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Binance seen unlikely to move ahead with FTX deal after finding deep hole

Nov. 9, 2022 Updated Wed., Nov. 9, 2022 at 6:26 p.m.

The logo for Binance Coin is displayed during the Dubai Crypto Expo at the Festival Arena in Dubai, United Arab Emirates, on Oct. 5.  (Christopher Pike/Bloomberg)
The logo for Binance Coin is displayed during the Dubai Crypto Expo at the Festival Arena in Dubai, United Arab Emirates, on Oct. 5. (Christopher Pike/Bloomberg)
By Yueqi Yang and Suvashree Ghosh Bloomberg

Binance CEO Changpeng Zhao moved fast when Sam Bankman-Fried’s FTX.com was on the brink, offering to take it over and stem any further crypto contagion.

Just hours into their due diligence, Binance executives found themselves staring into a financial black hole – casting doubt on whether the firm should rescue its onetime top rival.

Binance is now unlikely to follow through on its takeover of FTX, according to a person familiar with the matter. At issue: A gap between liabilities and assets at FTX that’s probably in the billions, and possibly more than $6 billion, said the person, who wasn’t authorized to publicly discuss the matter.

“Binance is still in early stage of conducting” due diligence and “will communicate further when we have something more substantive to share,” a firm spokesperson said.

Moving ahead with the deal given the shortfall would be a tough pill to swallow for Zhao, known as CZ. He said in a memo to employees that he has no “master plan” and that the stunning collapse of FTX “is not good for anyone in the industry.”

In addition to FTX’s financial hole, it may also face regulatory pressure. The Securities and Exchange Commission and the Commodity Futures Trading Commission are investigating whether the firm properly handled customer funds, as well as its relationship with other parts of Bankman-Fried’s crypto empire, Bloomberg News reported Wednesday.

Binance’s due diligence could take 30 days, the person familiar said. The firm’s non-binding letter of intent allows it to fully acquire FTX, buy parts of the assets or walk away.

An immediate issue is the way FTX valued its utility token FTT and whether it should have been marked at a lower price, the person said. The token has plunged some 70% since Zhao said his exchange would be liquidating its FTT holdings, worth $529 million at the time.

Zhao’s move followed a story from CoinDesk saying that a potentially partial balance sheet shows FTT made up about a quarter of assets at Alameda Research, a trading house owned by Bankman-Fried. The crypto news site earlier reported that Binance was leaning against its FTX takeover.

The proposed deal between Binance and FTX doesn’t involve Alameda, the person familiar said. Bankman-Fried had already said that the transaction would exclude FTX.US, a separate exchange he founded.

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