Binance to acquire rival FTX: What led to this deal?
Binance and FTX are two of the biggest names in the crypto world. The founders of the two exchanges have been engaged in a much-publicized spat for months. To almost everyone's surprise, Binance has now signed a non-binding letter of intent to fully acquire FTX. Last week, CoinDesk had reported that FTX is facing significant liquidity issues. So what led to this surprising deal?
Why does this story matter?
The world's largest crypto exchange has decided to acquire the third-largest exchange. What does that mean for the world of digital currency? Does this spell out an end of decentralization? It might as well be, as Binance is set to become more powerful than it has ever been. We are certainly looking at a tumultuous period for the crypto world in the coming weeks.
FTX asked for Binance's help: Changpeng Zhao
Changpeng Zhao, the founder of Binance, and Sam Bankman-Fried, FTX's founder, took to Twitter to announce the news. Zhao said that the decision was reached after FTX asked for Binance's help. He added that his exchange intends "to fully acquire FTX and help cover the liquidity crunch." The completion of the deal will be subject to due diligence by Binance.
Check out Zhao's announcement about Binance's decision to acquire FTX
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
Most of Alameda Research's balance sheet is composed of FTT
Questions about FTX's liquidy began to rise after a CoinDesk report revealed that most of Alameda Research's assets are tied in illiquid altcoins. It is a proprietary trading firm co-founded by Bankman-Fried. According to the report, out of Alameda's $14.6 billion of assets, $3.66 billion are held in FTT (the native coin issued by FTX) and $2.16 billion are held in FTT collateral.
Alameda's balance sheet raised questions about FTX's liquidy
Although the report by CoinDesk did not show anything untoward, it showed how closely tied Alameda and FTX are. It also showed that the trading giant mostly rests on the foundation of FTT, a coin invented by its sister company. This raised questions about the liquidity of FTX as investors feared that any large selling order of FTT could affect FTX's financial health.
Binance decided to sell FTT on its books after report
Binance was FTX's first investor. When it exited FTX last year, the company received $2.1 billion of FTT and stablecoins. After the news about Alameda and FTX came out, Zhao said that Binance has decided to liquidate FTT on its books. This created even more panic in the market. However, Zhao's statements were not taken kindly by Bankman-Fried or Alameda.
Bankman-Fried accused Binance of spreading false rumors
After Zhao's comments about selling FTT, Bankman-Fried alleged that "a competitor is trying to go after us with false rumors." "FTX is fine. Assets are fine," he added. Caroline Ellison, the CEO of Alameda, offered to buy FTT from Binance for $22. She also said that the balance sheet revealed by CoinDesk doesn't show the whole picture.
Bankman-Fried called the take over 'a strategic transaction'
Bankman-Fried has made a complete U-turn with the new announcement. He said, "We have come to an agreement on a strategic transaction with Binance for FTX.com." He added that FTX is working on withdrawal backlogs and that it will help in dealing with liquidity issues. SBF, as he is popularly known, even thanked Zhao and Binance.
All assets will be fully repaid after deal is complete
2) Our teams are working on clearing out the withdrawal backlog as is. This will clear out liquidity crunches; 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.
— SBF (@SBF_FTX) November 8, 2022
