Binance and FTX: How All Developed and Was It a Well-Crafted Plan of CZ?

When FTX claimed insolvency and Binance announced its intention to purchase it, there were many rumors that CZ planned it all. 

Is it really so?  

I’ve recently met the Binance CEO along with his team at a conference, and indeed, I was impressed by their attitude. That’s why for me, there was more reason to think about the entire situation once more.

Binance Is an Early Investor in FTX

In 2019, Binance invested in FTX and took a long-term position in FTT, the native FTX token. However, from being a small platform, FTX soon grew to become one of Binance's major rivals. But what about Binance's equity then? If the platform continued receiving its share of FTX’s profits, how was it possible that CZ planned to make FTX collapse?

Binance exited the FTX equity in 2021 and received approx. $2.1 bln in cash (BUSD and FTT). 

The platform continued to hold FTT until the previous year. The reason? CZ explains it better than I’d do it.

Source: Twitter

So what happened now? 

Before moving further, some background information is needed. 

The FTX CEO and founder is Sam Bankman-Fried. He is also a founder of Alameda Research, one of the biggest trading firms. 

Alameda Research had over $14,6 bln of assets as of June 30, 2022. And on November 2, CoinDesk published a revealing article where it stated that based on the Alameda Research balance sheet, a huge part of the trading firm’s assets were in FTT - a token that FTX was printing out-of-the thin air. So, Alameda’s balance was backed by its sister’s company token. 

That was risky for both Alameda Research, FTX, and anybody holding FTT. If FTT went down, Alameda would have to face margin calls which is bad enough. But if FTX were the lender to Alameda, the situation would be even worse. 

Changpeng Zhao knew that perfectly and needed to protect his own company that was still holding a significant amount of FTT. So, he announced that Binance was going to offload the remaining FTT. At that time, the entire value of FTT held by Binance was approx. $500mln, something that FTX could buy out to prevent the FTT price from plummeting. 

Source: Twitter

But this announcement sends the FTT price from over $24 to slightly over $22. The Alameda CEO offered to buy tokens from Binance to prevent the price dump.

Source: Twitter

But CZ refused, claiming that he is for the free market. So, Binance would be selling FTT to whoever is willing to buy them.

And still, at that time, it was not critical if it was about money only. But it was also about the trust of users, including big investors. 

They started moving their funds from FTX. Within 24 hours after the announcement, millions of dollars were moved from the exchange.  

Source: Twitter

Even Alameda Research moved funds from FTX to their own wallet. 

Source: CoinDesk

After that, the process couldn’t be stopped. 

At some point, the platform faced liquidity issues and froze withdrawals. As experience shows, it means the platform’s end. 

However, Changpeng Zhao understood perfectly that the FTX collapse would pull the entire industry down, including Binance and BNB. And it, in turn, would mean more attention from regulators. For Changpeng Zhao, it was not acceptable.

So, Changpeng Zhao and Sam Bankman-Fried came to an agreement that Binance would purchase FTX.

Source: Twitter

Source: Twitter

The deal is not finalized so, another development of the story is still possible. 

Changpeng Zhao was clear about its intentions: Binance will perform proper due diligence to assess whether the deal is worth the effort. So, if the gaps in the FTX balance are too big, the deal may not happen, and FTX will vanish from the market. 

There are speculations that Binance is intentionally taking time for the full due diligence to allow FTX to recover. After that, the deal would be canceled. While such a possibility exists, I don’t see any reason in doing so. 

What Outcome Is More Probable?

For now, it looks like Binance will make an effort to keep FTX afloat by purchasing it. 

Why do I believe so? Changpeng Zhao doesn’t look like a person who would just waste money. Etherscan says that there are still millions of FTT on Binance wallets.

Source: Etherscan

Offloading them now after having FTT plummet would result in a significant loss. So, the only option is to purchase FTX, make the token recover its value, and benefit from it.

There are implications that by buying FTX, CZ is getting access to the USA market. There is some unclarity here. Sam states clearly that FTX.US is not impacted by the deal while CZ claims that Binance is considering FULLY purchasing FTX. 

For now, it is unclear how things are going to move here because, for some reason, the “U.S. Commodity Futures Trading Commission is monitoring the situation” Why would a regulator be interested if not a full acquisition was planned?

It is also worth remembering Binance is under investigation by the U.S Justice Department for possible violations of money-laundering rules. That’s why even after the acquisition deal is finalized, it is difficult to see how Binance will access the USA market so effortlessly. But the FTX purchase would facilitate it for sure. 

There are opinions that for Binance, buying FTX means eliminating one of its major competitors. Thus, it will threaten the much-valued decentralization of the crypto market. However, if FTX just collapses, it could have an effect on decentralized services. But in addition, it would send the prices of all coins deep down. So, the acquisition isn’t the worst scenario. 

Was It Planned by Changpeng Zhao?

I don’t believe so.

Why? 

Because it was not CZ who forced Alameda to rely on a token issued by its sister company. It was also not CZ who reviewed the balance sheet of FTX. And for sure, it was not CZ who traded with users’ funds. Yes, with the purchase, Binance will eliminate its main competitor but it was FTX and Alameda who dug their own grave.