As if yesterday’s news wasn’t crazy enough, Binance CEO, Changpeng Zhao, has announced that Binance is walking away from the deal to acquire FTX.
This came just a day after the announcement that Binance has signed a nonbinding letter of intent to acquire FTX.com (and bail them out), following a liquidity crunch on the FTX crypto exchange.
For context, Binance is the largest crypto exchange and FTX was the third largest in the world, making this huge news within the crypto industry.
But why did Binance back out? And more importantly, what happened to FTX?
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TL;DR: Binance Backs Out of FTX Acquisition, Following FTX Liquidity Crunch
- Nov 2: CoinDesk reported on a leaked balance sheet from Alameda Research, indicating heavy reliance on FTT, the native token of FTX.
- Nov 6: Binance stated its intent to liquidate its holdings (US$580 million) of FTT “due to recent revelations that have come to light”.
- Nov 6 – 8: FTX had seen around $6 billion of withdrawals in 72 hours
- Nov 8: Binance has signed a nonbinding letter of intent to acquire FTX.com, following a liquidity crunch on FTX.
- Nov 9: Binance has backed out from the deal while Temasek is in talks with FTX and “are engaging FTX in their capacity as a shareholder”.
FTX Liquidity Crunch – The Flow of Events
To understand this whole ordeal, we first have to understand what went on with FTX.
FTX is owned by Sam Bankman-Fried, who also owns a crypto trading firm called Alameda Research.
On November 2nd, CoinDesk reported on a leaked balance sheet from Alameda Research. It revealed that although both are separate businesses, the balance sheet of Alameda was “full of FTX”.
In other words, Alameda was holding on to large amounts of “locked” FTT tokens ($3.66 billion of Alameda’s $14.6 billion in assets), while its third biggest asset was $2.16 billion in FTT collateral.
FTT is the native token of FTX, which FTX uses to grant its users discounts on trading fees.
Investors were quick to notice that Alameda’s foundation is too heavily reliant on a cryptocurrency that its sister company invented and this raised concerns about the solvency of FTX
On November 6th, Zhao tweeted that Binance would liquidate its holdings (US$529 million) of FTT “due to recent revelations that have come to light”. This further fueled investor panic as there were already rumours about the possible insolvency of FTX since the leaks.
As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books. 1/4
— CZ 🔶 Binance (@cz_binance) November 6, 2022
FTT Token Price from 1st November to 9th November 2022
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By November 8th, FTX had seen around $6 billion of withdrawals in 72 hours which led to a liquidation problem. Bankman-Fried soon announced that withdrawals were effectively paused.
Shortly after that, it was announced that FTX had “come to an agreement on a strategic transaction with Binance for FTX.com”.
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 https://t.co/BGtFlCmLXB and help cover the liquidity crunch. We will be conducting a full DD in the coming days.
— CZ 🔶 Binance (@cz_binance) November 8, 2022
On November 9, Binance then backs out from the deal after realising the internal state of affairs at FTX and citing reasons such as the mismanagement of customer funds and investigations by US regulators.
As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of https://t.co/FQ3MIG381f.
— Binance (@binance) November 9, 2022
Meanwhile, Singapore’s sovereign wealth fund Temasek, who had invested in FTX in the Series B, Series B extension, and Series C funding round in October last year and early January this year, is engaging with FTX within their capacity as a shareholder.
What Does This Mean For You?
If you hold funds on FTX
At this moment in time, if you do hold funds in FTX, there’s really nothing much you can do but wait as the situation develops.
With Binance backing out of the deal, the chances of another suitor bailing FTX out are slim.
If you hold funds on other exchanges
As evident from previous crypto insolvencies, the saying holds true “not your keys, not your coins”. Clearly, keeping funds with exchanges is risky, even if you are with some of the biggest exchanges. Remember that nothing is too big to fail.
If you’re still keen on investing in crypto, it would be wise to move your assets into a cold wallet.
If you are invested in FTT
Sad to say, the price of FTT has crashed really hard and is on a slow decline now. The chances of it recovering a slim with Binance backing out.
So unless a filthy rich firm comes in to bail FTX out, the price of FTT is likely to continue its decline – even to zero.