Is Binance really doing what it claims? The world’s biggest cryptocurrency exchange by trading volume will likely buy one of its biggest competitors. This news helped to calm the market. What’s next, though? What happens if Binance goes through with the takeover? What is the final deal? And what does this story says about FTX’s business model? Did they succeed by fractional-reserving?
Let that sink in… pic.twitter.com/Whj50bR2Ey
— wolf (@ImNotTheWolf) November 8, 2022
Let’s analyze the official but not abundant information out there and try to reach our own conclusions.
Sam Bankman-Fried Bends the Knee
The mind behind FTX Research and Alameda Research spoke after a long morning of silence. Sam Bankman Fried gave a twitter thread that will last forever. “we have come to an agreement on a strategic transaction with Binance for FTX.com,” he tweeted. Then, he announced that “our teams are working on clearing out the withdrawal backlog as is. This will clear out liquidity crunches; all assets will be covered 1:1.” Wasn’t that supposed to be the case from the beginning, though?
2) We are currently clearing the withdrawal backlog. This will eliminate liquidity issues and all assets will now be covered 1:1. This is one of the main reasons we’ve asked Binance to come in. You may need to adjust and settle. — we apologize for that.
— SBF (@SBF_FTX) November 8, 2022
Bankman Fried declared then the winner. “A *huge* thank you to CZ, Binance, and all of our supporters. This is a user-centric development that benefits the entire industry,” he tweeted about his new boss. “Binance has shown time and again that they are committed to a more decentralized global economy while working to improve industry relations with regulators. We are in the best of hands.”
5. I am aware that conflict has been reported between our exchanges. However, Binance has proven time and again their commitment to a decentralized world economy. They also work to improve the industry’s relations with regulators. We’re in great hands.
— SBF (@SBF_FTX) November 8, 2022
But is the agreement final? According to River’s CEO Alexander Leishman, “The DD on this deal is going to take forever. Bankruptcy still on the table if Binance decides they don’t want to touch it after digging deeper.”
BNB price chart in FTX | Source: BNB/USD on TradingView.com
Binance CEO Announces Their Win
CZ claimed that he knew exactly what he did all along. Today, CZ is able to show his true colors after disengaging himself from war and stating that Binance was focusing on building. “This afternoon, FTX asked for our help. It is experiencing a severe liquidity crisis. To protect users, we signed a non-binding LOI, intending to fully acquire FTX.com and help cover the liquidity crunch,” he humbly tweeted.
This is an extensive task that will require a considerable amount of time. It is an extremely dynamic situation and we are continuously assessing it. Binance can withdraw from this deal at any moment. As things progress, we expect FTT will be volatile over the next few days.
— CZ 🔶 Binance (@cz_binance) November 8, 2022
However, CZ is admitting to a liquidity crunch that shouldn’t be there. And then, he clarifies that the deal isn’t done yet. “There is a lot to cover and will take some time. It is an extremely dynamic situation and we are constantly monitoring it. Binance has the discretion to pull out from the deal at any time.”
We can only analyze the data that we do have. DeFinace Capital’s Arthur Ox tweeted, “Given how little time it took to close this deal. It’s likely Binance acquire FTX for nominal/negligible amount and assume all the liabilities of FTX.” And then, he gave advice, “if I am previous round investor of FTX, I will probably start engaging litigation lawyer now.”
The Future of Binance and FTX
Analysts are enjoying a field day over this story. Dylan LeClair, who’s been covering the ins and outs from day one, recently tweeted that the resolution “confirms that FTX is insolvent without a bailout from Binance” and that “Alameda was speculating with user funds.” Those are hard accusations, but he’s got some data to back them up.
My impression was that your deposits are backed 1:1.?
Oder was it your proprietary trading desk that directed trades using user funds? As reserves dwindled, we could see that the Alameda wallets were flooding back on-chain. pic.twitter.com/f7Y3LsYsqq
— Dylan LeClair 🟠 (@DylanLeClair_) November 8, 2022
Questioning the liquidity crunch, LeClair asks, “was your “proprietary trading desk” directionally trading using user funds. We could all see the movements flooding back from Alameda wallets on-chain yesterday as reserves got depleted.” Taking it to the next level, economist Tuur Demeester is concerned with the implications, “If Binance buys FTX and hence takes over the claims of its depositors, it seems likely that Binance then would also become (or remain) a fractional reserve operation.”
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