Tuesday, December 6, 2022

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    Binance chief says FTX acquisition is ‘not a win’ as source says deal may not go through

    The world’s largest crypto exchange yesterday agreed to buy out one of its most formidable competitors. Now, however, amid threat of regulatory crackdown, it’s less clear whether the deal will be finalized.

    Binance, the world’s largest crypto exchange by trading volume, yesterday signed a letter of intent to acquire one of its biggest rivals, FTX. However, doubts that the deal will go through are surfacing. 

    The news that Binance would acquire its competitor punctuated a days-long public sparring between the two competitors as FTX faced major liquidation challenges that caused a number of digital currencies to plunge on Tuesday. 

    Issues arose when CoinDesk last week reported that a leaked balance sheet from Alameda Research – FTX chief Sam Bankman-Fried’s first venture, a crypto hedge fund – indicated that the majority of its reserves were in FTX’s native token FTT. The CoinDesk report was a fairly damning look at how Bankman-Fried used FTX as a kind of funding machine for its sister company Alameda Research – based on the currency that FTX manufactured. As Jonathan Wu, head of growth at Web3-focused privacy firm Growth put it on Twitter: “FTX isn’t Alameda’s data source. FTX is Alameda’s piggy bank.”

    In light of the news, Binance chief executive Changpeng “CZ” Zhao announced that his company planned to sell off its billions in FTT holdings, citing “post-exit risk management.” Other FTX investors including Coinhako, Nexo and Jump Crypto followed suit. The flurry of activity sent FTT’s price into a downward spiral, ultimately leading to a liquidity crunch.

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    The two crypto exchange founders had challenged one another on social media for months prior. Zhao had made digs at Bankman-Fried, who many refer to as SBF, in the past over his tactics in Washington, claiming that the FTX chief lobbies “against other industry players behind their backs.”

    It’s been widely reported that Bankman-Fried planned to spend $1bn in the next US election cycle in efforts to affect financial regulations. (It’s also worth noting that Bahamian FTX has positioned itself as very pro-regulation, even releasing a list of principles and proposals in late 2021 in an effort to help lawmakers build crypto regulations – a divergence from many other crypto exchanges who have jilted regulatory efforts in decentralized industries). 

    The rivalry appeared to come to a head at the beginning of this week with news of Binance’s plans to sell its FTT holdings. Bankman-Fried said in a since-deleted tweet on Monday that “a competitor is trying to go after us with false rumors.” He went on to emphasize that “FTX is fine. Assets are fine.”

    Then, in a largely unexpected turn of events, it was announced yesterday that Binance would acquire FTX’s non-US operations. Binance’s Zhao said that the company agreed to the deal after FTX asked for assistance. “To protect users, we signed a non-binding LOI, intending to fully acquire FTX and help cover the liquidity crunch. We will be conducting a full DD in the coming days,” the executive tweeted yesterday. 

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    Zhao has since tweeted out further admonitions of SBF, saying yesterday evening, “Never use a token you created as collateral” and “Don’t borrow if you run a crypto business. Don’t use capital ‘efficiently’. Have a large reserve.”

    It’s estimated that Bankman-Fried’s net worth plunged by some 93% overnight. Though many see the acquisition as a bulwark for Binance – which is now poised to eat up a larger portion of the market that it already dominates – Zhao this morning tweeted out an internal memo shared with Binance staff about the deal that struck quite a different tone. After urging employees not to trade FTT tokens and to avoid speaking with the press, the executive said, “FTX going down is not good for anyone in the industry. Do not view it as a ‘win for us.’” He pointed out that the marketplace stir has impacted user confidence. Plus, as the Binance pig is fattened up, it becomes a bigger target for regulatory scrutiny. 

    Still, he expressed confidence that the company is well-positioned to handle the potential turmoil. “[We] are used to being open and leaning into headwinds,” Zhao said in the memo. “In fact, we embrace scrutiny.” He explained that transparency and proof-of-reserves would be priorities moving forward before encouraging staffers to ignore price fluctuation in the market and focus on progress. 

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    But outside of Binance, industry players are already expressing skepticism of the deal. For one, the acquisition has piqued some concerns about anti-competition practices and regulation of the crypto space more broadly. “Even without a look at the book, it was clear from the start that this deal wouldn’t pass muster. If not failing at due diligence, it would never get past antitrust [legislation],” Dr. Martin Hiesboeck, head of blockchain and crypto research at digital currency exchange Uphold, tells The Drum. “Otherwise, this would mean that Binance would be 80% of the market.” 

    What’s more, both the US Securities and Exchange Commission and the Commodity Futures Trading Commission have been investigating improper lending practices in recent months – which could pose additional hurdles for Binance. 

    Hiesboeck suggests that the drama is only beginning.

    It seems he’s onto something: reports by CoinDesk this morning indicate that a source close to the deal has said that Binance is now wavering on its decision and, less than a day after offering to acquire FTX, is unlikely to complete the deal. It’s been suggested that Binance may be getting cold feet after beginning its due diligence review of FTX’s business.

    Major coins dropped in light of these reports; Bitcoin matched its 2022 low of around $17,100 and Ether dipped to $1,160. 

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    Ultimately, experts believe the brouhaha evidences a greater need for policy change.

    “Unlike the traditional banking sector, which is heavily regulated and sometimes receives bailouts from government institutions, the blockchain space is different – such bailouts are only left to the private sector,” says David Kemmerer, cofounder and chief executive at crypto tax software CoinLedger. “While other fallouts in the past – including the recent collapse of Terra Luna – have heightened scrutiny in the sector, FTX failures will only tighten the noose. We will [have to] use a more proactive regulatory approach in the space.”

    The sentiment is echoed by other players in the space. “This definitely shows the need for stronger global crypto regulation,” says Zaven Nahapetyan, cofounder of Web3 content platform Niche. “For the Web3 space to succeed, the public needs to have trust in the stability and security of the ecosystem. Events like this hurt that trust.”

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