Explained: What went wrong at crypto exchange FTX and why the Binance deal collapsed

5paisa Research Team 5paisa Research Team 10th December 2022 - 12:27 am

Cryptocurrency markets have been hammered this year, with bitcoin and most other digital currencies losing two-thirds of their value as rising interest rates, a deep correction in stock markets in general and tech stocks in particular as well as liquidity crises and other challenges worsened the situation.

And this week, the crypto market has received another massive jolt. The empire of Sam Bankman-Fried, a crypto billionaire and founder of the crypto exchange FTX has all but collapsed. And there is little hope of a rescue after Binance, the world’s biggest cryptocurrency exchange, walked out of a deal to acquire FTX. Here’s all you want to know.

First things first, what is FTX and who were its investors?

FTX is a Bahama-based cryptocurrency exchange. It was founded in 2019 by Sam Bankman-Fried, or SBF as he is known in the crypto world. The exchange grew rapidly and raised millions of dollars in funding from venture capital funds.

In July last year, it secured $900 million at a valuation of $18 billion. Months later, in October 2021, it was valued at $25 billion when it raised funding from Singapore state investment firm Temasek and US-based Tiger Global. And in January 2022, its valuation soared to $32 billion when it raised $400 million from Japan’s SoftBank.

Despite raising millions of dollars, why is it facing a collapse?

Until July this year, FTX seemed to be on a roll. It offered to buy bankrupt crypto lender Voyager Digital and even got approval to operate its exchange in Dubai.

But in August, a US bank regulator ordered FTX to stop “false and misleading” claims that it made about whether funds at the company were insured by the government.

FTX’s problems compounded in early November and then quickly got out of hand. Earlier this month, crypto news website CoinDesk reported a leaked balance sheet that showed Alameda Research, SBF’s crypto trading firm, was heavily dependent on FTX's native token, FTT. A couple of days later, Binance CEO Changpeng Zhao said his firm would liquidate its FTT holdings due to “recent revelations”.

SBF initially sought to defend FTX, saying the exchange was doing fine. But then the value of FTT plunged 72% on November 8 as clients rushed to withdraw their funds.

How much shortfall is FTX facing?

SBF said this week FTX was facing a shortfall of as much as $8 billion from withdrawal requests and needed emergency funding, Reuters reported. He said on Tuesday that customers had sought withdrawals of $6 billion. He also deleted Monday’s tweets that FTX had enough assets to cover the gap.

So, how did Binance enter the picture and why is it pulling out now?

Earlier this week, as SBF scrambled for funds and even approached VC investors, Binance stepped in. Binance said it had reached a nonbinding deal to buy FTX’s non-US businesses for an undisclosed amount.

However, Binance quickly retreated, citing reports of “mishandled customer funds and alleged U.S. agency investigations.” CEO Zhao also said that Binance was selling its holdings in the FTX token FTT.

“In the beginning, our hope was to be able to support FTX’s customers to provide liquidity,” Binance tweeted on Wednesday. “But the issues are beyond our control or ability to help.”