, the executive director of the Blockchain Association, a D.C.-based crypto lobbying group, says. “This is absolutely mind-blowing news for the crypto community, and a day that is going to be looked back upon for years ahead.”

“Most people did not expect FTX to end up in this situation, given they were the savior of these other distressed companies,” Svanevik says. “We of course know that Sam Bankman-Fried had been quite active trying to influence regulation in the U.S. It looks a bit embarrassing to end up in this situation so shortly after.”

What this means for crypto

In the short term, the news sent major shockwaves through crypto, with Bitcoin dropping 10% and Ether dropping more than 17%. It’s possible that the downward spiral could continue, as collapses of crypto platforms or companies have proved to be contagious to the larger ecosystem.

Smith predicts that the sale will cause Bankman-Fried to take a backseat in U.S. crypto regulatory negotiations. “I don’t imagine that we’re going to see him walking the halls of Capitol Hill anytime soon,” she says. She also says that FTX’s downfall could lead to increased urgency from legislators to regulate large exchanges. “If there’s one thing the events have shown, it’s that we really do need to have more transparency into how centralized crypto exchanges work,” she says. “We need to get legislation passed.”

Zhao’s Binance, on the other hand, is now the undisputed powerhouse of the centralized crypto world. The company’s acquisition of FTX is concerning to many crypto idealists given the importance they place on decentralization. And others in the industry are concerned that the deal will draw antitrust scrutiny in more stringent jurisdictions around the world, including in the E.U.

John Lo, managing partner of digital assets at the investment firm Recharge Capital, wrote in an email to TIME that after the sale, crypto “is more centralized than ever.” However, he hopes that the events serve as a wake-up call to the crypto community to re-orient its priorities toward the technology’s core values. “Centralized actors will continue to curb stomp decentralization when presented the opportunity,” he wrote. “However, the ascent of decentralized and autonomous solutions are inevitable.”

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