Crypto Reacts as Binance on Brink of Acquiring FTX

Binance’s fast-developing and unexpected pending takeover of longtime rival crypto exchange FTX is likely to add even more scrutiny to the asset class, industry participants told Blockworks.

Binance CEO Changpeng ‘CZ’ Zhao tweeted Tuesday that his exchange had signed a “non-binding” letter of intent to fully acquire FTX, adding that “FTX asked for our help” amid a liquidity crunch. The move does not affect FTX’s US division, and it’s unclear whether the market maker’s venture capital arm would be included in the purchase.

“There is a lot to cover and will take some time,” Zhao said in a separate tweet. “This is a highly dynamic situation, and we are assessing the situation in real time. Binance has the discretion to pull out from the deal at any time.”

A spokesperson for Binance did not immediately return a request for comment. An FTX spokesperson declined to comment, deferring to CEO Sam Bankman-Fried’s tweets.

Matt Lason, chief investment officer at the digital-assets focused Globe 3 Capital, said it was concerning that FTX needed to be backstopped, given that they were “the original backstops” this summer for Celsius and Voyager Digital — crypto lenders that both filed for bankruptcy.

“Bear markets make for strange bedfellows,” Lason told Blockworks. “It’s a crazy shotgun marriage that no one saw coming.”

Swan Bitcoin CEO Cory Klippsten said he believes the acquisition of FTX will go through, but a few outstanding questions remain surrounding investors and customers. That’s especially true given FTX’s move Tuesday to suspend withdrawals of certain cryptocurrencies.

“But as we’ve seen with other ‘CeFi’ collapses this year, there’s no guarantee that all users will be made whole, nor that it will happen in a timely fashion,” Klippsten said in a statement.

Terra co-founder Do Kwon — whose company crumbled earlier this year when its algorithmic stablecoin depegged from the dollar and spurred a broad-based digital assets implosion — said on the UpOnly podcast he expects Bankman-Fried would likely be “fine.”

“I’m assuming that the sale price is at a reasonable discount to whatever the private funding was,” Kwon said. “If CZ steps in and makes users whole, there’s no reason why [Bankman-Fried] would be in any meaningful distress. He’ll probably move on to something else.”

Eric Risley, managing partner at mergers and acquisition advisory firm Architect Partners, said disclosing an acquisition publicly before terms are cemented is unusual — adding that a great deal can, and, indeed, often does, shift before the dust settles. While Risley said crypto broker and exchange consolidation is a strategic imperative, this one seems driven by a liquidity crisis.

“Unfortunately, this situation is yet another example of crypto relearning the lessons of finance and trading,” Risley said. “Liquidity and trust are essential and without either, it’s an existential crisis that impacts both the particular company as well as the overall industry via interconnected relationships.”

How did we get here?

A partial balance sheet of FTX sister firm and asset manager Alameda Research, reported by CoinDesk last week, showed about 40% of the firm’s $14.6 billion worth of assets were attributed to FTT, the token that powers trades on FTX. Alameda, founded by Bankman-Fried, engages in proprietary digital asset trading and venture capital investing.

Alameda CEO Caroline Ellison rebuffed claims that the firm is on the verge of insolvency, tweeting the leaked balance sheet didn’t provide the full scope of Alameda’s assets, including not reflecting related hedges.

In a rare maneuver, Zhao tweeted he would liquidate his firm’s substantial FTT holdings. The price of FTT subsequently tumbled.

Zhao tweeted Tuesday — after saying his firm would buy FTX outright — that he expects FTT to be “highly volatile” in the coming days.

FTT rose to about $19 following the news of the pending purchase, but dropped to $4.23 by about 3 pm ET — down more than 40% in just one hour.

Bankman-Fried, after tweeting about the deal, wrote that FTX was working to clear its withdrawal backlog, noting that, “all assets will be covered 1:1.”

The long-term impact of the potential FTX acquisition

Joseph Edwards, an investment partner at Securitize Capital, said it had become increasingly clear that the battle between FTX and Binance was going to be one of existential proportions — that has broader implications for the industry.

“The surprise here is of course how quickly it concluded,” Edwards told Blockworks. “That pace now puts Binance in a genuinely monopolistic position, which they wouldn’t have had in a protracted conflict.”

Edwards added the impending acquisition is good for the short-term security of the industry.

“But the long-term implications could be dark if Binance is able to consolidate the lead they now have,” he said. “They were already more wealthy by a significant degree than any other entity, they now may be by an order of magnitude.”

Industry watchers also said they’re expecting fresh rounds of regulation, including in the closely-watched US — ahead of Tuesday’s midterm elections — to stem from the likely takeover.

Ryan Shea, a crypto economist at finance broker Trakx, said the speed at which the non-binding agreement was reached could spur authorities to analyze what went on at FTX or Alameda Research. He added that authorities could use this as justification to bring forward more stringent regulation.

“Die-hard crypto-anarchists may find such notions repellent, but this is likely a necessary condition for broader public adoption of cryptocurrencies because regulation brings with it the perception of legitimacy,” Shea told Blockworks. “Additionally, it will also help encourage institutional investors into the sector because they are used to operating in a regulated environment.”

Zhao tweeted a couple hours after revealing the intended takeover of FTX that Binance would soon start implementing proof of reserves.

“Banks run on fractional reserves,” he said. “Crypto exchanges should not.”

A spokesperson for the CFTC told Reuters that the regulator was monitoring Binance’s acquisition of FTX.

“It is noteworthy that the CFTC has already stated that they are monitoring the situation,” Serhii Zhdanov, CEO of crypto exchange EXMO, told Blockworks. “The transparency of reserves may become a part of crypto regulation.”

Michael Bodley contributed reporting to this story.

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