​Binance vs FTX: How the confrontation between two crypto giants arose

(At the time of publication, it became known about the agreement to acquire FTX by the Binance exchange, for more details, see GetBlock Magazine’s feature. The article reflects the development of events preceding the deal - ed. note).

An open confrontation began between the two largest crypto exchanges when Binance’s CEO announced that his company would liquidate its stocks of FTX’s native token. While market observers see what is happening as a battle for market share, the large sales are causing cryptocurrency prices to plummet and rumors of FTX’s insolvency.

Binance was founded by Changpen Zhao (CZ) in 2017 and quickly grew into a market leader, becoming the largest among centralized crypto exchanges. Since its launch, no competing trading platform has ever overtaken Binance in terms of trading volume and user base size. In May 2019, the FTX platform led by Sam Bankman-Fried (SBF) entered the market and rapidly began to break into the lead.

That same year, 2019, Binance co-invested in FTX and also used FTX resources to create a number of institutional trading products within its ecosystem. Capitalizing on a growing crypto market, FTX began to expand, becoming a full-fledged competitor to Binance, though it was still far behind in terms of trading volumes. In 2021, during FTX’s record-breaking $900 million investment round, Binance withdrew its stake, which is valued at $2,1 billion in its own stablecoins Binance USD (BUSD) and FTT, the FTX exchange’s native tokens.

Bankman-Fried openly spoke of his ambitions to cover as much of the crypto sphere as possible, acting as an investor in crypto projects or buying out bankrupt companies with market clout. To expand his influence in the United States, the head of FTX actively interacted with regulators and sponsored the Democratic Party, second only to George Soros in the amount of donations. In a now-deleted tweet, Bankman-Fried quipped that for Zhao doors in Washington closed, where he could speak on behalf of the crypto industry.

It was Bankman-Fried’s active support for the regulation of cryptocurrencies and the DeFi sector in particular that hit his image in the crypto community hard, unleashing a barrage of criticism on him from both public figures and the mass of cryptocurrency and digital asset proponents. In this, CoinDesk published an article stating that the $14,6 billion in assets of FTX-owned Alameda are mostly backed by FTT tokens, as well as SOL of Solana, where Alameda is one of the leading investors. This inevitably led to the widespread belief that with the collapse of FTT, the FTX exchange and companies in its ecosystem could be on the edge of risk.

“Alameda has gotten into the situation that it has been predicted for the last year, which is that it has become too enthusiastic about pledging in FTT tokens (essentially its own, due to its close relationship with FTX). And now it may play a cruel joke with the entire crypto industry,” comments co-founder of ENCRY Foundation Roman Nekrasov. Binance may well be trying to simply drag market share to itself, taking advantage of a situation where one of the competitors showed weakness and was in a vulnerable position, Nekrasov believes.

According to Nikita Zuborev, senior analyst of Bestchange.ru aggregator, the CoinDesk investigation is obviously made on the basis of a very limited amount of “leaked” data, which knowingly puts researchers in a situation where they need to create a quotable newsbreak based on snippets of information. “We don’t rule out that the companies’ dependence may in fact be so serious for their future, but we believe that the conclusions are drawn very hastily and without the proper basis for it,” the expert commented.

Timeline of the conflict

On Sunday, November 6, Zhao tweeted that Binance was liquidating its positions in FTT completely. He called the decision “risk management” after Binance’s exit from FTX equity, adding that it was motivated by “recent revelations that have came to light.” According to Whale Alert, nearly 23 million FTT worth $584,8 million were transferred from an unknown wallet to Binance. Zhao openly confirmed that the transaction is related to token liquidation.

Such statements led to a sharp drop in the price of FTT. Alameda CEO Caroline Ellison openly offered to buy back the tokens in an over-the-counter trade at $22. However, Zhao continued his public remarks, adding that the company had learned a lesson from the Terra blockchain ecosystem situation and the impact of its collapse on the entire cryptocurrency market. He also wrote that “we won’t support people who lobby against other industry players behind their backs.”

On November 7, the head of FTX wrote on Twitter that “a competitor is trying to go after us with false rumors,” adding that the withdrawal of funds from the exchange works, customer funds are in place and not invested anywhere and that FTX still has more than a billion dollars on the bank account. That same day, however, Alameda began selling off several tokens from its reserves. The company has 18 cryptocurrencies in reserves, each over $1 million, and at least some of them were probably sold to support FTT’s rate.

On November 8, FTT collapsed by more than 30%. On the same day, withdrawal problems from FTX began to arise, and the situation continues to evolve. Bankman-Fried did not make public statements until the publication of the article.

Market implications

The main risk in this context is that FTX may not have enough capital to continue the stable operation, Zuborev notes. While real threats cannot be ruled out, especially after the story with the bankruptcy of Three Arrows Capital (3AC) fund, so far what is happening looks more like Zhao decided to take advantage of the situation and stir up a scandal and artificial liquidity crisis at one of the main competitors of his service.

Star Xu, the founder of the OKX exchange, wrote on Twitter that if “FTX becomes another LUNA, nobody in the industry can benefit from the accident including Binance.” Both customers and regulators will lose confidence in the entire industry, he said. He hopes Zhao will stop selling FTT and that the parties will come to an agreement. The collapse of FTX and Alameda, which spent the last six months actively “saving” crypto lending platforms affected by the collapse of Luna, will lead to such disastrous consequences that hardly anyone can benefit from it in principle, Nekrasov agrees.

After the cascade of liquidations and bankruptcies of multimillion-dollar crypto companies this year, market participants inevitably draw parallels with the current situation and assess the risks. While FTX withdrawals were available, millions of dollars of its users started leaving the exchange, many of whom did not allow FTX to fail but chose to insure against even the smallest probability of such an outcome. This, in turn, led to even greater liquidity problems on the exchange.

Such a factor can bankrupt institutions even from the world of traditional finance, but when it comes to crypto exchanges, most projects due to the specifics of business try to reinsure themselves and have a liquidity reserve that exceeds their obligations to investors, so they are not so easy to fail, Zuborev notes.

According to Coinglass, after bitcoin and other cryptocurrency prices fell, traders lost more than $374 million in 24 hours to liquidate long positions, more than $13 million of which fell on FTT positions. “The billionaires with abbreviations for names are fighting and as a result, we are losing money,” wrote Jordan Fish (Cobie), a well-known crypto-influencer and host of the UpOnly podcast. Back on November 7, Bankman-Fried said that he was willing to come on his podcast and talk about what is going on.

“I rather assume that Binance is trying to influence Alameda and its loyal partners, including Circle in some way to push them to some decisions it wants. A kind of blackmail within the laws of the market,” Nekrasov reasons. In his opinion, in the near future the crypto market “will be tossed from side to side like a ship in a storm.” The expert advises retail investors not to act under the influence of emotions. In his opinion, FTX will be able to extricate itself from difficulties, refinance or raise capital in some other way thanks to influential partners who “do not benefit from watching their partner go down.”

The consequences for the whole market will probably be almost imperceptible, Zuborev believes. However, the outflow of liquidity and decrease in the market share may have a negative impact on the FTX business itself, up to and including staff reduction and curtailing of most of the expensive marketing campaigns. Herewith, it is hard to say whether the company’s nearest competitors will benefit or lose. According to the analyst, the atmosphere on the market will be “moderately negative in the coming weeks” but FTX’s competitors may not get new customers either.