CZ took over FTX but set off the real Lehman Brothers in the crypto world

At 0:00 am on November 9, SBF posted a tweet on his social media account:

“Hi everyone, I have a few things to announce.

So full circle, we have reached a strategic deal with Binance, FTX's first and final investor (pending due diligence). Our team is clearing the withdrawal backlog as it stands, which will eliminate the liquidity crunch; all assets will be covered 1:1. This was one of the main reasons we asked Binance to come on board. This may take some time to fully resolve, and we apologize for that.

A huge thank you to CZ, Binance, and all of our supporters. This is a user-centric development that benefits the entire industry. CZ has done, and will continue to do, an incredible job of building the global crypto ecosystem and creating a freer economic world. I know there have been rumors in the media about a conflict between our two exchanges, but Binance has repeatedly stated that they are committed to building a more decentralized global economy while working to improve relationships with regulators. He will take care of everything. (Please note that FTX.us and Binance.us, two separate companies, are not currently impacted by this. Withdrawals on FTX.us have always been available, assets are fully 1:1 covered, and are operating normally.)”

10 minutes later, CZ followed up with a post:

"This afternoon, FTX reached out to us for help due to a severe liquidity crunch. To protect our users, we have signed a non-binding letter of intent whereby (Binance) intends to acquire (FTX) in full. We will conduct a complete investigation into this matter in the coming days. There is a lot to cover and it will take some time. This is a highly dynamic situation and we are evaluating it in real time. Binance reserves the right to exit trading at any time. As this situation develops, we expect the price of FTT to fluctuate significantly in the coming days."

This unprecedented showdown involving billions of dollars and causing a sensation inside and outside the industry ended abruptly in less than 48 hours with one or two understated tweets. After a year and three months, FTX returned to Binance. As soon as the news was announced, FTT and BNB soared in a short period of time, with the largest increase exceeding 40% within 15 minutes.

In fact, the grievances between FTX and Binance have been going on for a long time. After the two companies officially announced their separation in July 2021, they have been in constant friction (BlockBeats note, for details, see " FTX and Binance's war escalates, from arm in arm to tit-for-tat "). From the launch of leveraged tokens, to the acquisition battles of crypto institutions such as Voyager, to CZ's response to his identity and nationality not long ago, the two crypto giants are alluded to in the back. The confrontation ended with Binance's acquisition of FTX and SBF's return to Zhao, which has drawn another "Lehman section mark" for the crypto industry.

48 Hours

The incident originated from an article published by CoinDesk on November 2. The article, titled " Divisions in Sam Bankman-Fried's Crypto Empire Blur on His Trading Titan Alameda's Balance Sheet ", disclosed a private financial document that pointed out the possible assets and liabilities of SBF's crypto trading giant Alameda Research.

The article points out that most of Alameda's balance sheet assets are FTX platform token FTT. As of June 30, Alameda's assets reached $14.6 billion, of which the largest single asset was FTT worth $3.66 billion. Other important assets included SOL and Solana ecosystem tokens worth $3.37 billion. Liabilities were $8 billion, mainly $7.4 billion in loans.

Once the article was published, it began to ferment in the community, and FUD sentiment continued to accumulate. In the early morning of the 6th, a Twitter user named Autism Capital posted that FTX's "mortal enemy" Binance had transferred the remaining $23 million worth of FTT in its account to the trading platform. After the news came out, it once again caused a reaction in the community, and the price of FTT fell.

On the evening of the 6th, Alameda made a positive response. CEO Caroline Ellison responded on social media to the recent rumors that "Alameda/FTX may be insolvent" and said that the online version of the balance sheet actually only listed part of Alameda's assets, and Alameda had more than 10 billion US dollars in funds that were not listed in the balance sheet.

Caroline added that the circulated balance sheet only lists Alameda's largest long positions, but Alameda obviously has other hedging assets. Given the tightening of the crypto credit space this year, Alameda has now repaid most of the loans. After the tweet was sent, the price of FTT rebounded to around $24.

Soon after, CZ posted a message saying that Binance received approximately $2.1 billion in cash (consisting of BUSD and FTT) after exiting FTX equity last year. Due to the recent revelations, Binance decided to liquidate all remaining FTT on its books. Binance will try to do it in a way that minimizes the market impact. Due to market conditions and limited liquidity, the sell-off is expected to take several months to complete. Binance always encourages cooperation between industry participants, and this sell-off has nothing to do with "targeting competitors." After CZ's tweet, the price of FTT quickly fell from around $24 to around $21.

Immediately afterwards, Alameda CEO Caroline Ellison responded to "Binance liquidated FTT" on social media. She said that if Binance founder CZ wanted to minimize the impact of liquidation on the secondary market, Alameda is now very willing to receive it at a price of $22. After the tweet was sent, the price of FTT rebounded to $22.

