It all started with a tweet from Changpeng Zhao (CZ), the CEO and founder of Binance, the number one trading platform of the cryptocurrency market. The Chinese billionaire has thrown a stone in the water by announcing that Binance will sell all of its FTT. It is a utility token issued by the FTX platform. Cryptocurrency allows, for example, to pay trading fees and enjoy high returns by depositing assets. We can compare its functioning to Binance’s BNB or Crypto.com’s CRO.
” Due to the recent revelations, we have decided to liquidate any remaining FTT in our accounts. We will try to do it in a way that minimizes the impact on the market. Due to market conditions and limited liquidity, we expect this to take a few months “Changpeng Zhao said, assuring that this is a simple risk management measure.
Between the lines, Zhao hinted that FTX, the number two exchange in the cryptocurrency sector, could meet a serious cash flow problem. Clearly, the US stock market would not have enough cash in stock to meet its commitments. This is the road to failure. However, FTX was valued at $32 billion at the start of the year.
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The Binance founder was referring to a media report from CoinDesk. This pointed the finger at the dubious financial practices of FTX. FTX was found to be financially reliant Research Alamedaa subsidiary owned by the same owner: Sam Bankman-Fried.
In addition, the media found out that most of this trading company’s funds were FTTs. More worryingly, it held 60% of the outstanding tokens. The Sam Bankman-Fried companies used the FTT as collateral to obtain loans and finance their businesses. A practice that Changpeng Zhao did not hesitate to criticize:
“Never use a token you created as collateral… Don’t borrow if you run a cryptocurrency business”.
When the price of the token drops sharply, the two companies find themselves mechanically short of cash. You will have understood: the situation was not not feasible in the long run, unless the price of the FTT token starts to rise again. The interdependence of the two companies ended up sinking a multibillion-dollar hole in FTX’s coffers.
To avoid bankruptcy, FTX used funds from its users financially support the Alameda investment fund. According to a report by ReutersSam Bankman-Fried would transfer” at least $4 billion of funds owned by FTX to save Alameda.
Part of this money belonged to clients of the FTX platform. Thanks to these embezzled funds, the trading company narrowly escaped bankruptcy last spring after the Voyager Digital debacle. The cryptocurrency broker filed for bankruptcy last June following Luna’s death, leaving Alameda in dire financial straits.
Panic among FTX customers
After Binance announced the sale of its FTTs, a wave of panic spread among FTX users, including the platform’s token holders. Many of them have liquidated their crypto-assets, anticipating an inevitable collapse in prices. The value of the FTT has also started to fade.
At the same time, a plethora of investors have pulled assets stored on the platform as a precaution. Still remembered, the specter of Celsius, an exchange that filed for bankruptcy in early summer, prompted users to take emergency measures.
First, Sam Bankman-Fried, CEO and founder of FTX, strongly denied rumors of a cash crisis. On his Twitter account, the billionaire, whose fortune has shrunk significantly within a week, nonetheless assured:
“FTX is doing well. Business is going well. FTX can cover all of its clients’ holdings”.
A few days later, when the situation worsened, the businessman revealed the truth. Note that FTX doesn’t actually have it not enough money to allow all its users to collect their goods.
“FTX International currently has a total market value of assets/collateral in excess of client deposits. But this is different from available liquidity, as you can see from the withdrawal status. Liquidity varies considerably” explains Sam Bankman-Fried.
1) I’m sorry. This is the most important thing.
I screwed up and I should have done better.
— SBF (@SBF_FTX) November 10, 2022
Binance flies to the aid of FTX
After several tense days, Binance has finally announced its intention to do so redeem FTX. The number one explained that he signed” a non-binding letter of intent, for the complete acquisition of FTX.com “.
This afternoon, FTX asked for our help. There is a significant liquidity crisis. To protect users, we have signed a non-binding LOI, intending to fully acquire https://t.co/BGtFlCmLXB and help cover the cash crunch. We will be conducting a full DD over the next few days.
