Mutual crypto-destruction assured | Financial Times


The Cold War between FTX’s Sam Bankman-Fried (SBF) and Binance’s Changpeng Zhao (CZ) went nuclear this week. Crypto was the biggest loser in the ensuing radioactive fallout.

However, in the battle between two biggest players in the “digital” “asset” “industry”, there was a clear winner and loser. By Tuesday SBF was tweeting that he had gone to CZ for help, and CZ whispered “no” did a few tweets that can be summarised “maybe! but also #RIPBozo lol”. In news that shocked pretty much no one, Binance has now said it will indeed walk away from the mooted FTX deal.

There has been plenty of wider collateral damage, of course, with ethereum down 24 per cent, solana down 46 per cent, and FTX’s token FTT down more than 75 per cent. Even BNB, the token of ostensible crypto-war winner Binance, is selling off. JPMorgan says “a new wave of crypto deleveraging (is) underway”.

Oh also, former inmate (/“fake Peter Pan cat”) Martin Shkreli and Interpol fugitive Do Kwon both appeared on a Twitch stream Tuesday to discuss the situation. Shkreli comforted his fellow degens with an assurance that jail wasn’t all that bad.

All clear, then?

Wait, what?! This is all so weird. I thought the guy with the funny hair seemed smart.

There’s a good reason for that! SBF has marketed himself very aggressively as The One Legit Cryptocurrency Guy, made a boatload of political donations, and helped promote an entire dang philosophical movement that rationalises wealth accumulation as a moral good.

Is this your king?! © Bloomberg

It’s starting to look like all of that good press papered over some major vulnerabilities in FTX’s business.

Namely, it was fragile enough that the founder of Binance, a major competitor, could spark a market panic with a series of tweets. Those tweets reportedly led SBF to shop around for a new round of investments, and eventually forced him to go, cap in hand, to CZ.

So FTX’s biggest competitor… started a panic… that hurt FTX’s business? And then almost took advantage of that to buy FTX?

Kind of!

But Binance only signed a “non-binding LOI”, or letter of intent. And the now-indisputably preeminent crypto exchange very publicly walked away from the deal with a killer parting shot:

As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of

Is that allowed?!

Unfortunately, the guys who would prosecute — a government and/or regulator — operate within jurisdictions. And we need to chat with a bunch of Bahamian and international law experts to figure out who has that reach.

Presumably someone has jurisdiction over Binance’s exchange, but CZ hasn’t disclosed where the main exchange is located. The firm has also reportedly moved money on behalf of Iranian crypto exchanges, despite stringent US government sanctions on Iran. ¯_(ツ)_/¯

But why did SBF say that the now-dead Binance deal was only FTX’s international business, rather than its US business?

Great question! We have been trying to work out the significance of that since yesterday.

FTX’s US platform is separate from its international exchange, as SBF said in his Tuesday tweets. He described FTX US on Twitter as “not currently impacted by this”, without saying whether “this” is the need for cash or the Binance LOI. FTX US also appears to be open for dollar withdrawals.

On one hand, this is a sign that US regulation more or less worked in the areas where it is currently built to work (dollar deposits on financial platforms).

Still, word has it that FTX’s international exchange has far better liquidity. So it seems suboptimal for SBF to lose that part of the business, right?

Questions also remain about whether FTX’s two platforms have — or, had — significantly different relationships with Alameda Research, a Hong Kong-based trading firm that SBF created before he started FTX.

Worries about Alameda’s balance sheet were the original cause of the market mess.

Alameda!? There’s a third company involved in this? At least it’s not some abbreviation.

Yep! Though it’s not obvious exactly how separate Alameda is from FTX. While CEO Caroline Ellison told Bloomberg that there is a “Chinese wall” to stop information sharing between Alameda and FTX, a Nov. 2 report from Coindesk raised questions about financing ties (not informational ones).

Coindesk saw documents showing at least one part of Alameda held a very large amount of FTT on its balance sheet as of June 30, with $2.2bn in FTT held as “collateral”.

It may not be Lehman, but it does sound like another lesson in the danger of using off-balance-sheet vehicles to add poorly-hedged leverage to a business. The report implied that FTX was able to effectively add leverage by issuing tokens to Alameda, because Alameda could then borrow against those tokens and redeploy the cash back on to FTX’s platform.

But when the price of a token — or any collateral really — slides, a firm needs to put up more cash against its loans. And when a firm’s holdings are so concentrated in one single asset, it is difficult to hedge price declines or raise cash (especially if the asset is issued by a related entity!).

Scare enough people out about the value of a financial firm’s ability to pay back its loans? Voilà — you’ve got a run on the non-bank.

Now, Binance seemed to be threatening to liquidate just around $530mn of FTT, and there was reportedly more than $5bn outstanding when Coindesk’s story was published Nov. 2.

But Alameda’s CEO added a bit of fuel to the fire on Sunday. In response to CZ’s liquidation threats, she tweeted an offer to buy Binance’s stash of FTT directly at $22 per token (rather than, you know, just buying it.)

Not only was that offer publicly rejected, but the entire market then got to watch as the price of the FTT token fell below $22, and kept falling. It was recently trading at $5.

What do the tokens really have to do with FTX’s business, anyway? Are they like a stock?

They are very different. In fact, tokens can’t be too much like stocks, or their issuers will get in trouble with the Securities and Exchange Commission.

The way FTX ran its FTT token makes it sound a bit like an airline-miles program, if airlines periodically bought back their miles. When you buy an FTT token, you don’t really get any ownership stake or guaranteed interest payments. But you do get perks. For airlines, it’s travel. For FTX, it’s discounts on trading.

Really?! I guess maybe I kind of get the appeal, if they’re gonna be bought back. What happened then?

In this case, imagine that Airline A owned a bunch of Airline B’s miles, and then told everyone it thought Airline B was dangerous, and that it was selling those miles to anyone who would buy them (there is no infrastructure to do this as far as we can tell).

How would you feel if you had lent to Airline B against its miles? (Bonds backed by airline miles exist, as many of you know, and have been fairly popular over the past decade!) You probably won’t be eager to buy those miles even at a discount, because who else is going to want them?

That’s what Binance did to FTX, more or less. People weren’t sure about the value of FTT, partly because CZ was threatening to sell. FTT’s dive may have taken down Alameda because, as Coindesk reported, the trading shop owns lots of it.

The collapse of FTT also broke something at FTX, whether directly or indirectly through its ties with Alameda. Bloomberg also reported in September that SBF owned “almost all” of Alameda. (It’s also tough to tell how much of Binance’s hesitation to buy FTX is based on balance-sheet concerns, and how much is the result of CZ doing some negotiating/grave dancing.)

Messy! So… uh… what now?

In short: there is still lots to sort through! While more details come to light, why not read through this old Odd Lots podcast script? Plenty of talk there about black boxes and crypto fairy dust. One thing we are confident saying is that the Expanded SBF Universe needs cash.

One interesting side note: Binance has a native token as well, called BNB. When news of the deal first broke it rallied, but then gave up all of those gains and is now down 20 per cent over the past 24 hours.

Even Bitcoin is down now, off 15 per cent. Bryce’s Cold War analogy was close, but this one did end in mutual destruction.

Price action implies that some market-making businesses got carried out on a stretcher yesterday. One theory is that these market-makers weren’t especially well hedged in options markets for these types of rare events, the way a market maker elsewhere would, hopefully, be.

The extent of the fallout is still becoming clear, so stay tuned. We’ve also heard that wunderkind prodigy crypto types may be looking for new jobs… if you are and feel like chatting/complaining/etc, you know where to find us!