Binance and FTX: A Hot and Cold Relationship
Sari Abu-Hamad (’24) | Nov 10, 2022
Binance is acquiring FTX: news that took the crypto world by storm and sent the prices of most major tokens on a wild roller-coaster of volatility, eventually resulting in the majority of them crashing by 20%.
Why was this a big deal? A day before this acquisition, FTX, one of the world’s largest international crypto exchanges, paused user withdrawals of funds which is a shocking predicament for users who still hold crypto on that platform (many users held upwards of 6 or 7 figures in crypto on FTX). The initial volatility was caused by the fact that such a large platform could fail nearly overnight without warning leaving tens of thousands of users stranded is terrifying and shakes the faith of those who believe in crypto’s future inevitably in daily society.
What’s next is that Changpeng Zhao (CZ), CEO of Binance, possibly the largest crypto exchange and one of FTX’s close competitors, announced that Binance would be acquiring the failing exchange in an act of horizontal integration and monopolization that would make Andrew Carnegie proud; this would also be able to provide the stranded users with some hope that liquidity is coming their way for them to withdraw their funds. Only a few hours after this news, however, the Wall Street Journal announced that FTX had been under investigation by the SEC for months over “possible securities-law violations” and has a liquidity shortfall of $8 billion. This was the reason for the paused withdrawals: FTX couldn’t pay their customers back due to the liquidity shortfall and their inflated balance sheets; they allegedly also used their customers’ funds as well as the buy and sell order data to move the market against their users.
Binance knew the problem was far out of hand. Within 24 hours of their power play, they took to Twitter and posted that they would be reneging on the deal because of “corporate due diligence” and news “regarding mishandled customer funds and alleged US agency investigations.”
This news again sent the crypto space into a spiral of uncertainty and indicates that the market itself is still at an immature stage if such a major player in the industry with billions invested into it from millions of users can simply collapse in such a way. As shown in the 1-week chart of any major cryptocurrency, half of the holders are shouting to “buy the dip,” while the other half is losing faith in its viability and taking advantage of the exit liquidity.
Many crypto exchanges currently act as unofficial banks that are less secure with no real insurance on deposits (in the same way as banks before the formation of the FDIC). There is no way to measure the trustworthiness and dependability of these exchanges besides the amount of money invested into the platform by big firms as well as the competency and honesty of the leadership which can be difficult to gauge. True decentralization is key to the future success of crypto. If no central bank/exchange is in charge of these vast amounts of funds, no one can control them besides the users themselves; these are the principles that bitcoin and other tokens were founded on.