— CZ 🔶 Binance (@cz_binance) November 8, 2022
This type of agreement does not bind Binance in any way. It allows the company to examine in detail the financial situation of the company before pursuing a possible acquisition. The transaction was aimed at overcoming FTX’s liquidity crisis. Sam Bankman-Fried was therefore enthusiastic about the acquisition.
For some observers, Binance has voluntarily orchestrated FTX’s financial woes to swallow a long-toothed competitor, which has become embarrassing for its development. In a letter addressed to his employees, and shared on Twitter, Changpeng Zhao strongly denies having fomented the upstream operation:
“We have not planned this or anything related to it. SBF called me less than 24 hours ago. And before that, I knew very little about the state of affairs within FTX.”
As part of the acquisition process, Binance reviewed FTX accounts. The buyer has found disturbing elements during the exam, indicating that users’ funds have been mishandled by the platform. For this Binance has preferred to cancel the operation, leaving FTX stalled.
Binance also seems aware that a deal of this magnitude would quickly capture the attention of regulatory authority, including US agencies. Gary Gensler, chairman of the US Securities and Exchange Commission (SEC), also revealed his intention to investigate the matter and the acquisition.
By gobbling up FTX, however, Binance would solidify its position as the market leader. The operation would have allowed the exchange to assert its dominance over the industry, to the detriment of Changpeng Zhao’s values of decentralization.
However, Binance has taken advantage of the situation to launch a skillful communication operation. The platform announced the creation of a backup trial. This is an analysis that proves that Binance has the resources of its users.
Published on Nov. 10, Binance’s first analysis reveals that the company is at a standstill $71 billion reserve. To prove its claims, the group has published the list of its addresses on the blockchain. By consulting these addresses, we discover that Binance holds 475,000 bitcoins, 4.8 million Ether, 17.6 billion USDT, 21.7 billion of its BUSD stablecoin, 601 million USDC and 58 million of its BNB token.
The exchange ensures that it cannot then divert its customers’ funds to support or finance projects. The message is clear: Binance presents itself as the most secure platform in the ecosystem and should not be mixed with FTX. Other major platforms, such as Kraken and Crypto.com, have taken a similar step to reassure investors.
Failure has become inevitable
Deprived of Binance’s backing, Sam Bankman-Fried has refused to give up his ventures. The 30-year-old came into contact with several Wall Street investors raise $8 billionenough to refund FTX customers.
In a letter to his employees, the former crypto-white knight said he wants to save FTX. However, he points out that his priority remains to reimburse customers. Lucid, Sam Bankman-Fried still expects imminent bankruptcy if ” no cash injections » does not run, reports Bloomberg.
Unsurprisingly, FTX finally filed for bankruptcy this Friday, November 11, 2022. Shocked by the revelations of the past few days, Sam Bankman-Fried has stepped down from his position as CEO. The company is placed below Chapter 11 of the United States Bankruptcy Act. Clearly, the group could continue its business by seeking an agreement with creditors. Withdrawals remain blocked – users’ funds are still inaccessible.
The cryptocurrency market is collapsing
Not surprisingly, these events have significantly affected the cryptocurrency market. In recent years, FTX and Alameda have has financially supported many large-scale projectsincluding the Solana (SOL) blockchain, the 12th most valuable cryptocurrency in the world.
Shortly after the cancellation of the acquisition, the price of these cryptocurrencies, closely or distantly related to Sam Bankman-Fried, suddenly unscrewed. Within days SOL’s price was also split by three, weakening a plethora of other players.
wider, the fall of FTX weighed down the entire ecosystem, still weakened by the Terra Labs UST crash last May. Bitcoin quickly dipped below the $16,000 mark, reaching a yearly low of $15,682, according to data from CoinMarketCap. As always, the queen of cryptocurrencies has trailed all other digital currencies.
At the time of writing this article, the market capitalization of the cryptocurrency market contract below the $900 billion threshold. Last year, the sector’s valuation reached $3 trillion.