FTX ‘liquidity crunch’ shocks crypto world; Binance comes to rescue

Amid a significant liquidity crunch at the world's most promising crypto exchange FTX, rival crypto giant Binance has said it'll acquire the company to "protect users" and help recover the liquidity crunch. The news has shocked the crypto world, which up until now considered FTX as the safest, best run crypto exchange and a solid rival against industry behemoth Binance.

The bailout deal between the world’s two largest crypto exchanges sent prices of several tokens and cryptocurrencies tumbling. It has once again flagged the volatility and vulnerability of the loosely regulated industry, which has had a rough year amid a global bear market. Reports on the financial vulnerability of FTX, based out of the Bahamas, also forced some of its major customers to withdraw funds, prompting a huge crypto selloff.

Sharing the news over the surprise acquisition on Twitter, Binance founder Changpeng Zhao 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."

The current development, apart from the FTX users, is also a setback for FTX's existing investors like Ontario Teachers’ Pension Plan, Singapore wealth fund Temasek and Softbank Vision Fund. The total value of the deal has not been disclosed but it's believed to be completely tilted in the favour of Binance.

FTX founder and CEO Sam Bankman-Fried, also known as SBF, has said his company came to an agreement on a strategic transaction with Binance for FTX, which at its peak was valued at $32 billion. As the panic increased, the crypto selloff surged many times, and FTX even stopped processing withdrawals on Tuesday for some time, leading to backlog. However, Sam later clarified the FTX teams are "working on clearing out the withdrawal backlog as is". This, he said, will clear out liquidity crunches; and all assets will be covered 1:1. "This is one of the main reasons we’ve asked Binance to come in. It may take a bit to settle etc. -- we apologize for that."

He said the important thing is that customers are “protected” and even thanked Changpeng Zhao, also known as CZ and his company Binance. "This is a user-centric development that benefits the entire industry. CZ has done, and will continue to do, an incredible job of building out the global crypto ecosystem, and creating a freer economic world."

He said though there have been rumours in the media of conflict between our two exchanges, Binance has shown time and again that they are committed to a more decentralised global economy while working to improve industry relations with regulators. "We are in the best of hands."

He further clarified that FTX US and Binance US are two separate companies, which are not currently impacted by this. "FTX.us’s withdrawals are and have been live, is fully backed 1:1, and operating normally."

How FTX crises emerged

The crises in FTX emerged after reports regarding its shaky financials gained ground over the past couple of weeks. Both Zhao and Sam even engaged in a public spat on Twitter over the issue. On November 6, Zhao 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). He said due to “recent revelations” Binance has decided to liquidate the remaining FTT on its books.

He clarified this is not a move against a competitor. "Our industry is in it’s nascency and every time a project publicly fails it hurts every user and every platform."

On November 7, Zhao sent out another series of tweets, saying the FTT selloff of Binance was part of its “post-exit risk management, learning from LUNA”. “We gave support before, but we won't pretend to make love after divorce. We are not against anyone. But we won't support people who lobby against other industry players behind their backs. Onwards.”

He also said Binance’s FTT stake was “not locked”. “We usually just hold. It removes any doubt that we would attack a “competitor”. Not financially sensible. We want the industry to grow together. But there is a limit to hold, lol.”

To these statements, Fried reverted saying "a competitor is going after us with false rumours. FTX is fine. Assets are fine." However, this was not enough to stoke the fears. In 24 hours on Tuesday, FTT's value dropped 63%. This also crashed the entire crypto market, with Bitcoin trading 6.33% down at $18,242.5, one of its all-time lows, and Ethereum down 10.02% at $1,297.11.

On November 8, crypto news platform Coindesk published a report that said Sam's other company Alameda Research, which is a trading company, has around $14.6 billion of assets as of June 30 and that its books are full of FTX's token called FTT, a coin invested for users to trade on its platform. This showed Alameda's majority of financial health rests on a coin invented by its sister company. On top of this, both FTX and Alameda have close financial ties. This sparked fears that any major fluctuation in FTT price could shake both companies. The company reportedly saw $6 billion in net withdrawals on the platform in the past three days, as compared to tens of millions of dollars worth of transactions on usual days.

What it means for crypto world

The Binance-FTX deal, if approved, will solidify Changpeng Zhao's position as the undisputed king of the crypto world, whose net worth is estimated at $17.4 billion. It has dethroned Sam and FTX from the status of a promising rival to Binance outside the US. From the outside, though the deal seems to be a rescue of sorts by the world's biggest crypto company, analysts say Zhao is, in a way, responsible for its demise. Zhao-led Binance was also the first biggest investor in FTX, though as the three-year-old company grew in size, their relationships started with wither. Zhao later sold his stake, which FTX paid in cash and FTT, its own token.