FTX and Binance: an Epic Drama

The crypto world may have spent the whole of 2022 in bear market conditions, but there has been plenty of drama, and as we approach the year-end, another engrossing story unfolded.

Events around crypto exchanges FTX and Binance had some observers questioning whether yet another black swan was landing, but the outcome was a significant shifting of the crypto landscape.

SBF in the Spotlight

If you follow crypto, you’ll likely be familiar with Sam Bankman-Fried, known familiarly as SBF. Crypto is populated with unusual characters who draw attention, either to themselves or their projects, and SBF is one such participant, occupying a central role in the crypto ecosystem.

SBF is the CEO and Founder of the crypto exchange, FTX, and has long maintained a reputation for being one of the smartest participants in the crypto merry-go-round. However, he has taken some flak recently, for several reasons.

Controversy around SBF ramped up last month when he released a tentative plan for voluntary crypto standards, in lieu of yet-to-arrive official regulation. Put mildly, his perspective didn’t receive a positive reception, with some of his propositions criticized as restrictive, controlling, and, on the whole, contrary to crypto’s open source ethos, through which there are no barriers to entry.

SBF had a public discussion with Erik Voorhees, the CEO of DeFi platform ShapeShift and an influential figure who articulates a liberty-oriented school of thought, who is opposed to heavy-handed regulation. A clip went viral, in which SBF appeared stumped by a comparison between financial transactions and email, and the crypto space’s collective shift in attitude towards SBF became more palpable.

A perception frequently voiced on social media was that SBF was jeopardizing some core crypto principles, with some observers putting that down to miscalculation, others claiming self-interest was at work, and some defending SBF’s views.

FTX, Alameda and CZ

Debate around SBF’s position on regulation had appeared to be cooling, when another bombshell dropped, involving FTX and Alameda Research, a crypto trading firm also owned by SBF, and which is closely linked to FTX. At this point, the CEO and Co-Founder of the crypto exchange, Binance, Changpeng Zhao, widely known as CZ, enters the story. Like SBF, CZ is very wealthy, plans strategically and is a major crypto player who can exercise significant influence.

Drama erupted when CZ let it be known, via Twitter, that Binance was liquidating its FTT position, which caused a sharp drop in the FTT price. This was consequential, as FTT is a token created by SBF’s FTX platform, which also happens to be the single biggest asset on Alameda’s balance sheet.

This news set in motion rounds of fear, uncertainty and doubt around FTX, Alameda and the entire SBF crypto empire. There was hugely increased scrutiny on the workings of FTX and Alameda, and there are reports laying out the case that the sister platforms have been operating a ‘flywheel scheme’.

In short, this means that a token is created out of thin air (the FTT token), the price of that token is driven up, it’s marked to market, and any major holders of that asset (Alameda Research) are gifted a bountiful, token-rich balance sheet. This paper wealth can then be used to expand operations, taking token prices higher, which feeds back into the loop, and the circuit repeats.

A glaring problem is that the flywheel must never stop spinning, because if it halts, then the true market value of the key asset in question becomes catastrophically evident, and can lead to structural collapse. And, in the case of FTX and Alameda Research, it looks as though CZ and Binance just threw a well-aimed spanner in the flywheel works.

A Gripping Performance

The crypto world was hit hard earlier this year by the collapse of Terra/Luna, which led to the downfall of Celsius and Three Arrows Capital, and sent the entire ecosystem into a bear market tailspin. These events came at a time of ongoing macro distress, crypto sentiment turned gloomy, and there was a sense that a period of regrouping was required. Recently, it appeared that the downward trend might have leveled off, the decks had been cleared, and we could take a cautiously optimistic view going into 2023.

However, as news about FTX and Alameda grabbed attention, the possibility that yet more key crypto platforms may be faltering or insolvent caused intense unease, and there has been a run on FTX as users move to withdraw funds, which, in turn, cracks the fault lines even more.

Critics of SBF, irritated by his recent takes on standards and regulation, have little sympathy for the FTX Founder, but, are cognizant that, the entire crypto ecosystem is in a fragile state of recovery and could be heavily impacted by further platform collapses. The majority view was, at first, that FTX could survive the storm, but the biggest shock came on Tuesday when it was suddenly announced, with FTX in the grip of a liquidity crisis, that Binance had signed a non-binding letter of intent, with the intention of fully acquiring FTX. It’s likely now that there will be waves of speculation about the levels of tactical planning and chicanery that led to this denouement, but, for the impartial observer, it has been a gripping performance from all involved.