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Crypto world rocked as world’s largest exchange rescues rival

Nov. 8, 2022 Updated Tue., Nov. 8, 2022 at 6:05 p.m.

Changpeng Zhao, founder of Binance, the world’s largest cryptocurrency exchang.  (New York Times)
Changpeng Zhao, founder of Binance, the world’s largest cryptocurrency exchang. (New York Times)
David Yaffe-Bellany New York Times

New York Times

The cryptocurrency world was rocked on Tuesday as one of the largest exchanges for digital currencies, which appeared to be on the verge of collapse, was bailed out by a major rival in a deal that underlined the perils of the industry’s volatility.

Binance, the world’s largest cryptocurrency exchange, said that it had reached an agreement to buy its competitor FTX, which struggled to meet a surge of withdrawal requests in recent days as the crypto market teetered on the edge of another meltdown. The size of the acquisition couldn’t immediately be determined, but the privately held FTX had once been valued at $32 billion.

The emergency deal making highlighted the persistent instability of the crypto industry, which was buffeted this spring by a $2 trillion crash that drained the savings of many amateur investors. That downturn destabilized some of crypto’s biggest firms, though FTX was by far the largest casualty. It was widely regarded as among the most nimble and best-run firms, until its finances started to unravel recently.

Many of the major crypto companies “are inherently fragile, susceptible to a Lehman-like collapse at any time,” said Cory Klippsten, a Bitcoin entrepreneur who is critical of the rest of the crypto industry. “The only hope once under pressure is that another player will bail them out.”

If the deal goes through, it will unite two of the largest crypto companies and cement the status of Binance’s founder, Changpeng Zhao, as one of the most powerful figures shaping the future of the loosely regulated technology.

The deal was announced as crypto markets, which have seen devastating losses this year, were on the brink of more panic. Reports had been circulating that FTX rested on shaky financial foundations. Many of its customers, who use FTX to buy and store their digital currencies, rushed to take their money out. On Monday night, the crypto research firm Nansen reported that more than $500 million had flowed off the platform over the previous 24 hours.

At one point on Tuesday, FTX stopped processing withdrawals altogether, according to the Block, a crypto research firm. The exchange appeared to have entered a “liquidity crunch,” meaning it lacked the funds to fulfill demand for withdrawals.

“This afternoon, FTX asked for our help,” Zhao said on Twitter, describing how Binance had struck the deal to buy FTX. He said that his company was planning to “fully acquire FTX.com” to help relieve the pressure on the exchange, but added that the agreement was “nonbinding.”

Sam Bankman-Fried, chief executive of FTX, said on Twitter that the deal “benefits the entire industry” and would allow FTX to meet the surge of withdrawal requests.

Bankman-Fried, who runs FTX from its headquarters in the Bahamas, added that the deal would not involve the company’s smaller U.S.-based arm.An FTX spokesman said the company had no comment beyond the Twitter posts. A Binance spokeswoman did not immediately respond to a request for comment.

The deal was a humbling reversal for Bankman-Fried, who had emerged over the last two years as one of the crypto industry’s most powerful figures. He started a lobbying push to shape crypto regulation in Washington and bought the naming rights to the Miami Heat’s arena as part of an aggressive marketing campaign. He has also been a major political donor, contributing $5.6 million to support Joe Biden’s 2020 election effort.

When the crypto market crashed in the spring, Bankman-Fried engineered deals to backstop struggling companies. He launched a bid to acquire Voyager Digital, a publicly traded crypto lender that filed for bankruptcy.

But cracks started emerging last week when the crypto publication CoinDesk reported on a leaked balance sheet that appeared to show that FTX’s sister company, Alameda Research, was on shaky foundations. Alameda is a hedge fund that Bankman-Fried founded before starting FTX. The two companies have close financial ties.

The report showed that a large portion of Alameda’s assets were a cryptocurrency called FTT, which FTX invented for traders to use on its platform. The disclosure stoked fears that a sudden drop in the price of FTT could cause a crisis for Alameda and FTX.

Zhao was an early investor in FTX, which gave him a stake in the company. Bankman-Fried later bought that stake back, paying for it partly in FTT. Over the weekend, Zhao announced that Binance would sell its FTT holdings, citing “recent revelations.”

The announcement set off a public spat between Zhao and Bankman-Fried. “A competitor is going after us with false rumors,” Bankman-Fried said on Twitter on Monday. “FTX is fine. Assets are fine.”

But Binance’s moves also sent the price of FTT spiraling. By Tuesday, it had dropped about 63% over the last 24 hours. The rest of the crypto market took a hit, with the prices of Bitcoin and Ether also falling.

Traders rushed to move their cryptocurrencies off FTX’s platform, as fears grew that the company could be the next in a series of high-profile crypto firms to collapse. More than $1.2 billion was withdrawn from FTX on Monday, the crypto tracking firm Nansen reported that night.

“There’s a confidence crisis here,” said Ed Moya, a crypto analyst at OANDA, a trading firm. “Whenever you have the instability of a key token or coin that is tied to one of the key crypto figures, there’s always concern that you could see contagion, and a much more significant moment of crisis.”

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