Binance seemingly smelled blood in the water in its move to snap up its key, struggling rival, FTX.
And now the deal is done — as in dead, not to be consummated.
What comes next for FTX is an open question. What comes next for crypto may be chaotic.
“As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged U.S. agency investigations, we have decided that we will not pursue the potential acquisition of FTX.com,” a spokesperson told CoinDesk. “In the beginning, our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help. Every time a major player in an industry fails, retail consumers will suffer. We have seen over the last several years that the crypto ecosystem is becoming more resilient, and we believe in time that outliers that misuse user funds will be weeded out by the free market.”
That resilience may be sorely tested. The gyrating crypto prices and various announcements from crypto firms about the safety of their own holdings underscore the uncertainty and doubt that have become hallmarks of the space.
Consider what tipped the dominoes over the past few days: Whispers set off a panic, a panic set off a run on assets, the run begat a liquidity crunch, and the liquidity crunch delivered FTX to Binance.
Reports circulated this week that Alameda Research, a sister firm founded by FTX head Sam Bankman-Fried, maintained a balance sheet laden with FTT, a reportedly illiquid FTX issued token.
A “public war of words” began between Binance CEO Changpeng Zhao and Alameda Research CEO Caroline Ellison. Binance said it would start selling off the FTT tokens, and Zhao pointed to “recent revelations” as a reason for the move.
And just like that, a panic set off in the markets. FTT recently changed hands at about $4.40, plummeting from more than $22 at the beginning of the week. Amid the panic, FTX has essentially jumped into Binance’s arms, asking, as Zhao put it, “for our help.” The deal is (or if it falls apart, was) non-binding, and it seems that there are at least some concerns over long-term business prospects.
The overall crypto markets have not exactly been calmed. As of Wednesday afternoon, bitcoin, the de-facto proxy for the space, was trading down by more than 10% to $16,800.
As for the reassurances, another tweet from Zhao early Wednesday said Binance has “topped up” its so-called Secure Asset Fund for Users (SAFU) to an equivalent of $1 billion worth of various cryptocurrencies. That fund is used, in turn, to protect users’ holdings. Separately, Coinbase has been seeking to reassure investors that it does not have any material exposure to FTT; in the meantime, its stock was down about 28% Wednesday.
Volatility and a Domino Effect
Stock market routs and crypto plunges may wind up having real ripple effects in some traditional finance channels — most notably the credit markets. If FTX is left at the altar, and should it fail, lenders and investors who were once willing to look past short-term volatility may be concerned with long-term prospects or volatility if coins plummet or if exchanges shutter (or exchanges keep buying each other).
Last year, a slew of investors including SoftBank and Sequoia put $900 million into FTX, and no doubt the losses sting a bit. In this rocky environment, the struggling crypto firms and exchanges may find it harder to tap “new” money to help shore up operations.
Should Binance go ahead with the deal — again, market watchers say it is unlikely — and succeed in swallowing FTX, it would gain some scale and eliminate a rival. FTX has, in the past, bought up other foundering crypto outfits. In one recent example, FTX bought lender Voyager Digital, which went bankrupt. It takes time to digest companies, and it will take time to digest a firm like FTX, which has digested others’ operations.
Everything will be examined, from the terms of any deal down to the balance sheets and what assets that are held on various balance sheets. Zhao himself has signaled this, writing in a Wednesday letter that “regulators will scrutinize exchanges even more. Licenses around the globe will be harder to get. And people now think we are the biggest and will attack us even more.” One by-product of all this, wrote the CEO, is that the company will increase its transparency, proof-of-reserves and insurance funds.
That letter came before reports that Binance would walk away. But regardless, those actions to improve transparency would go a long way in addressing the waves of doubt swamping so much of the sector today.
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