Crypto giant Binance has signed a non-binding agreement to buy rival FTX’s non-United States unit, FTX.com, to cover a “liquidity crunch” at the cryptocurrency exchange, the companies said on Tuesday.
The surprise move has raised new concerns about the risks investors face in the volatile crypto market.
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Binance CEO Changpeng Zhao said in a tweet that FTX, run by billionaire Sam Bankman-Fried, had “asked for our help” after “a significant liquidity crunch”.
Zhao said Binance, the world’s biggest crypto exchange, would be conducting due diligence in the coming days as the next step towards acquisition of FTX.com.
In a separate tweet, Bankman-Fried said the US operations of Binance and FTX were not part of the deal.
“It has been an open secret for a while now that FTX and Binance were in existential competition; the only surprise today is that things have escalated so quickly to a seeming conclusion,” said Joseph Edwards, investment adviser at Securitize Capital. “The move should provide relief to consumers in the short-term, but creates questions in the long run.”
The deal is the latest emergency rescue in the world of cryptocurrencies this year, as investors pulled out from riskier assets amid rising interest rates. The cryptocurrency market has fallen by about two-thirds from its peak – to $1.07 trillion.
It also underscores an abrupt reversal of fortune for Bankman-Fried, who had positioned himself as the industry’s saviour by rescuing rivals who had got themselves into trouble earlier in the year.
“Liquidity crunch issues continue to haunt the crypto market,” said Dan Raju, CEO of Tradier, a financial services provider and brokerage. “It’s scary to think that FTX, which is one of the largest crypto exchanges in the world, was bitten by liquidity concerns and Binance, their biggest rival, is coming to their rescue. This will make for some strange bedfellows.”
FTX had seen about $6bn of withdrawals in the 72 hours before Tuesday morning, according to a message to staff sent by Bankman-Fried, which was seen by the Reuters news agency.
“On an average day, we have tens of millions of dollars of net in/outflows. Things were mostly average until this weekend, a few days ago,” Bankman-Fried wrote in the message to staff sent on Tuesday morning. “In the last 72 hours, we’ve had roughly $6b of net withdrawals from FTX.”
Withdrawals at FTX.com are “effectively paused”, he wrote, adding this would be resolved in “the near future”.
FTX did not immediately respond to a request for comment on the message to staff.
Crypto mogul face-off
Two of the most powerful moguls in the crypto industry, Zhao and Bankman-Fried have had a turbulent relationship.
In late 2019, Binance invested in FTX, then a far smaller exchange, before exiting the investment in July last year. By then, FTX had mushroomed into a growing rival to Binance, which dominates the crypto industry with more than 120 million users.
Tensions between Zhao and Bankman-Fried had surfaced in recent days, with a public disagreement playing out on Twitter.
“A competitor is trying to go after us with false rumors,” FTX’s Bankman-Fried tweeted on Monday, a day after Zhao said Binance would sell its holdings of FTX’s in-house token, without giving further details. He tagged Zhao in a later tweet, saying “I’d love it, @cz_binance, if we could work together for the ecosystem.”
‘Legitimate reason to worry’
The deal comes after the in-house token of crypto exchange FTX slumped, losing one-third of its value and dragging down other considerable digital assets, amid talk of pressure on FTX’s financials.
Binance is currently under investigation by the US Justice Department into possible violations of money-laundering rules, Reuters reported last week.
A spokesperson for the US Commodity Futures Trading Commission said the agency is monitoring the situation.
News of the deal initially buoyed big cryptocurrencies but those gains were quickly erased.
FTX token was last trading at $5.33, down by more than three-quarters on Tuesday.
Bitcoin, the biggest digital token, was down by 11 percent.
“People have a legitimate reason to worry about the security of their digital assets if one of the world’s largest centralized exchanges ends up in financial difficulties,” said Pascal Gauthier, CEO and chairman of crypto security firm Ledger. “It’s time for an honest, industry-wide reckoning on the importance of crypto custody.”
Crypto users raised questions on Twitter last week about FTX’s token following a report by the news website CoinDesk that Alameda Research, a trading firm founded by Bankman-Fried which has close ties with FTX, appeared to be on a shaky foundation.
On Sunday, two days before the deal was announced, Zhao said his firm would liquidate its holdings of the FTX token due to unspecified “recent revelations”.
Bankman-Fried had initially said the exchange was “fine” and that concerns were “false rumours”.
In a tweet on Tuesday, he said his teams were working on clearing out the withdrawal backlog: “This will clear out liquidity crunches. This is one of the main reasons we’ve asked Binance to come in.”
“A *huge* thank you to CZ, Binance,” Bankman-Fried added, referring to Zhao who is known by his initials.