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Binance crashed FTX, then acquired it

Widely compared to a ‘chess move’ by crypto watchers near and far, Binance, the largest exchange by trading volume, has acquired FTX, the third largest exchange by trading volume, amid a ‘liquidity crunch’ that they largely caused.

It all started on November 6th, when Changpeng Zhao, CEO of Binance, announced their decision to liquidate their FTT tokens, the official trading token of the FTX exchange, which the company mistakenly uses as collateral.

On the 21st of October, he made this statement to his followers:

Expect very high volatility in #crypto over the next few months.

— CZ 🔶 Binance (@cz_binance) October 21, 2021

His statement caused widespread panic, causing holders to sell their tokens in anticipation. He then decided to sell his $529 Million FTT tokens “due to recent revelations that came to light”, a move that is colloquially known as a ‘whale dump’.

As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books. 1/4

— CZ 🔶 Binance (@cz_binance) November 6, 2022

A ‘whale dump’ happens when a user who owns a large amount of tokens decides to sell them, causing the price of the token to spiral out of control.

The coin, which traded at around $22 on Monday, sank below $5 Tuesday afternoon in New York. The sell-off effectively wiped out more than $2 billion in value in the space of 24 hours.

FTX was now undergoing a major ‘liquidity crisis.’

FTX founder and CEO Sam “SBF” Bankman-Fried took to Twitter to refute these claims, saying FTX “assets are fine”, and assuring his user base that he had enough funds to cover all client holdings and does not invest client assets, even in treasuries.

He then reached out to Binance for help.

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 https://t.co/BGtFlCmLXB and help cover the liquidity crunch. We will be conducting a full DD in the coming days.

— CZ 🔶 Binance (@cz_binance) November 8, 2022

A non-binding LOI was signed, and Binance fully acquired FTX after some back and forth that both CEOs stressed would not impact customers. “FTX’s withdrawals are and have been live, are fully backed 1:1, and operating normally,” noted CEO Sam “SBF” Bankman-Fried.

1) Hey all: I have a few announcements to make.
Things have come full circle, and https://t.co/DWPOotRHcX’s first, and last, investors are the same: we have come to an agreement on a strategic transaction with Binance for https://t.co/DWPOotRHcX (pending DD etc.).

— SBF (@SBF_FTX) November 8, 2022

Although Binance’s liquidation practically caused FTX’s insolvency, CEO Sam Bankman-Fried sounded grateful that the situation was safely resolved. Some Twitter users, however, blamed him for seeking a “bailout from the competitor that triggered the bank run in the first place,” citing a number of other exits that the entrenched CEO could have taken to exit.

1/ Ok so just processing this out loud because I am pretty mindblown that FTX chose – of all options, a buyout from Binance.
These were the options open to SBF: (a) seek emergency debt financing, (b) seek new money investment, (c) liquidate assets and/or (d) buy time…

— wassielawyer (@wassielawyer) November 8, 2022

Yesterday, CEO Changpeng Zhao tweeted his learnings to his followers:

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.🙏

— CZ 🔶 Binance (@cz_binance) November 8, 2022

Although the deal is finalized on both ends, it is still awaiting regulatory approval, which might be hard to come by as the two large exchanges joining forces are expected to trigger a number of antitrust concerns in the U.S. and outside of it.

Next time, check the compliance of your tweet with antitrust laws before you post, @cz_binance. At this stage, I wouldn’t be surprised to find this tweet in a forthcoming court document/antitrust litigation. https://t.co/vUcx75BQCY

— Thibault Schrepel (@ProfSchrepel) November 8, 2022

Since regulators have the power to block large mergers that might limit market choice and affect fair market competition, this acquisition might trigger the Sherman Act Law for “anti-competitive behavior”, a term that is used when direct competitors act to protect each other, as in the case with Binance and FTX.

Brandon Kressin, a crypto-focused attorney at boutique antitrust law firm Kressin Law Group, backed Schrepel’s impromptu analysis.

“This [deal is] a textbook horizontal merger of the sort that the antitrust laws in the U.S. and internationally are meant to address,” Kressin said. “I think that the apparent hope they have that excluding the U.S. exchanges from the deal is going to save their deal from antitrust scrutiny is very short sighted.”

He added: “These are global markets, and the transaction is undoubtedly going to have an effect on the U.S. – and U.S. enforcers have an interest in making sure that the antitrust laws protect U.S. consumers.”

Kressin’s second point was regarding how fast the agreement was reached, which he called “aggressive” and “potentially reckless.”

“You have to give the antitrust authorities a chance to evaluate the transaction first. You can’t just start taking actions that merge the companies and taking actions that you wouldn’t otherwise take, if not for the fact that you’re being merged,” Kressin added. “Them taking actions already based on the assumption that this transaction is going to go through may itself raise what we call ‘gun jumping’ issues.”

Kressin also noted that the company’s origins may result in an “added layer of scrutiny.”

“There is a concern that runs along with general antitrust concerns about this being a direct, horizontal overlap with the dominant player in the world market,” Kressin said. “The fact that there’s at least a possibility or suggestion of Chinese involvement is going to raise the scrutiny.”

This is a developing story.

The post Binance crashed FTX, then acquired it appeared first on WAYA.

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