Crypto people have seen things. They’ve seen massive breaches and fraudulent scams and amazing success stories. But they’ve never seen a day like Tuesday, when the world’s largest crypto exchange carried out the corporate equivalent of murdering its nearest competitor.
If you’re not immersed in crypto and are wondering what everyone else is talking about, here’s a basic guide to the insanity surrounding Binance and FTX — and why it matters.
What exactly happened?
Binance is a giant offshore crypto exchange run by a sly Chinese-Canadian billionaire known as CZ. Binance was on top for a while but, in recent years, an upstart competitor called FTX started to bite. FTX was founded by a wild-haired young American known as SBF (the initials are something in crypto).
Last weekend, CZ began protesting SBF’s lobbying tactics and then used Binance’s market power to destroy its competitor.
How exactly did CZ do this?
The two of them were friends, you see, and that included CZ investing in SBF’s new cryptocurrency exchange. Over time, CZ decided he didn’t want to own it anymore, and when he sold his stake in FTX, he got paid in a crypto token called FTT. These tokens are used by customers on the FTX exchange to receive trading discounts, but unlike Bitcoin, they are not particularly liquid.
In retrospect, this was a stupid deal by SBF because it resulted in CZ owning a huge amount of FTT tokens, thus giving him power over FTX. It’s as if Pepsi gave Coca-Cola a big chunk of stock that Coke could sell whenever it wanted. And that’s what happened: CZ got mad at SBF and flooded the market with several FTT brands.
This was disastrous because SBF also has a trading fund that has many FTT tokens on its balance sheet. When the price of FTT tokens began to decline, SBF tried to defend its value by selling other assets to buy the FTT tokens that were flooding the market — but it didn’t work, and as the value of FTT declined, SBF discovered the liabilities his assets began to exceed him. By Tuesday, his companies were facing bankruptcy and he had to turn to his rival to get them off his hands.
This is crazy. Why would CZ do such a thing?
It’s possible that CZ did this in part because it wanted to crush an up-and-coming competitor. But part of it was personal. In recent months, regulators have become aggressive towards the crypto industry, and both Binance and FTX are trying to stay on their good side. Amidst all this, CZ believed that SBF was whispering venom into the ears of US regulators – possibly implying to them that CZ was connected to China – and so CZ chose to retaliate.
“We’ve given support in the past, but we won’t pretend to make love after the divorce. We’re not against anyone. But we won’t support people who lobby against other industry players behind their backs,” CZ wrote in a fateful tweet on Sunday. . Two days later, he had destroyed his rival’s company.
So does Binance now own FTX?
No. At least not yet. All CZ said is that Binance has signed a “letter of intent” to acquire FTX, which means it could happen, but there’s no guarantee. In the meantime, CZ and SBF have stated that Binance will take care of FTX customers and make sure their funds are not wiped out.
Who is to blame?
Well, you could say it’s CZ’s fault for not using his power on FTX to destroy it. But people are also pointing the finger at SBF for not being transparent about the full overlap between FTX and its trading company, which owned heaps of FTT. If it was transparent, people probably would have raised the alarm about this vulnerability earlier, and maybe FTX could have prevented this mess.
Others have also made a more serious allegation: that SBF may have used client funds to plug holes in the balance sheets of one or both of his companies. This was the case with several other crypto companies that collapsed this spring, and it’s too bad. But to be clear, these are just allegations and there is no proof that SBF did this.
OK, but why is it such a big deal? Don’t things like this happen all the time in crypto?
Yes, crypto has a well-deserved reputation for jerks and executives who play fast and loose. But this episode stands out since FTX is the second largest company in the crypto space and because SBF was widely seen as the industry’s golden boy who would help it get on the right side of regulators. So much for that.
So what does this mean for the price of cryptocurrencies?
Well, in the short term, it’s not good news. Prices fell after rumors that FTX was in trouble, but then rebounded briefly when Binance announced its bailout, only to crash again later on Tuesday.
These events have hit the price of FTT and a token called Solana associated with SBF. When there is a big selloff in a major token, it usually has a negative effect on the rest of the market, and this seems to be the case. Bitcoin fell about 10%, and Ethereum fell 15%, which is bad but not horrible for the two biggest coins by market cap.
This story was originally featured on Fortune.com
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