Financial news

Binance and FTX – two of the world’s largest cryptocurrency exchanges – are reportedly merging. Binance says it has signed a nonbinding agreement to buy FTX’s non-US unit to help cover a liquidity crunch at the rival exchange.

Let’s take a look at what’s going on…

Binance CEO Changpeng Zhao sparked a brouhaha on Tuesday when he took to Twitter to reveal his company intended to bail out and acquire rival FTX.com.

In a tweet, Zhao said: “This afternoon, FTX asked for our help. There is a significant liquidity crunch. To protect users, we signed a non-binding LOI, intending to fully acquire FTX.com and help cover the liquidity crunch. We will be conducting a full DD in the coming days.”

While Sam Bankman-Fried, CEO at FTX, also tweeted: “Things have come full circle, and FTX.com’s first, and last, investors are the same: we have come to an agreement on a strategic transaction with Binance for FTX.com (pending DD etc).”

“I know that there have been rumors in media of conflict between our two exchanges, however Binance has shown time and again that they are committed to a more decentralised global economy while working to improve industry relations with regulators. We are in the best of hands.”

Concern around FTX’s liquidity began last week when crypto news website CoinDesk released the balance sheet of Alameda Research – a separate business owned by Bankman-Fried. The report showed that Alameda held $14.6billion in assets with $8billion in liabilities. Their largest asset reported was FTT, shown to be worth $5.8billion. Following the report, Binance decided it would liquidate its FTT holdings.

Despite the acquisition agreement, FTX’s exchange token, FTT, went into freefall on Tuesday – sinking more than 80 per cent to just over $4.

Stunned industry

Lachlan Feeney, founder and CEO of Australian on-shore blockchain consultancy Labrys, says what was little more than a “few unfounded rumours a week ago” has exploded over the last 24 hours and “stunned the industry”.

“It’s hard to downplay quite how significant the collapse of FTX, arguably the second largest exchange in the world, is,” says Feeney. “This isn’t the collapse of a smaller, ‘cowboy’ crypto exchange; it is one of the most heavily-regulated and heavily backed businesses – including by pension funds – in any industry. Until it exploded overnight, this was considered inconceivable.

“Besides a ‘non-binding’ letter of intent – which is light on detail – there is very little substantive clarity out there. Indeed, Binance CEO Changpeng ‘CZ’ Zhao tweeted that the situation was ‘dynamic’ and that Binance had the discretion to withdraw at any stage. What we do know is that the news catalysed a quick and concerted sell-off, with the price of cryptocurrencies dropping very significantly. In terms of what this means for investors and retail customers, though, there are still far more questions than answers.”

Binance must succeed

Timo Lehes, co-founder of regulated DeFi platform Swarm, thinks the level of consolidation makes Binance too big to fail.

“Their success is now crucial to the systemic operations of the crypto industry, given that more than half of global spot trades and a large chunk of crypto derivatives business is transacted across both exchanges. It is no secret that Binance is trying to increase its regulatory footprint and the FTX acquisition advances that strategy.

“The timing of the deal is interesting as it comes less than 24 hours after Binance pulled its liquidity from FTX. The events of the last 24 hours highlight the lack of transparency as a centralised phenomenon. It was those monitoring on-chain activity who pointed out strange ongoings with FTX wallets, prompting the rumor mill on Twitter to unfold and putting pressure on the FTX team for answers. Had there been more transparency and less convolution around FTX’s operations, perhaps this would have caused less FUD and put SBF and his team in a stronger position.

“If the deal does go through, a consolidation of this size will be unprecedented in the crypto space — ironically one that values decentralisation and transparency.”

Industry challenges

Cryptocurrency platform Coinbase said it was important to explain the challenges the industry faces amid liquidity struggles. It insisted that regardless of whether the Binance/FTX transaction completes, it has seen very little exposure to FTX nor exposure to the FTT token.

In a blog post, Alesia Haas, CFO at Coinbase, wrote: “Given how much conversation there has been in the past few days around liquidity struggles, we thought it important to provide clarity around these challenges and reiterate how Coinbase’s business is different.

“First, from day one Coinbase has sought to be the most secure and compliant crypto exchange. And today, Coinbase and our customers are not in any direct danger of liquidity or credit risk. Regardless of whether the Binance/FTX transaction completes, we have very little exposure to FTX and we have no exposure to its token, FTT.  Currently we have $15 million worth of deposits on FTX to facilitate business operations and client trades. We have no exposure to Alameda Research, and we have no loans to FTX.

“Second, as a publicly traded company in the US, we’ve also built our business in a way that allows us to be transparent about our track record, balance sheet strength, and effectively and prudently manage risk for our customers and ourselves.

Lessons to learn

After offering to buy FTX, Zhao tweeted that there are two major lessons that other players in the industry can learn from the fallout.

“Two big lessons: 1: Never use a token you created as collateral. 2: Don’t borrow if you run a crypto business. Don’t use capital ‘efficiently’. Have a large reserve.”

Zhao says Binance has never used BNB for collateral and has never taken on debt.