Binance Proposes to Acquire FTX’s non-U.S. Operations to Ease the Liquidity Crisis

Binance proposes to acquire FTX’s international operations in an effort to ease the exchange’s “liquidity bottleneck.”

Abstract:

The cryptocurrency exchange FTX, owned by Sam Bankman-Fried, has been acquired by Binance.

The CEO of Binance, Changpeng Zhao, tweeted on Tuesday morning that the company had “signed a non-binding LOI, intending to fully buy http://FTX.com and help cover the liquidity constraint” after FTX sought for help.

The largest cryptocurrency exchange, Binance, has saved its competitor cryptocurrency exchange, Sam Bankman-FTX, Fried’s from a liquidity problem by agreeing to buy it for an unknown amount.

In a tweet published Tuesday morning, Binance CEO Changpeng Zhao stated that his company had “struck a non-binding agreement with the purpose to fully acquire http://FTX.com and help cover the liquidity issue” after being asked to assist by FTX.

In the following days, Binance, which was founded in China but currently has no fixed headquarters, will undergo a thorough due diligence process, and the company retains the right to back out of the deal if it so chooses.

This morning, Sam Bankman-Fried tweeted his approval of the deal.

The transaction is a catastrophic fall for a business that was valued at $32 billion by private investors early this year and had aspirations of becoming a crypto giant through a series of mergers and acquisitions. The venture capital firm Sequoia Capital and the investment firm BlackRock backed FTX a few months earlier at a $25 billion valuation. According to Forbes, Bankman-Fried is worth $17 billion, most of which comes from his ownership in FTX.

In an interview this summer with CNBC, Bankman-Fried said that while FTX isn’t “immune” to the crypto collapse, the company is in a better position than competitors thanks to its successful market share acquisition strategy. The CEO also claimed that the company’s expansion was more ethical than that of competitors.

To keep costs down, “we recruited a lot less than most organizations did,” Bankman-Fried explained.

Changpeng Zhao, creator of Binance, was an early backer of FTX. As Bankman-Fried put it in a tweet, Binance would be FTX.com’s “first, and final” investor.

FTX.com’s international operations are unaffected by the purchase. Separation of FTX.us from Binance is permanent. A 2021 audit, however, found that FTX’s American operations contributed only 5% of overall revenue. Bankman-Fried established FTX in the Bahamas.

According to Tweets from both Zhao and Bankman-Fried, the deal is contingent on a non-binding letter of intent and a thorough review of all relevant documents.

In the wake of the deal, the value of FTT, FTX’s native token, soared briefly before plunging by more than half. Concerns over the financial stability of FTX and its sibling trading firm, Alameda Research, sparked a massive sell-off on Monday evening. Binance’s native coin, BNB, has seen mixed results today, but is ultimately up by a small amount.

Zhao of Binance tweeted that he anticipates “extremely volatile” FTT prices in the days to come as developments unfold.

When some nervous investors tried to pull their money off the FTX platform early on Tuesday, the exchange temporarily suspended withdrawals. Over the weekend, Zhao tweeted that the company would be selling its shares of FTT, which shook investor confidence.

In a tweet, Zhao said that Binance owns $2.1 billion worth of FTT and BUSD (the Binance and Paxos stablecoin backed by fiat currency).

He explained that the company has decided to “liquidate all remaining FTT on our books” because of “new disclosures that came to light.”

As Alameda Research is Bankman-trading Fried’s firm and FTX’s sibling company, the news has also caused alarm there. The majority of Alameda’s assets and liabilities are tied to FTT and the activities that leverage FTT, according to a study on the city’s financial health that was released last week. Alameda has refuted this, noting that FTT is only a small portion of the city’s overall financial picture.

According to Arca’s chief investment officer Jeff Dorman, “The Alameda hedge fund is related to FTX through a massive amount of FTT tokens,” and “if they are utilizing all of these FTT tokens as collateral…there are two difficulties.” Alameda could be hit with margin calls and other forms of pressure if the price of FTT drops dramatically, and if FTX is Alameda’s lender, then everyone is in trouble.

He also noted that “what might have been a localized problem at Alameda” escalated into a “bank run.” As a result of widespread speculation that FTX will soon become bankrupt, “everyone started to take their assets out of FTX.”