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Explainer: how Binance and FTX sent shockwaves through the crypto world

The saga between two of its top players, Binance and FTX, has turned the crypto ecosystem upside down.

It’s been a tumultuous few days in the largely unregulated cryptocurrency world, with Twitter mud-throwing, a takeover bid for a shock exchange and falling token values.

The world’s largest exchange, Binance Holdings Ltd., now plans to take over troubled rival FTX.com in what would be a radical consolidation of power in the crypto world. However, the letter of intent is non-binding, which shook the market and caused a further decline in values. While crypto may seem like a niche of finance, the saga between two of its top players has rocked the crypto ecosystem and is likely to have far-reaching consequences.

What are Binance and FTX?

They are two of the largest crypto exchanges, the marketplaces where investors buy, sell and store tokens. Binance is by far the largest crypto exchange by volume – and FTX is in the top five, according to crypto data provider CoinMarketCap (which is owned by Binance).

Who runs them?

They were also led by two of the most visible and charismatic people in the crypto world: Binance by Changpeng Zhao (or CZ, as he is known) and FTX by Sam Bankman-Fried (or SBF).

Formerly a trader at Jane Street, until just a few weeks ago, the curly-haired 30-year-old was all over the crypto industry, supporting swaying projects including BlockFi, Voyager Digital, and Celsius. His investors included Softbank Vision Fund, Singapore wealth fund Temasek and Ontario Teachers’ Pension Plan.

Zhao is a Chinese-born Canadian citizen who immigrated to Vancouver at age 12 and graduated with a degree in computer science from McGill University in Montreal. He started Binance in Shanghai in 2017, but the Chinese government banned crypto exchanges the same year. He is now based in Dubai.

Read more: ​​​​Crypto’s richest man faces regulatory crackdown, brutal winter

Why did they fall out?

In 2019, Binance invested in FTX, then a derivatives exchange. The following year, Binance launched its own crypto derivatives and quickly became the leader in the field.

Tensions mounted as the two companies engaged in increasingly divergent tacks with regulators. Bankman-Fried testified in the US Congress, while Binance would face regulatory investigations worldwide.

The two companies are also competing for assets, with both bidding for Voyager Digital assets – an auction that FTX.US won.

Zhao and Bankman-Fried have been trading barbs on Twitter for months, arguing over issues ranging from lobbying US politicians to accusations of pre-dealing transactions.

So what just happened in the crypto world?

Over the weekend, Zhao tweeted that Binance would liquidate its holdings of a token known as FTT, which is issued by FTX.

The tweet followed a story from crypto news channel CoinDesk that said Alameda Research, a trading house owned by FTX founder Bankman-Fried, had many of its assets in FTT token.

That fueled wider concerns about FTX’s health and investors began to withdraw money. The FTT token fell 72% on Tuesday and fell again on Wednesday. A day before reaching a deal, Bankman-Fried said on Twitter that the assets on FTX were “fine” and that “a competitor is trying to go after us with false rumours.”

What does this mean for the markets?

It has brought a lot of uncertainty to investors. Even with the announcement of the deal, crypto price movements could make it difficult. Bitcoin briefly fell to its lowest level since 2020, leaving many holders under water.

And then there’s Solana, which is backed by Bankman-Fried and fell 23% on Tuesday.

What does this mean for Binance and FTX users?

Both CZ and SBF said on Twitter that the deal was made to protect users, although the exact terms are unclear. There have been no announcements from Binance as to what will happen to FTX accounts. It is unlikely that customers will be happy with the token price drops.

Read more: ​Crypto retail investors rattled as Binance moves to acquire FTX

FTX.US is not part of the deal.

What consequences does this have for CZ and SBF?

This deal basically makes CZ the top figure in the crypto world – if he wasn’t already. And it’s a huge comedown for SBF, previously seen as one of the most talented people in the industry.

That also plays out in fortunes. Bankman-Fried’s 53% stake in FTX was worth about $6.2 billion before Tuesday’s acquisition, according to the Bloomberg Billionaires Index, based on that fundraising round and the subsequent performance of publicly traded crypto companies. His crypto trading house, Alameda Research, contributed $7.4 billion to his personal fortune.

The Bloomberg wealth index assumes that existing FTX investors, including Bankman-Fried, will be completely wiped out by Binance’s bailout, and that the root of the stock’s troubles came from Alameda. As a result, both FTX and Alameda are valued at $1. That leaves SBF’s net worth at about $1 billion, down from $15.6 billion on Tuesday. The 94% loss is the biggest one-day collapse ever among billionaires tracked by Bloomberg.

CZ has also had a rough patch, down 83% from the year so far according to the Billionaires Index, but is still valued at $16.4 billion.

What does this mean in terms of regulation?

This episode and how quickly it unfolded sets a strong example for regulators concerned about the lack of guardrails in the freewheeling crypto space. Jurisdictions that have considered looser rules are less likely to do so — especially after a few months ago of implosions in the Terra/Luna ecosystem and hedge fund Three Arrows Capital.

In addition to general crypto regulations, the deal itself may be under scrutiny as it is between two of the top players in the space and could raise concerns about the market dominance of a combined entity.

What’s next?

It’s a bit unclear. Since the Binance agreement to buy FTX is not binding, many different things can happen. Binance could take over FTX, walk away altogether, or maybe take over parts of it. And it’s not even clear whether FTX would continue to exist as a separate entity. Some of this may depend on what Binance actually finds, as it also works on the due diligence.

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