Binance-FTX deal now in doubt after revelations of huge black hole and investigations by the SEC and CFTC.
By Wolf Richter for WOLF STREET.
So here we go again. Bitcoin has plunged into the $15,000 zip code, from $21,000 a couple of days ago, and from $68,000 a year ago. The FTX token, the native token of the Bahamas-based crypto exchange FTX, founded by Sam Bankman-Fried, has collapsed by 90% in two days. Cryptos across the board are getting crushed.
FTX is in a solvency crisis. Users pulled out nearly all of the 20,000 Bitcoins (about $430 million at the time, now a lot less) of the Bahamas-based crypto exchange in just four days, according to Bloomberg, citing data from CryptoQuant. Yesterday, FTX has halted withdrawals of cryptos.
Bankman-Fried also founded crypto-trading firm Alameda Research, and the whole mess became public a few days ago when CoinDesk reported that a quarter of the holdings of Alameda Research may be made up of the FTX token, which entered free-fall, which triggered the solvency crisis. The website of Alameda Research (https://www.alameda-research.com) has now been taken down.
The SEC and CFTC are investigating FTX.
The SEC and CFTC (Commodity Futures Trading Commission) are investigating whether crypto-exchange FTX.com mishandled customer funds, following the disclosures of a solvency crisis, according to Bloomberg, citing three people familiar with the matter.
The SEC claims oversight over cryptos that it qualifies as securities. The CFTC, in terms of cryptos, can take enforcement action if it believes there’s fraud or manipulation in the market that underlies the derivatives, which it regulates. Both agencies oversee investment firms.
Turns out, the SEC has been investigating FTX US and its crypto-lending activities for months, according to Bloomberg, citing two of the three people.
They’re investigating the relationships of FTX.com has with its US counterpart FTX US and Alameda Research, according to Bloomberg, citing two sources. Bloomberg:
In recent days, the regulators have asked for details about the ownership structure of FTX US and FTX.com, which caters to non-American clients, according to two of the people. Regulators are interested in any overlap between management and board structures, and the financial relationship between the two entities. The agencies have also asked for details on whether customer accounts were properly segregated and the composition of the investor base at FTX.com, said one of the people.
Binance Deal now in doubt: investigations & black hole.
Revelations of the scope of the investigations into FTX and Alameda Research come at the nick of time for Binance, the largest crypto exchange in the world, which had made a nonbinding offer to buy FTX to “help cover the liquidity crunch” and prevent further contagion into the DeFi space.
But Binance offered to buy FTX at a price that would wipe out FTX investors including founder and CEO Sam Bankman-Fried, Softbank Vision Fund, Singapore wealth fund Temasek, and Ontario Teachers’ Pension Plan.
These investigations are throwing further doubts on Binance’s willingness to move forward with the deal.
During the first hours of due diligence, Binance executives found a huge shortfall between liabilities and assets at FTX, possibly more than $6 billion, according to Bloomberg, citing a source.
An immediate issue is the way FTX valued its own FTX token and whether it should have been marked at a lower price, the person told Bloomberg.
The FTX token has plunged 90% in two days, after Binance co-founder and CEO Changpeng Zhao said that Binance would be liquidating its own holdings of the FTX token, valued at the time at $530 million, after it emerged that a quarter of Alameda Research’s holdings were composed of the FTX token.
Binance owned $530 million of the native token of its competitor FTX, and after it found out that Bankman-Fried’s other company was also loaded with the FTX token, Binance gets cold feet?
Try to go to heaven together, end up going to heck together?
Turns out that the fundamental principal in Decentralized Finance (DeFi) is that every firm must be deeply interconnected with other firms, each holding the other’s token, and lending to the other, and bidding up each other’s tokens, so that if one firm goes to heaven, they all go to heaven together – which they did – and when one firm goes to heck, they all go to heck together – which they’re now doing. Makes for very smooth and efficient contagion.
This was tested successfully by Voyager Digital, a crypto platform, crypto lender, and crypto broker, which filed for bankruptcy on July 6, after crypto hedge fund Three Arrows Capital went to heck amid huge leverage when cryptos plunged. Voyager had lent 15,250 bitcoins and 350 million USD Coins to Three Arrows ($650 million at the time), and Three Arrows went to heck and defaulted on that loan, and Voyager went to heck, and whoever had fiat or crypto in an account at Voyager is now an unsecured creditor in a bankruptcy case.
Celsius Network, one of the largest crypto lenders, also went to heck in July because it traded other cryptos that it had borrowed from its users – similar to a bank but without any safeguards – and then the cryptos it had bought plunged after terraUSD and luna had gone to heck, and Celsius could no longer pay back the loans to its users, and Celsius went to heck, and its users are now unsecured creditors in the bankruptcy proceedings.
They all hold each other’s tokens, and they all bid up each other’s tokens to mind-boggling levels amid gobbledygook theories of the new financial world, called DeFi, but now they want to sell each other these tokens, and prices collapse and exchanges, trading firms, and lenders go to heck?
Binance is now unlikely to follow through on its takeover of FTX, according to Bloomberg, citing a person familiar with the matter. The non-binding letter of intent allows Binance to fully acquire FTX, buy parts of the assets, or walk away. The takeover doesn’t involve Alameda Research – which may have already gone to heck – and it doesn’t involve the separate US crypto exchange of FTX.
Binance co-founder and CEO Changpeng Zhao told employees in a memo that he has no “master plan” and that the collapse of FTX “is not good for anyone in the industry.” The players in DeFi wanted to go to heaven together, and now they’re going to heck together?
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