And in another quick twist of events, Binance — just 24 hours after it announced it would acquire embattled FTX and after it would conduct due diligence — walked away from the deal, leaving the platform on the brink of collapse, sending shockwaves across the industry and bringing the crypto prices tumbling.
On Nov. 9, Binance tweeted: “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 FTX.com. In the beginning, our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help. Every time a major player in an industry fails, retail consumers will suffer. We have seen over the last several years that the crypto ecosystem is becoming more resilient and we believe in time that outliers that misuse user funds will be weeded out by the free market. As regulatory frameworks are developed and as the industry continues to evolve toward greater decentralization, the ecosystem will grow stronger.”
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“It seems pretty clear that Binance took a look at FTX’s books and didn’t like what they saw – at all,” said Brent Xu, CEO and co-founder of Umee. “What they saw was too much bad leverage shared between Alameda and FTX, both which fall under Sam Bankman-Fried’s now-crumbling empire. Initially, Binance probably thought it was a liquidity crunch over at FTX, and responded as such, but what they later found on inside was, again, tons of bad leverage that they don’t want to touch.”
Xu added that what is clear from this is that FTX doesn’t know anything about leverage or how to trade it.
“I also think it’s clear that our industry as a whole needs to focus on DeFi more, notably on how to promote more transparency and auditability that comes with using blockchain networks. That is the way forward for us,” he said.
Xu added that he doesn’t think any other centralized exchanges and trading shops are as leveraged as FTX is, so “I’m not sure if there will be more blowups across the industry.”
“It’s possible, sure, but if there are other blowups at other exchanges, they won’t likely be nearly as big as what happened with FTX. FTX was likely the biggest and most damaging. But I think what we will be seeing is just how bad the situation within FTX and Alameda really was, including what sort of wild risks they took with leverage. And that in itself will be shocking,” Xu added.
The sentiment was echoed across the industry. Brock Pierce, Bitcoin Foundation chairman, said that as they entered into a non-binding acquisition subject to due diligence, if they pulled out of the deal within 24 hours of doing due diligence, “I assume they did not like what they saw,” he said.
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The deal, announced on Nov. 8 and after a few tumultuous days, came as a shock to many and was a stunning and very quick turn of events for Sam Bankman-Fried, FTX CEO, who had emerged as the savior of all things battered since the crypto winter started.
“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 FTX.com and help cover the liquidity crunch. We will be conducting a full DD in the coming days,” Changpeng Zhao, aka CZ, Binance CEO, tweeted on Nov. 8.
The unraveling of FTX hastened following a CoinDesk report that raised concerns about the balance sheet of Bankman-Fried’s other company, Alameda Research, which was said to be too heavily reliant on illiquid tokens including FTX’s native crypto token FTT, as GOBankingRates previously reported.
After that initial news, on Sunday, Nov. 6, CZ announced on Twitter, “Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books.”
This brought the price of FTT crashing and on the morning of Nov. 8, FTX halted withdrawals. On the afternoon of Nov. 8, FTT was down about 80%, according to CoinMarketCap data. On the afternoon of Nov. 9, it was down around 55% and Bitcoin was down 13%.
In a turn of events reminiscent of what happened earlier this year with the Three Arrows Capital, which itself went bankrupt after the implosion of Terra LUNA and its TerraUSD (UST) stablecoin, on Nov. 8., CZ tweeted there were some lessons to be learned from this: “Two big lessons: 1: Never use a token you created as collateral. 2: Don’t borrow if you run a crypto business. Don’t use capital “efficiently”. Have a large reserve. Binance has never used BNB for collateral, and we have never taken on debt. Stay #SAFU”
“That Binance is now pulling out of this deal just shows how bad the situation really is at FTX, and I think it’s clear they don’t want anything to do with what appears to be a lot of bad debt,” said Jacob Sansbury, co-founder and CEO of Pluto, adding that this decision is likely to have big ramifications for the crypto market.
“I think we should be prepared for more blowups like that which happened with Celsius, Three Arrow and, of course, FTX. I’m not saying such blowups of more exchanges are inevitable, but we are now in a world of very low liquidity and higher interest rates. So the conditions for more trouble ahead for the crypto industry are certainly there and possibly ripening,” Sansbury added.
James Butterfill, head of research at CoinShares, wrote in a Nov. 9 blog post that the ramifications for the crypto market might include “a potentially protracted period of investor skepticism and lower crypto prices.”
While he noted that regulatory pressure is only likely to accelerate, he added that “we see this as a positive, the cleaning up of grubby practices that affect consumers is sorely needed in this industry. Recent scandals, including alleged FTX practices, severely undermine all the credible work being done in this asset class.”
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This article originally appeared on GOBankingRates.com: Binance Walks Away From FTX Deal — What To Expect Next
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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