Crypto markets collapse amid an apparent feud between the CEOs of two big crypto exchanges: Binance and FTX. We list the more worrying developments and discuss the possible implications of this new war within crypto. It started with the Nov. 2 Coindesk report that suggested Alameda had a lousy record. Alameda is a cryptocurrency trading company with close and opaque ties to the FTX cryptocurrency exchange. And that’s the (supposed) problem: Alameda owns a lot of FTT, a coin minted by sister company FTX.
Bank run on FTX
An Alameda spokesman quickly dismissed the data, saying the leaked data underestimated the assets side of the balance sheet. FTX CEO Sam Bankman-Fried tried to downplay the damage by saying, “FTX is fine, assets are fine.” But rumors are never good, no matter how casual or rugged you try to dispel them. FTX-FTT token price started falling. A bank run on FTX began to unfold. This means FTX has two problems: using capital to defend the cost of FTT and providing funds to allow its clients to exit this bank run.
Dangerous token flywheel
This situation is dangerous for Alameda/FTX because a falling FTT price further weakens their balance sheet. Alameda has a lot of FTT on its record. If the price falls too low, Alameda could become insolvent. It worked so well in the bull market: launch a token, watch (or manipulate) how the price goes up, and lend against those tokens.
Who leaked this balance sheet data that caused the market to panic? Hedge fund financial data leakage is a significant ban in traditional financial markets. A likely candidate is the rival exchange Binance. This became particularly likely when the CEO of Binance, nicknamed “CZ,” declared on Twitter that they were selling their $500 million worth of FTX shares “due to recent revelations that came to light.” Binance was one of the first investors in FTX. Could the little brother trade for CZ have grown too fast? This is, of course, speculation.
The world of crypto exchanges may be a growth industry, but not during this bear market. Furthermore, it is widely believed that the United States only has room for a few great ones. Increasing regulatory requirements make launching a new exchange a $100 million expense. It is, therefore, a murderous affair to become and remain in this exquisite group.
So, was this just a calculated move to weaken an opponent? Possibly. But there seems to be more. FTX is rumored to be behind the news that Binance has facilitated cryptocurrency trading in sanctioned Iran. The two CEOs have a long history of personal staples.
Meanwhile, CZ denies being involved in a fight and claims he posted about the FTT sale for transparency. That may be true: the community had already spotted much on-chain activity for FTT on Binance accounts, so there was no real hiding. CZ: “Sorry to disappoint you, but I put my energy into building, not fighting.”
The story can be exciting, but the implications could be daunting depending on how it unfolds. Market participants need to learn precisely what is going on behind the scenes. What liabilities does Alameda have? What exposure to Alameda Exchange? Does FTX? That only drives prices down.
If significant market players Alameda and FTX go under, it will be comparable to or worse than the market crash when Celsius and 3AC went under in June 2022. It will be a new blow to the crypto industry, leading to even more scrutiny or even a crackdown from regulators.