What's going on between Binance and FTX? is it the end of FTX?

What's going on between Binance and FTX? is it the end of FTX?

Published May 5, 2021
2 min read

This week, the abrupt collapse and likely emergency sale of FTX, one of the world's major digital currency exchanges, compounded the difficult year for digital currencies.

Binance, the largest exchange by trading volume, announced on Tuesday that it has signed a letter of intent to acquire FTX, the fourth-largest exchange, in what amounts to a rescue of a digital currency ecosystem pillar. The purchase was announced around one week after FTX's dire status became apparent.

Until the most recent crises, FTX was widely regarded in the digital currency business, in part because of its CEO, the rapidly ascending crypto billionaire Sam Bankman-Fried (also known as SBF), who had arguably become the face of digital currency in the United States.

But fractures began to appear on November 2, when CoinDesk reported that Alameda Research, a trading firm also led by Bankman-Fried, had huge quantities of a coin developed by FTX. As noted by CoinDesk, this indicated that Alameda's basis did not rest "on an independent asset like as a fiat money or another digital currency," but rather on a coin (known as FTT) issued by its sister firm, FTX.

Due to their close relationship, any problems at FTX that diminish the value of its coin, FTT, will also affect Alameda, according to Acheson. This has unnerved investors and spurred a sell-off of FTT, which began when Binance, an early investor in FTX, dumped approximately $530 million worth of the coin, bringing its price down. Last week, the CEO of Binance, Changpeng Zhao, also known as "CZ," and Bankman-Fried engaged in a long-standing Twitter feud.

Eventually, additional sellers joined in what amounted to a run on FTX. The exchange rapidly had a liquidity bottleneck, which prevented it from allowing users to withdraw funds. On Tuesday of this week, FTX ceased withdrawals from customer accounts. However, the repercussions extend beyond that single conversation. As the price of FTT fell drastically, large digital currency marketplaces also experienced a decline.

The enormous volume of outflows, according to Andrew Thurman, a chimpanzee psychometric enhancement technician at the blockchain analytics firm Nansen, signalled a liquidity shortage before Binance and FTX announced their impending partnership. "There were even warning signals of ecosystem-wide liquidity difficulties, such as stETH beginning to depeg, that we hadn't seen since Terra/3AC [Three Arrows Capital]," he said, referring to past digital currency events that shook the markets.

"This is a tremendous blow to the digital currency community's confidence with authorities," said Mark Lurie, CEO of Shipyard Software, a company that develops applications and solutions for decentralised banking. "For a brief period of time, SBF was the face of digital currency lobbying, donating enormous sums to both parties and participating extensively with regulators. Legislators and regulators are also people, and the natural human response to a false prophet is to reject their entire platform and community. They may have difficulty trusting the space for an extended period of time."

But now, binance has refused to take on this deal.

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