The Story of Sam Bankman-Fried’s Backroom Deal with Binance’s CZ

We may never know how close Sam Bankman-Fried’s (SBF) crypto empire came to collapse or the collateral damage it would cause the industry, but we do know the main risks involved. And unfortunately, they’re the same issues that Bitcoin was created a decade ago to solve: financial self-sufficiency, human hubris, and opaque markets.

What Just Happened: Binance, the world’s largest crypto exchange by volume, has agreed to buy a competitor it first nurtured and then nearly destroyed, FTX. Binance CEO Changpeng “CZ” Zhao confirmed the deal on Twitter, saying the two exchanges had signed a non-binding letter of intent.

This article is excerpted from The Node, CoinDesk’s daily roundup of the most important stories in blockchain and crypto news. You can subscribe to get the full text newsletter here.

The deal, which is still subject to due diligence processes and has not been completed, is a stopgap measure to save the SBF crypto exchange from insolvency. It will likely calm markets that have been shaken by a public rift between two crypto titans so well-known that they speak simply by their initials.

This is a meteoric decline for SBF – the once beloved poster boy of crypto who plastered his exchange’s name on stadiums and posed for glossy magazines – who just months ago was being touted as the ‘JP Morgan’ of crypto for the its efforts to stop bankrupt blockchain companies like BlockFi.

“Things have come full circle and the first and last investors of FTX.com are the same: we reached an agreement on a strategic transaction with Binance for FTX.com (pending DD etc.),” ​​Bankman- Fried he tweeted Tuesday, using shorthand for “due diligence.”

Keeping with the full circle pattern, it’s worth noting that SBF has always seen blockchain more as a means to an end. He entered crypto after a few years as a Jane Street quant, with the stated goal of making as much money as possible to gain as much influence as possible. This would be a nice mindset in crypto if SBF had an overt love for the tools and protocols that made him rich.

Instead, SBF, a political mega-donor that has spent $50 million in the past US election cycle, has used its influence to push for regulations that upset its clients and competitors. He was a vocal supporter of it DCCPA bill that would create a brokerage-like licensing system for decentralized finance and support financial privacy.

That’s what he said publicly. For CZ, the biggest concern was what was said behind closed doors, “[W]Will not support people lobbying against other industry players behind their backs,” Binance CEO tweeted this weekend. This was CZ’s attempt to be “transparent,” he said, explaining a large trade of over $500 million in FTT tokens on Binance that took place the previous day.

He announced that Binance would sell these tokens on the open market and drew an alarming comparison to LUNA, another project that Binance backed early on that later collapsed after a bank run. CZ was taking advantage of the moment caused by market uncertainty after Alameda Research’s financials were leaked to CoinDesk.

The links between FTX and its sister company, hedge fund Alameda, have historically been unclear, other than that both were founded by SBF. Leaked financial statements showed that the majority of Alameda’s assets were illiquid or locked altcoins – many of which SBF had a stake in including FTT, SOL and SRM (the token from the Serum decentralized exchange co-founded by Bankman-Fried).

Read more: Solana Falls and Speculation Centers on Links to Sam Bankman-Fried’s FTX, Alameda

“Alameda will never be able to cash out a significant portion of FTT to pay off its debts,” said Mike Burgersburg, an independent market analyst for Dirty Bubble Media, which was early to call Terra/LUNA a bust.

Bank runs can be self-fulfilling prophecies. Although several analysts said it was unlikely that either FTX or Alameda would suffer a profit margin, investors began capital raisingworried that their capital would be locked up in bankruptcy proceedings like with the new banks Celsius and Voyager Digital.

Bankman-Fried and Alameda CEO Caroline Ellison did their best to calm investor nerves by offering to moderate FTT’s sharp selloff by offering CZ $22 per coupon. Ellison said the leaked financial document did not account for another $10 billion that Alameda allegedly had, while SBF said client funds were “safe” and never reassigned to other crypto deals.

Down the chain analysis showed a more troubling story. Stablecoins and other assets were being drained from FTX. Before the Binance acquisition was announced today, traders had withdrawn all bitcoin held by FTX from the platform, according to Coinglass. Alameda unlocked funds from various DeFi platforms to send ETH to FTX, seemingly oblivious to high withdrawal fees.

FTX users began tweeting about delays in transferring funds from the platform, while BitDAO asked Alameda to prove it still held the 100 million BIT tokens the trading company acquired last November, and they began voting on whether to unload the 3.36 million FTT tokens earned by BitDAO this deal.

Throughout this process, industry commentators berated SBF for the exchange’s lack of transparency and demanded that it prove reserves for both FTX and Alameda. “It’s not too much to ask, critics note, given the SBF’s recent prominence on the need for more regulation and better governance in cryptocurrencies,” wrote Fortune’s Jeff John Roberts.

Yesterday, it became clear that Binance would do so reject SBF offers to sell its FTT tokens OTC to minimize the sell-off. Instead, he would hold those assets – the fruit of what CZ called a “divorce” – like a Damocles sword. Bellwether cryptocurrencies such as BTC and ETH, which traded sideways yesterday, began to slide overnight.

It was clear that the broadcast would be serious if the SBF empire fell. Crypto is tied up in complicated knots and once the entire ecosystem frays it can unravel – like after the collapse of the hedge fund Three Arrows Capital. A stablecoin called magic internet money (MIM), capitalized mostly with FTT, has lost its peg to the dollar.

See also: Binance CEO Zhao Considers Buying Banks: Report

At least with open financial systems like MIM, investors knew at what price they would liquidate. FTX is a black box and people only have the information SBF chose to reveal. Many began to read Bankman-Fried’s retweets of unconfirmed airdrops for FTX users who kept their funds on the exchange as signs of desperation.

“[R]Regardless of how it ends, it’s another blow against the industry (and financial institutions in general) simply because of a lack of voluntary transparency, but it’s another huge checkmark for blockchain data transparency and the skilled researchers trained to uncover, read and interpret that data,” said Jeff Dorman, chief investment officer at crypto hedge fund Arca.

And so, we’re back to square one. It shouldn’t come as a relief that SBF and CZ have apparently been able to come to an agreement. It’s just another backroom deal.

Leave a Reply

Your email address will not be published. Required fields are marked *