The cryptocurrency space is still in shock after Binance, the world’s leading cryptocurrency exchange, announced that it plans to acquire FTX. FTX is one of the top five cryptocurrency exchanges in terms of trading volume and a major Binance rival in the United States and other parts of the world.
Why Did FTX Faced Insolvency Challenges?
The move began following a disagreement between Changpeng Zhao (CZ), Binance’s CEO and Sam Bankman-Fried (SBF), FTX’s CEO, regarding the best way to regulate the cryptocurrency market.
Bankman-Fried has maintained that broader regulation is needed in the space, especially in the DeFi ecosystem. However, CZ believes that the crypto space needs to find a way to work with regulators without losing the decentralized feature of the ecosystem.
A week ago, crypto media publication CoinDesk claimed that it had acquired Alameda Research's balance sheet. Alameda Research is a hedge fund owned by Bankman-Fried. The balance sheet showed a view of the relationship between Alameda, a hedge fund, and FTX, an exchange.
Less than a week ago, on November 2nd, CoinDesk broke a story claiming to have acquired Alameda Research's balance sheet.
— jonwu.eth (@jonwu_) November 8, 2022
It showed a damning view of the relationship between Alameda, a hedge fund, and FTX, an exchange.https://t.co/HtMDoSIhkK
Data indicated that FTX gives Alameda priority orderflow, allowing its sister hedge fund to front-run other traders. The incriminating revelation from Coindesk was that a plurality of Alameda's assets ($5.8 billion of the $14.6 billion reported) were in FTX's own exchange token, FTT. Most of the funds were in the Solana ecosystem tokens.
However, data showed that FTT had remarkably low circulating liquidity relative to Alameda and FTX's holdings. This implies that even if Alameda wanted to sell the $5.8B of FTT it had, there wouldn’t be enough buyers of its tokens. This is because Alameda's holdings represented 2-3x FTT's circulating supply.
Binance Selling Its FTT Tokens Finally Brought Everything Crashing
FTX began to struggle over the weekend after CZ announced that Binance would liquidate the $584 million it held in FTT tokens. Binance had received these FTT as part of its exit from an equity position in FTX. FTX bought Binance’s stake for $2.1 billion in FTT and BUSD, a stablecoin native to the Binance exchange.
Alameda Research offered to purchase the FTT tokens from Binance at $22 per coin in order to limit the potential impact on the market. However, CZ disagreed, adding that Binance will sell the tokens in the open market over the next few months. CZ said;
“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.”
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
Binance argued that it was exiting its position from FTX to avoid a similar situation it experienced with LUNA earlier this year. This saw the FTT token dip by more than 20% on Monday.
By the morning of November 8th, FTX was facing a lot of pressure and had to pause withdrawals on its platform. Before the end of the day, Alameda and friendly-to-FTX entities scrambled to facilitate customer withdrawals and preserve confidence.
The struggles by FTX and Alameda Research subsequently prompted Binance to step in and agree on a deal to acquire FTX. CZ said;
“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 http://FTX.com and help cover the liquidity crunch. We will be conducting a full DD in the coming days.”
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
Binance’s acquisition of FTX would make it the world’s largest cryptocurrency exchange by miles. According to data obtained from Coinmarketcap, Binance has a daily trading volume of $44 billion. Coinbase comes in second with $5 billion, while FTX processes over $4 billion daily.
Adding FTX’s trading volume to its order book will make Binance the undisputed king of crypto, and this could probably last for years.