In just one day, due to the chain reaction caused by community information and Binance's sale of FTT, nearly $1 billion in assets have flowed out of the relevant wallet addresses of FTX and Alameda. SBF responded on the afternoon of the 8th, accusing competitors of deliberate smearing and emphasizing that the platform has the ability to cover the assets of all users, trying to appease the market and FTX users. However, SBF's response did not play a big role. There are still a large number of customers on the platform transferring funds, and the stablecoins on FTX are rapidly drying up, and even the stablecoins that have just entered the platform are almost exhausted immediately (Figure 2, Figure 3).

Now, FTX and Alameda not only need to pay for user withdrawals, but also deploy capital to defend the value of FTT. Alameda's related wallet addresses have also begun to frequently transfer assets from major exchanges to FTX. At the same time, CZ added fuel to the fire and replied with a shrug emoji to a tweet questioning Alameda's $22 buyback commitment. This also directly angered FTX Digital Markets CEO Ryan Salame, who directly quoted CZ's tweet on Twitter and expressed his dissatisfaction with his selling of FTT in the open market.

As panic built up, a large number of speculators began to pour into the contract market. Within a few hours, the trading volume of FTTUSDT perpetual contracts on Binance surged from $20 million to around $40 million, with a fierce battle between long and short positions. Alameda also tried to defend FTT, and the price difference between FTX and Binance also reached a historical high. After several rounds of tug-of-war, FTT still fell below the $22 mark and fell all the way to around $15.

Seeing the two giants fighting so hard, many people began to realize the hidden dangers that this life-and-death duel might bring to the entire crypto industry. On the afternoon of the 8th, OKGroup founder Xu Mingxing posted on social media: "If FTX unfortunately becomes another LUNA, then no one, including Binance, can benefit from this accident. Customers and regulators will lose some confidence in the entire industry. I hope CZ can consider stopping the sale of FTT and reaching a new agreement with SBF."

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Total collapse after collective excitement

After the acquisition was announced, the tokens of the two trading platforms soared instantly, with FTT rising above $20 and BNB above $370. The community became even more lively, with memes and texts flooding the screen, instantly making CZ the "Emperor of Cryptocurrency."

But tonight, with the blood moon in the sky, God apparently felt that things were not reversed enough. The community’s spiritual carnival lasted less than half an hour before the FUD from the acquisition agreement itself and external supervision immediately struck back.

According to media reports, SBF had sought help from billionaires in Wall Street and Silicon Valley before reaching an acquisition agreement with Binance to obtain $1 billion in emergency aid. But at noon on Tuesday, FTX's funding gap had quickly risen to $5-6 billion. Everyone suddenly realized the huge potential hole that FTX might have. CZ then tweeted that all cryptocurrency trading platforms should do Merkle tree reserve proofs. Banks operate on partial reserves. Cryptocurrency trading platforms should not do so. Binance will soon begin to do reserve proofs with full transparency.

Soon after, Binance’s acquisition of FTX attracted the attention of antitrust regulators around the world. According to a CoinDesk article, if regulators around the world are worried that the acquisition will restrict market freedom of choice, they have the right to block the major merger, and there are also strict laws prohibiting anti-competitive behavior.

Thibault Schrepel, an associate professor at the University of Amsterdam who specializes in blockchain and antitrust issues, also tweeted: "Next time, check your tweets before posting them to see if they comply with antitrust laws. At this stage, I wouldn't be surprised if CZ's tweet was found in upcoming court documents/antitrust lawsuits." Schrepel believes that U.S. law will apply to this case because the transaction affects FTX's entire company, including its U.S. business.

It is also reported that the transaction must also be approved by antitrust authorities in jurisdictions such as the European Union, which also have the power to block mergers and acquisitions. For larger transactions, if a company "gets approval first," the European Commission can impose a fine of up to 10% of its turnover. Meanwhile, Steven Adamske, a spokesman for the U.S. Commodity Futures Trading Commission (CFTC), said it is following the FTX incident, but "no regulatory issues are currently clear."

Suddenly, the market sentiment took a 180-degree turn, from a sharp rise to a sharp fall. FTT directly started the liquidation mode, and the price instantly dropped to single digits. BTC and ETH were all affected, breaking through the price that had been sideways for several days. Even Robinhood in the Web2 world was implicated. Since SBF holds 56 million shares of Robinhood and is the third largest shareholder, Robinhood's stock price fell by 18.83%.

From the excitement of the crowd to the collapse of the market, the situation developed so fast that people didn’t even have time to react to it. In the real-time Twitter Spaces, news came from time to time that other mainstream exchanges such as KuCoin were also unable to withdraw coins, and one could even feel the panic of the host. In less than 30 minutes, FTX went from being a lucky person who was insured to an innocent ghost who attracted the thunder. We have to sigh that FTX is the real Lehman Brothers of this round of crypto cycle. We also have to question, what did CZ do?