Nov 10 (Reuters) – (Second paragraph of this article contains language that some readers may find offensive)
On Tuesday morning, Sam Bankman-Fried, owner of cryptocurrency exchange FTX, caught employees off guard with a solemn message.
“I’m sorry,” he told them.
Reason for fault: His announcement 30 minutes ago that FTX’s biggest rival Binance was planning a shock takeover of a major trading platform to save it from a “liquidity crisis.” Binance founder Changpong “CZ” Zhao, whom the billionaire accused of sabotage, is now his White Knight.
The seeds of FTX’s downfall were sown months ago, according to interviews with people close to Bankman-Fried and communications from the bank. Both companies not previously reported.
Some of these deals involving Bankman-Fried trading firm Alameda Research led to a series of losses that ultimately led to his bankruptcy, according to three people familiar with the company’s operations. increase.
Interviews and messages also shed new light on the fierce rivalry between the two billionaires. In recent months, the two have publicly accused each other of trying to hurt each other’s businesses by competing for market share. It culminated on Wednesday, when Binance withdrew its trade, leaving FTX’s future uncertain.
Bankman-Fried couldn’t find a buyer and was looking for alternative backers, two people close to him said. After Binance pulled out, he said in a message to FTX staff that Binance had not previously communicated any concerns about the transaction and was “exploring all options.”
Neither Binance nor FTX responded to requests for comment. Bankman-Fried told Reuters on Tuesday that he would be “probably too busy” to do an interview. He did not respond to further messages.
Binance previously said it decided to pull out of the deal as a result of due diligence on FTX and news reports of a US investigation into the company.
Bankman-Fried’s spectacular comeback comes to an end as Zhao unveils its acquisition plans. The 30-year-old founded his Bahamas-based FTX in 2019, leading him to one of the largest exchanges, amassing a fortune of nearly $17 billion.
The news of FTX’s liquidity crisis, which was valued at $32 billion in January by investors including SoftBank and BlackRock, has sent echoes through the crypto world.
Prices of major coins plummeted, bitcoin slumped to an almost two-year low, further hurting a sector whose value has fallen by about two-thirds this year as the central bank tightened credit. .
By abandoning the deal, Binance also sidestepped the likely regulatory scrutiny that accompanies the acquisition. Zhao flagged it as a possibility in a note to employees posted on Twitter.
Financial regulators around the world have issued warnings that Binance is operating without a license or violating money laundering laws. The US Department of Justice is investigating Binance for possible money laundering and violating criminal sanctions. Reuters reported last month that Binance had helped an Iranian company make $8 billion in transactions since 2018 despite US sanctions.
Deteriorating relationship
Zhao and Bankman-Fried’s relationship began in 2019. Six months after FTX launched, Zhao bought his 20% of the exchange for around $100 million, said a person with direct knowledge of the deal. Binance said at the time that the investment was “aimed at growing the crypto economy together.”
However, within 18 months, their relationship soured.
According to former Binance employees, FTX is growing rapidly and Zhao now sees FTX as a true competitor with global ambitions.
When FTX applied for a subsidiary license in Gibraltar in May 2021, it was required to provide information about its major shareholders, but according to exchange-to-exchange messages and emails seen by Reuters, Binance has offered FTX’s assistance. blocked the request.
Between May and July, FTX lawyers and advisers wrote to Binance at least 20 times, asking for details about the source of Mr. Cho’s wealth, his relationship with the bank, and his ownership of Binance.
However, in June 2021, FTX lawyers told Binance’s chief financial officer that Binance was not “properly engaged with us” and risked “severely disrupting projects that are important to us.” A Binance legal representative told FTX that they are trying to get answers from Zhao’s personal assistant, but they may not be able to provide all of the requested information as it is “too general”. .
By July of that year, Bankman-Fried was impatient. He bought back Mr. Zhao’s FTX shares for about $2 billion, said a person with direct knowledge of the deal. Two months later, with Binance no longer involved, the Gibraltar regulator licensed his FTX.
Part of that amount was paid to Binance in FTX’s own coin, FTT, Zhao said last Sunday.
“Trying to follow us”
In May and June of this year, Bankman-Fried’s trading firm Alameda Research suffered losses on a series of transactions, according to three people familiar with the business. These included his $500 million loan deal with failed crypto lender Voyager Digital, two people said. Voyager filed for bankruptcy protection the following month, and FTX’s U.S. division paid him $1.4 billion for its assets at its September auction. Reuters was unable to determine the full extent of the damage suffered by Alameda.
Bankman-Freed transferred at least $4 billion in FTX funds in an attempt to shore up Alameda, which holds about $15 billion in assets. The funds are protected by assets including shares in FTT and trading platform Robinhood Markets, the people said. Alameda he disclosed her 7.6% stake in Robinhood in May.
Some of these FTX funds were customer deposits, although Reuters was unable to determine their value.
Bankman-Fried did not speak to other FTX executives about the move in favor of Alameda, they said, adding they feared it would leak.
However, a Nov. 2 report by news outlet CoinDesk detailed a leaked balance sheet showing that much of Alameda’s $14.6 billion in assets is held by the FTT. Alameda CEO Caroline Ellison tweeted that the balance sheet was only for “a subset of our corporate entity” and did not reflect more than $10 billion in assets. Did not respond to requests for comment.
That hasn’t quelled growing speculation about what Alameda’s financial position means for FTX.
Zhao then said that Binance will sell all shares of Token FTT worth at least $580 million. Blockchain data shows that the price of the token fell by 80% over the next two days and saw a surge in outflows from exchanges.
withdrawal surge
In a message to employees this week, Bankman-Fried said the company saw a “huge spike in withdrawals” as users rushed to withdraw $6 billion in crypto tokens from FTX in just 72 hours. I was. Bankman-Fried told employees that daily withdrawals typically total tens of millions of dollars.
After Zhao tweeted that Binance would sell its FTT holdings, Bankman-Fried predicted confidence that FTX would weather rival attacks. He told Slack staff that the withdrawal was “not shockingly expensive,” but they were able to handle the request.
“We are working hard together,” he wrote. “Obviously, Binance is going after us.
By Monday, however, the situation had become dire. Unable to quickly find his backers or sell his illiquid assets quickly, Bankman-Fried contacted Mr. Zhao, according to people familiar with the matter. Zhao later confirmed that he had received a call from Bankman-Fried.
Bankman-Fried has signed a non-binding agreement for Binance to purchase FTX’s non-US assets. This made him value FTX in the billions, two people familiar with the letter said.
Zhao announced the potential acquisition hours later, with Bankman-Fried tweeting, “Big thanks to CZ.”
“Let’s live to fight another day,” Bankman-Fried told staff on Slack.
His employees were shocked. Even executives didn’t know about Alameda’s shortfall and acquisition plans until Bankman-Fried notified them that morning, said two of his people who work with him. The two said they had no idea the withdrawal situation was this serious.
Binance then announced on Wednesday that it was declining the acquisition. “The problem is beyond our control and ability to help,” Binance said.
Reporting by Angus Berwick of New York and Tom Wilson of London. Additional reporting by Hannah Lang in Washington and Elizabeth Howcroft in London.Edited by Paritosh Bansal and Chris Sanders
Our Standards: Thomson Reuters Trust Principles.
