{"id":25454,"date":"2022-11-14T08:30:56","date_gmt":"2022-11-14T08:30:56","guid":{"rendered":"https:\/\/research.reading.ac.uk\/research-blog\/?p=25454"},"modified":"2023-02-07T11:54:07","modified_gmt":"2023-02-07T11:54:07","slug":"cryptocurrencies-why-binances-failed-ftx-rescue-deal-could-mean-crypto-winter-is-coming","status":"publish","type":"post","link":"https:\/\/research.reading.ac.uk\/research-blog\/2022\/11\/14\/cryptocurrencies-why-binances-failed-ftx-rescue-deal-could-mean-crypto-winter-is-coming\/","title":{"rendered":"Cryptocurrencies: why Binance\u2019s failed FTX rescue deal could mean \u2018crypto winter\u2019 is coming"},"content":{"rendered":"

This article is republished from The Conversation<\/a> under a Creative Commons license and was first published before FTX filed for bankruptcy.<\/em><\/p>\n

Life in the cryptocurrency industry is rarely quiet for long, and after a\u00a0tumultuous summer<\/a>, it seems the market is now entering a \u201ccrypto winter<\/a>\u201d. Over the past week, the founders of two of the largest cryptocurrency exchanges \u2013 Binance and FTX \u2013 have had a public Twitter spat that triggered the collapse of one exchange and a failed bailout deal from the other. Unsurprisingly, these events have caused widespread panic across a market that has barely recovered from several major failures earlier this year.<\/p>\n

\"Graphic<\/p>\n

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Binance, which is estimated to be worth more than\u00a0US$300 billion<\/a>\u00a0(\u00a3263 billion), was actually FTX\u2019s first investor in December 2019. Since then, FTX has grown to be worth more than\u00a0US$32 billion as of last January<\/a>, counting mainstream finance giants such as BlackRock and SoftBank among its many backers.<\/p>\n

Binance CEO Changpeng Zhao and FTX founder Sam Bankman-Fried (often referred to as CZ and SBF, respectively) are two of the most influential people in the cryptocurrency exchange world where investors can buy, sell and store digital currencies. While Zhao has been associated with\u00a0regulatory concerns<\/a>\u00a0around Binance, Bankman-Fried was seen as a relatively stable and ambitious figure in the wild west world of cryptocurrencies. He swooped in to rescue failing companies during last summer\u2019s crypto bust and has made a point of\u00a0speaking with the media<\/a>\u00a0and\u00a0US policymakers<\/a>.<\/p>\n

What happened to FTX?<\/h3>\n

Bankman-Fried\u2019s empire included the FTX exchange business, as well as Alameda Research, a trading firm that was supposed to be separate from FTX. But a recent story by industry news site\u00a0Coindesk<\/a>\u00a0reported that Alameda\u2019s balance sheet was dominated by FTT. This is the crypto token or coin issued by the FTX exchange, which grants holders a discount on trading fees on the marketplace.<\/p>\n

FTT is entirely controlled by FTX, Alameda\u2019s sister company and can be \u201cprinted\u201d as FTX wishes. Alameda also held US$3.37 billion across a range of other cryptocurrencies, such as Solana and Serum, which means that any cryptocurrency collapse could severely affect the company.<\/p>\n

While there is nothing illegal or wrong with these holdings \u2013 particularly in the notoriously\u00a0unregulated crypto industry<\/a>\u00a0\u2013 the report showed Alameda\u2019s heavy reliance on a coin invented by its sister company and not one issued by an independent backer or as legal tender by a government. If a company in such a position gets into trouble, such assets would be useless in shoring up the business and protecting users because they would also fall in value. This discovery about Alameda\u2019s balance sheet led to liquidity concerns about the entire company.<\/p>\n

Indeed, after the Coindesk news story was published, Binance CEO Zhao tweeted plans to liquidate the remaining FTT on Binance\u2019s books. In another post a few hours later he called the move \u201cpost-exit risk management, learning from LUNA\u201d (a reference to a roughly\u00a0US$60 billion<\/a>\u00a0crypto crash that happened earlier this year).<\/p>\n

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As part of Binance\u2019s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books. 1\/4<\/p>\n

— CZ \ud83d\udd36 BNB (@cz_binance) November 6, 2022<\/a><\/p><\/blockquote>\n