Binance has signed a Letter of Intent to buy the non-U.S division of FTX. Here's what you need to know
[Update: Binance has backed out of the deal, less than a day after announcing that it was going to buy FTX in a non-binding deal]
The biggest news in the crypto world has just hit: Binance is buying its biggest rival, FTX.
This comes after the CEO of Binance, Changpeng “CZ” Zhao announced in a tweet that the company has signed a non-binding Letter of Intent (LOI) to acquire FTX.com to help cover “the liquidity crunch”.
This all seemed too crazy to be true, until FTX’s own CEO Sam Bankman-Fried (SBF) confirmed this in a tweet. He said that FTX had “come to an agreement on a strategic transaction with Binance”, and that the "teams are working on clearing out the withdrawal backlog as is, all assets will be covered 1:1”.
In the same tweet, SBF also assured that customers' funds would be protected and FTX.us would not be impacted and "is operating normally".
Prices of cryptocurrencies including Bitcoin and Ethereum came crashing down when rumours of a potential collapse of FTX began circulating. When the news broke, Bitcoin, Ethereum, and BNB — Binance’s native token — shot up when the Binance deal came to light. However, they have since gone back down again at the time of writing.
How FTX imploded
The spectacular collapse of FTX came as a surprise to many, considering that the firm is one of the largest crypto exchanges in the world. The company also had a valuation of US$32 billion earlier this year.
In particular, SBF, who had a net worth of US$16 billion, was regarded as a saviour in the crypto space when he helped to bail out several struggling crypto firms this year.
However, rumours began swirling about FTX’s financial troubles on 2 Nov when CoinDesk reported a leaked balance sheet from Alameda Research — an independent trading firm founded by SBF — revealing that both companies have close ties.
More importantly, the report also revealed that Alameda held a large amount of FTT, which is a token native to the FTX exchange, in its balance sheet. In fact, US$3.66 billion of US$14.6 billion in assets were held in “unlocked” FTT. The third biggest asset was US$2.16 billion worth of "FTT collateral".
This meant that Alameda was highly dependent on FTT and FTT’s value was in turn dependent on the purchases of FTX.
On top of this, FTX also has US$8 billion worth of liabilities, including US$292 million of "locked FTT".
In a shrewd move, Binance CEO CZ announced in a tweet on 6 Nov that the company would be liquidating their stake in FTT — about US$580 million — “due to recent revelations that have come to light”. Binance had acquired a stake in FTX by being an early investor. This placed further pressure on the price of FTT, which prompted investors to panic and triggered a major selloff.
On 7 Nov, SBF responded by tweeting that FTX and their assets were “fine” and that “a competitor is trying to go after us with false rumours”.
However, a day later on 8 Nov, there were reports that FTX had stopped processing withdrawals for Ethereum (ETH), Solana (SOL), and TRON (TRX). The company also saw around US$6 billion in withdrawals within 72 hours before the Binance announcement.
Despite reports that SBF had tried several ways to stop the massive selling to give FTX a lifeline, he eventually ran out of options as the demand for withdrawals was too hot and he didn't have enough liquidity.
What happens now
This deal means that Binance has firmly cemented its place as the biggest crypto exchange in the world.
However, news of the deal will no doubt raise further questions about the transparency and accountability of crypto firms. Moreover, the credibility and reputation of crypto firms will also be further tarnished.
The lack of transparency means that no one knows the actual assets held by crypto firms as well as their liquidity.
Calls to regulate the crypto industry will also be raised again. In particular, policymakers and investors alike will want a detailed disclosure of liquidity through a Proof-of-Reserve.
A Proof-of-Reserve is an audit conducted by an independent third party to ensure that the balances held by exchanges are backed by real assets. This helps to paint an accurate picture of held balances while maintaining trust among users. It also helps to improve transparency and to safeguard against different security risks in the crypto industry.
In fact, a recent survey by Bitstamp revealed that Singapore investors want more regulation in the crypto industry, despite an overall positive sentiment about the industry.
If you're a crypto investor and plan to invest in crypto, it's important that you do your due diligence before investing. This includes doing your own research, understanding your risks, and diversifying your investments, among others.
If you're looking for less risky ways to invest your money, consider investing in fixed deposits, the Singapore Savings Bond, T-bills, and robo-advisors.