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If you thought the blowback from Elon Musk’s recent Twitter takeover was frenzied, you ain’t seen nothing yet. In a year of eventful stories in the cryptocurrency world, nothing comes close to the action of recent days, which started when two of the industry’s biggest personalities became embroiled in a very public spat. Though the feud initially proved a source of entertainment for many, the ramifications were soon felt in the markets as prices nosedived, a takeover was announced, and a U.S. Senator felt moved to weigh in.
Empires Collide
The combatants in the billionaire dogfight were Sam Bankman-Fried (goes by SBF), the outspoken owner of crypto exchange FTX and trading firm Alameda Research, and Changpeng Zhao (goes by CZ), founder and CEO of the world’s largest digital asset exchange by trading volume, Binance. So what exactly happened?
This past Sunday November 6, CZ sent shockwaves through the industry by announcing that Binance planned to “liquidate any remaining FTT on our books.” FTT, of course, is the native token of SBF’s FTX – and CZ’s tweet quickly went viral. The reason for the sudden token dump? “We won’t support people who lobby against other industry players behind their backs.”
While it’s unclear what exactly CZ was referring to, some commentators have speculated that the magnate was angered by revelations in a CoinDesk article published last Wednesday, one which appeared to show that Alameda “rests on a foundation largely made up of a coin that a sister company [FTX] invented, not an independent asset like a fiat currency or another crypto.”
Others believe SBF’s recent article about the future of Web3 may have forced CZ’s hand. Entitled ‘Possible Digital Asset Industry Standards,’ the lengthy dispatch ignited a debate in the cryptosphere about just whose side the FTX boss was on: the crypto community or regulators.
“CZ is old-school crypto, he’s cut from similar cloth to Vitalik Buterin, and he made his money delivering value to customers by emphasizing transparency and trust,” says Adam Lavigne, Founder of DeFi platform Ethos. “Sam’s regulatory positioning rubbed him the wrong way, especially as it seemed to favor centralization over DeFi which is not in the spirit of the roots of crypto.”
Whatever the motivation, here are the facts: last year, Binance exited from FTX equity, receiving $2.1 billion worth of BUSD (Binance’s native stablecoin) and FTT in the process. Binance’s FTT holdings were said to represent 17% of the asset’s circulating supply, making CZ’s token dump a major headache for Bankman-Fried – not to mention regular retail investors with FTT on their portfolios.
A day before CZ made the Twitter announcement, $584 million worth of FTT tokens were transferred from a wallet to Binance’s exchange, with CZ later stating that he wanted to offload the tokens “in a way that minimizes market impact.” According to his tweet, this process would take a few months to complete.
Despite such assurances, FTT has completely crashed since Zhao opted to liquidate; with investors making $6bn of withdrawals in three days, it has lost over 80% of its value. Some have speculated that Zhao’s motives were selfish, an attempt to foment distrust among traders and drive a bulldozer through FTX, which is one of Binance’s strongest competitors. During the unfolding imbroglio, CZ clarified that liquidating FTT was “just post-exit risk management, learning from LUNA” – a reference to the spectacular downfall of Terra in May. It’s obvious he knew what he was doing when mentioning FTT and LUNA in the same breath.
“The late night Twitter Drama on Sunday between two of the richest personalities in this industry highlighted the sensitivity of markets when it comes to insolvency rumors,” says Ajay Dhingra, Head of Research and Analytics at Smart Exchange Unizen.
“FTT dipped sharply when CZ announced that they are liquidating all of their inventory. Despite Alameda’s CEO responding to the queries, there were no answers on how many debt positions use locked SOL and FTT as collateral. We still haven’t got past the Celsius, Voyager and Three Arrows Capital implosion timeline and now another company having their assets tied in a deeply illiquid scenario does raise concerns. The locked tokens are also subject to market downturn where they may lose value and liabilities keep on piling up, skewing the balance sheet towards aggressive margin calls.”
The Takeover
The FTT token was on the way down when CZ made his next move. Or perhaps it was SBF who waved the white flag. Taking to Twitter, CZ revealed that FTX had sought his help to stem the tide of liquidations and that Binance was acquiring the company and helping to cover the liquidity crunch.
Liquidity crunch is an understatement. Over $700 million of long trades have been wiped out in the past 24 hours, with the cryptocurrency market capitalization falling almost 9%. The bloodletting even drew the attention of U.S. Senator Cynthia Lummis, who said the story was “the clearest example yet of why we need clear rules of the road for digital asset exchanges in the United States.” She added, “Market manipulation, lending activity, and whether customer funds and assets were appropriately safeguarded are just a few of the many issues my colleagues and I need to consider in the coming days.”
The comments reflect the growing perception that Alameda/SBF had inflated its balance sheet with tokens FTX could print ex-nihilo. CZ, for his part, seems to agree with Lummis; he has called for crypto exchanges to use merkle-tree proof-of-reserves and promised that Binance will lead the way. A slew of major exchanges – Gate.io, KuCoin, Poloniex, Bitget, Huobi and OKX – have since pledged to do the same.
The Luna crash highlighted many things, perhaps none more than the cult of personality that had grown around hubristic CEO Do Kwon, now apparently evading authorities in Europe. The same specter hangs over Binance and FTX, with their self-assured figureheads backed by a small army of acolytes – and opposed by many detractors.
The last thing the crypto industry needed was another black swan event, but perhaps the silver lining benefits the space over the long term: not only have several exchanges promised to publish proof-of-reserves, thus enhancing consumer protections, and serve as a cautionary tale for other crypto entrepreneurs with an appetite for risky business. Maybe.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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