- History of the relationship
- Reasons for the collapse
- Withdrawals became disastrous
- Seeking a bailout
- After the Binance-FTX collision, the dominoes collapsed
On Tuesday morning, Sam Bankman-Fried, owner of the cryptocurrency exchange FTX, caught his employees off guard with a grim message.
“I’m sorry,” he told them. “I f***** up.”
After months of trying to keep the top FTX exchange afloat, its owner managed to negotiate with Binance to acquire FTX assets to cover liquidity. However, at the last moment Binance rejected the deal and FTX was left with nothing.
Thirty-year-old Bankman-Fried founded his own cryptocurrency exchange in the Bahamas in 2019. Very soon FTX became one of the largest exchanges, and the creator became $17 billion rich.
Zhao and Bankman-Fried’s relationship began that same year. Six months after FTX was launched, Zhao bought 20 percent of the exchange for about $100 million. Binance said the investment was “aimed at the joint development of the crypto economy.”
Within 18 months, however, their relationship soured. According to former Binance employees, FTX was growing rapidly, and Zhao now saw it as a real competitor with global aspirations.
When FTX applied for a Gibraltar license for a subsidiary in May 2021, it had to provide information about its major shareholders, but Binance rejected FTX’s requests for help. Between May and July, FTX lawyers and advisers wrote to Binance at least 20 times to get details about Zhao’s sources of income, banking relationships and ownership of Binance.
In June 2021, an FTX lawyer told Binance’s CFO that Binance was “not interacting with us properly” and risked “seriously disrupting an important project for us.” A Binance legal officer responded to FTX, saying she tried to get a response from Zhao’s personal assistant, but the information requested was “too general” and they may not provide everything.
By July of that year, Bankman-Fried got tired of waiting. He bought Zhao’s stake in FTX for about $2 billion. Two months later, Gibraltar’s regulator granted FTX a license.
That amount was paid to Binance, in part, in FTX’s own coin, FTT, Zhao said last week. He would then order the sale of assets, precipitating a crisis at FTX.
The FTX crisis began months ago because of mistakes made by Bankman-Freed after he tried to save other cryptocurrency firms, as the cryptocurrency market collapsed amid rising interest rates. As a result, some of those deals involving Bankman-Fried’s trading firm, Alameda Research, resulted in a series of losses that ultimately led to the current situation.
Bankman-Fried’s trading firm, Alameda Research, incurred a series of deal losses in May and June. They included a $500 million loan agreement with failed crypto lender Voyager Digital. The following month, Voyager filed for bankruptcy protection, and FTX’s US unit paid $1.4 billion for its assets in a September auction. The size of Alameda’s full losses has not yet been announced.
Reportedly, in an effort to support Alameda Research, which had nearly $15 billion in assets, Bankman-Fried transferred at least $4 billion in asset-backed FTX funds, including FTT and shares in trading platform Robinhood Markets Inc.
On Nov. 6, Zhao said Binance would sell its entire stake in the FTT token for at least $580 million “due to the recent revelations that have become known.” The price of the token dropped 80% over the next two days, and the flow of withdrawals from the exchange gained momentum.
In a message to employees this week, Bankman-Fried said the firm saw a “giant withdrawal surge” as users rushed to withdraw $6 billion worth of crypto tokens from FTX in just 72 hours. Daily withdrawals normally totaled tens of millions of dollars, Bankman-Fried told his staff.
After Zhao tweeted that Binance’s decision was to sell its FTT assets, Bankman-Fried expressed confidence that FTX would withstand attacks from its competitor.
“We’re chugging along,” he wrote. “Obviously, Binance is trying to go after us. So be it.”
But by early this week, the situation became nearly hopeless. Bankman-Fried contacted Zhao, unable to quickly find a backer or sell other illiquid assets on short notice. Bankman-Fried signed a non-binding letter of intent from Binance to buy FTX assets outside the US for a few billion dollars – enough for the exchange to cover all withdrawal requests.
Zhao announced the potential deal hours later, and Bankman-Fried tweeted, “a huge thank you to CZ.”
“Let’s live to fight another day,” Bankman-Fried told employees who were shocked. It turned out that even the executives had been in the dark about Alameda’s deficit and takeover plan until Bankman-Fried told them about it. No one at the company knew that the withdrawal situation was that serious.
Then came Binance’s announcement to cancel the takeover. “The problems are beyond our control or ability to help,” Binance said.
Zhao tweeted “Sad day. Tried,” with a crying emoji.
FTX CEO Sam Bankman-Fried said he was “exploring all the options,” but fading hopes for rescue left FTX teetering. A message on the FTX website said: “FTX is currently unable to process withdrawals. We strongly advise against depositing.”
FTX’s own token, FTT, was down 90% and trying to hold steady at around $2 – just above its all-time low of around $1.50.
Bitcoin fell next – below $16,000 for the first time since late 2020 overnight and was last at $16,435.
Another exchange, OKX, said it was also approached this week by Bachman-Fried, who described a $7 billion liability that needed to be covered quickly.
“Even Elon Musk would not be able to commit to a deal with $7 billion liability within a few hours of negotiations. That was too much for us,” Lennix Lai, director of financial markets at OKX said.
“(It) is a big hole to plug,” he added. “The dagger will continue to hang over the crypto market, as long as the outlook of FTX’s fate remains unclear.”
Crypto brokerage Hidden Road Partners urged customers to sell off all balances and positions on cryptocurrency exchange FTX.com and convert them to US dollars
Hidden Road, which completed a $50 million funding round a few months ago with backers including Citadel Securities and FTX’s venture capital arm, FTX Ventures, told customers in a message Wednesday that they have until 7:30 p.m. New York time to liquidate assets in FTX.com. Hidden Road said it was declaring an “exchange default” under a clause in customers’ contracts.
This decision by Binance shows how the turmoil at FTX is spreading to a broader group of digital asset firms, while highlighting the close ties between many of the crypto world’s platforms.