Binance has entered into a non-binding LOI to fully acquire crypto exchange FTX.
This afternoon, Changpeng Zhao (CZ) of Binance announced his company signed a non-binding letter of intent (LOI) to acquire Sam Bankman-Fried’s (SBF) FTX fully. FTX was reportedly facing insolvency and asked Binance for help.
Binance Signs LOI to Acquire FTX
In his tweet, CZ explained his company entered a non-binding LOI to acquire FTX due to a “liquidity crunch” faced by FTX. Zhao stated that the situation is highly dynamic and that they “assess it in real-time.” Shortly after CZ, Bankman-Fried tweeted out his statement on the matter:
SBF also stated that they are clearing their withdrawal backlog and that all assets will be converted 1:1. In the thread, he pointed out that “the important thing is that customers are protected” and that the acquisition and the “liquidity crunch” is not affecting FTX US or Binance.us, as those are both separate companies.
Reportedly, the liquidity problems partially stem from the fact that FTX’s users withdrew $6 billion in just 72 hours between Saturday and Tuesday. SBF told his employees in a text message,
“On an average day, we have tens of millions of dollars of net in/outflows. Things were mostly average until this weekend, a few days ago. In the last 72 hours, we’ve had roughly $6b of net withdrawals from FTX.”
According to individuals with reported inside access to the deal, FTX sought over $1 billion in financing before completing the deal with Binance. One source, however, revealed that the debt would require considerably more funding.
What Happened to FTX?
On Saturday, Nov. 5, it was reported that an unknown wallet initiated a transfer of nearly $585 million (22,999,999 FTT) from FTX to Binance. CZ later confirmed that the transaction came from his company and that Binance was liquidating its FTT. Zhao also hinted that the decision resulted from some “revelations” and was driven by lessons learned from the LUNA collapse in May.
This led to widespread speculation that there was a “feud” between Binance and FTX—and that the move was meant to drive SBF’s company out of business. CZ quickly responded to these allegations stating that while the memes were funny, he is spending his energy “building, not fighting”. Sam Bankman-Fried responded to the widespread rumors, stating that “FTX is fine.”
Despite the dust apparently starting to settle, a report came out early on Nov. 8, indicating that FTX might have paused withdrawals. The allegations were all but confirmed in the Twitter thread later posted by SBF in response to CZ’s announcement. Later on Tuesday, an employee confirmed on the company’s official Telegram channel that “any transfers besides fiat are halted.”
It remains unclear how bad the “liquidity crunch” is, and that the LOI signed by Binance is non-binding. CZ has made it known that he can back out should he so choose.
The Immediate Aftermath of the Announcement
The news that FTX might be insolvent sent shockwaves throughout the crypto sector. While most digital currencies saw a brief rally after CZ announced he would acquire SBF’s company, most quickly went down with both Bitcoin and Ethereum dropping around 10%.
These developments also affected the prices of both BNB and FTT. Binance’s token saw a price increase of around 7% going from about $325 to $357 before quickly plunging to $321. FTX’s FTT dropped drastically late last night going from $22 to less than $15. It briefly rose to $19 after CZ announced the LOI, but is currently down around 75% and is valued at just over $5, at the time of writing.
Later on Tuesday, CZ tweeted that he believes that “all crypto exchanges should do merkle-tree proof-of-reserves.” In the same Tweet he added that while banks do run on fractional reserves, crypto exchanges should not. Zhao also later stated that Binance never used BNB as collateral and that he believes no exchange should use its token as collateral.
The announcement also had a limited spillover effect on the stocks of crypto companies. Robinhood (NASDAQ:HOOD) was down almost 20% by the time the markets closed, and Coinbase (NASDAQ:COIN) also suffered a 10% decrease in share price.
The news also prompted Brian Armstrong and Coinbase to create posts explaining that the company has limited exposure to Binance and FTX and provide an insight into why they believe a similar scenario can’t happen to their exchange.
