Binance Takeover of FTX Is a Huge Red Flag for Crypto

[Chevilopuvvu]

The cryptocurrency world was rocked on Tuesday as one of the largest exchanges for digital currencies, which appeared to be on the verge of collapse, was bailed out by a major rival in a deal that underlined the perils of the industry’s volatility.

Binance, the world’s largest cryptocurrency exchange, said that it had reached an agreement to buy its competitor FTX, which struggled to meet a surge of withdrawal requests in recent days as the crypto market teetered on the edge of another meltdown. The size of the acquisition couldn’t immediately be determined, but the privately held FTX had once been valued at $32 billion.

The emergency deal making highlighted the persistent instability of the crypto industry, which was buffeted this spring by a $2 trillion crash that drained the savings of many amateur investors. That downturn destabilized some of crypto’s biggest firms, though FTX was by far the largest casualty. It was widely regarded as among the most nimble and best-run firms, until its finances started to unravel recently.

Many of the major crypto companies “are inherently fragile, susceptible to a Lehman-like collapse at any time,” said Cory Klippsten, a Bitcoin entrepreneur who is critical of the rest of the crypto industry. “The only hope once under pressure is that another player will bail them out.”

If the deal goes through, it will unite two of the largest crypto companies and cement the status of Binance’s founder, Changpeng Zhao, as one of the most powerful figures shaping the future of the loosely regulated technology.

The deal was announced as crypto markets, which have seen devastating losses this year, were on the brink of more panic. Reports had been circulating that FTX rested on shaky financial foundations. Many of its customers, who use FTX to buy and store their digital currencies, rushed to take their money out. On Monday night, the crypto research firm Nansen reported that more than half a billion dollars had flowed off the platform over the previous 24 hours.

At one point on Tuesday, FTX stopped processing withdrawals altogether, according to the Block, a crypto research firm. The exchange appeared to have entered a “liquidity crunch,” meaning it lacked the funds to fulfill demand for withdrawals.

“This afternoon, FTX asked for our help,” Mr. Zhao said on Twitter, describing how Binance had struck the deal to buy FTX. He said that his company was planning to “fully acquire FTX.com” to help relieve the pressure on the exchange, but added that the agreement was “nonbinding.”

Sam Bankman-Fried, chief executive of FTX, said on Twitter that the deal “benefits the entire industry” and would allow FTX to meet the surge of withdrawal requests.

Mr. Bankman-Fried, who runs FTX from its headquarters in the Bahamas, added that the deal would not involve the company’s smaller U.S.-based arm.

An FTX spokesman said the company had no comment beyond the Twitter posts. A Binance spokeswoman did not immediately respond to a request for comment.