A very public war of words between two otherwise affable constituents of the cryptocurrency scene has exposed long-running tensions brewing under the surface of the sector’s biggest digital asset exchanges.
In one corner is Changpeng ‘CZ’ Zhao, head of the world’s largest crypto exchange Binance.
In the other corner is Sam Bankman-Fried (aka SBF), founder of the FTX crypto exchange and head of prominent crypto-focused venture capital fund Alameda Research.
Following a recent CoinDesk investigation that exposed Alameda Research’s balance sheet as stacked with some US$6bn in illiquid FTX Tokens (FTT), CZ very publicly announced that Binance would begin liquidating its stake in FTX.
There remain many questions around Alameda Research’s financial position: If indeed its balance sheet consists of dubiously valued FTX Tokens while simultaneously having US$8bn in liabilities in fiat, the firm could be in serious trouble.
Bankruptcy speculation has starting to gain traction and while nothing is certain, the speculation has hit SBF where it hurts.
Millions in crypto assets have been withdrawn from the FTX exchange, while at the same time, large-scale FTT short positions have been opened, suggesting that investor sentiment expects the coin to suffer more losses than the 30% in market value already lost.
Now, at the time of writing, FTX appears to have paused all withdrawals from the exchange according to The Block, though user reports are conflicting.
The implications for another bank run in the crypto sector cannot be understated: Following Terraform Labs’ US$60bn collapse in May this year, over two trillion was wiped from the market.
The crypto markets have barely recovered from that collapse, so a similar event could be catastrophic.
What happened?
SBF and CZ: Friends turned enemies
While both parties are renowned for their ambition and smarts, they have vastly opposing ideologies.
For SBF, regulation and Big Government is the key to success; a fact underscored by his US$16mln worth of donations to Democrat-linked political action committees.
SBF makes no bones about this. He penned a lengthy pro-regulation missive in October that promoted blocklists, sanctions, public disclosure, and broad regulatory oversight.
His proposals were met with severe backlash in the crypto community for going against the grain of decentralised finance (DeFi) philosophy.
CZ is far from an anti-government libertarian- he believes that regulation is important for mass adoption, but he favours a more soft-touch approach.
In October 2020, Forbes reported on Binance’s apparent scheme to avoid anti-money laundering regulation through an elaborate corporate structure, citing a lawsuit accusing Binance of being the go-to location for “the laundering of cryptocurrency”.
Let's also not forget that the Binance blockchain receives plenty of flack from the crypto world for being in the hands of only 21 pre-selected operators, making it one of the least decentralised blockchain in existence.
Where both parties align is in their appetites for investment opportunities.
Through both FTX and Alameda Research, SBF became the most famous angel investor in the crypto sector in recent years.
From big-hitters like Voyager and BlockFi, to lesser-known enterprises like Japanese exchange Liquid Group, Canadian exchange Bitvo, and even some Bitcoin miners, not to mention his 7.5% stake in Robinhood after the hybrid trading platform suffered over US$3.7bn in losses throughout 2021, SBF’s thirst for distressed companies can hardly be quenched.
Some have even likened him to John Pierpont Morgan.
As for CZ, Binance has invested more than US$1bn into DeFi projects this year, and that’s excluding the half a billion pledged to Elon Musk’s Twitter takeover.
But perhaps CZ’s boldest chess move was into FTX itself.
Binance and FTX: A history
FTX was but a fledgling startup in 2019, far from the biggest threat to Binance’s market dominance that it is today.
This new cryptocurrency derivatives exchange caught the eye of CZ, and in December 2019, Binance committed an equity investment into FTX, as well as a long-term position in the FTX Token (FTT) “to help enable the sustainable growth of the FTX ecosystem”.
The size of Binance’s equity investment was not disclosed, but we do know that it was in the billions- “As part of Binance’s exit from FTX equity last year, Binance received roughly US$2.1bn USD equivalent in cash,” so Tweeted CZ.
As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books. 1/4
— CZ ???? Binance (@cz_binance) November 6, 2022
Binance’s divestment from FTX last year went under the radar, but looking back, tensions were evidently already starting to mount.
“We recently repurchased shares from Binance to buy them out of our cap table,” Bankman-Fried said in a July 2021 interview with Decrypt, adding: “I think it just makes sense given the role that our businesses are playing in the space. It can also give us more flexibility going forward.”
More tellingly, SBF mentioned “differences between how we run our businesses”, while also citing the “barrage” of warnings Binance was receiving from regulators around the world.
There were no doubt major discrepancies between the lenses through which both men view the crypto markets, but any animosity between them was kept private… Until now.
In what appears to be a deleted reply, SBF seemed to make a broadside against China-born CZ by sarcastically questioning whether he was allowed in Washington DC.
SBF understands that in order to one day beat Binance, he needs to leverage US politics as a weapon.
And he also knows his angle. CZ was born in China & there are rumors of Chinese involvement with Binance.
As US<>China tensions rise, he has an angle to attack Binance. pic.twitter.com/FZHAGxBkQ0
— Alex Valaitis (@alex_valaitis) November 7, 2022
While the intentions behind that comment are known only by him, public relations between the two took a sharp nosedive in the following days.
Upon announcing his intention to liquidate Binance’s FTT position, CZ indirectly threw accusations back across the net.
“We are not against anyone. But we won't support people who lobby against other industry players behind their backs,” CZ Tweeted.
Perhaps more savage was the correlation drawn between FTT and the collapsed LUNA cryptocurrency.
Which brings us to the current state of the market.
FTX Token plummets
FTX Token (FTT) has dipped over 30% following Binance’s divestment announcement and subsequent public feud.
While FTT, which gives holders cheaper FTX trading fees and other benefits, may be used as a proxy for the health of the FTX exchange and by association Alameda Research, it does not give an indication of the underlying performance of either entity.
However, one thing is certain: FTX is getting hit hard.
Coinbase has just overtaken FTX as the second-largest cryptocurrency exchange according to CoinMarketCap’s metrics.
According to Nansen metrics, US$1.2bn has been withdrawn from the FTX exchange, with net outflows numbering -US$653mln.
24H total deposits to FTX: $540M
Total withdrawals: $1.2B
Netflow: -$653M
Note: $ETH and ERC-20 tokens only pic.twitter.com/YbNjpFREy6
— Nansen ???? (@nansen_ai) November 8, 2022
FTX may have the reserves to make it through this, but the future of Alameda Research is less certain.
With billions in investments committed by the firm, what could happen if the fears surrounding its balance sheet come true, and it has no real way of honouring its liabilities?
In Alameda’s defence, chief executive officer Caroline Ellison attempted to assuage fears by Tweeting: “That specific balance sheet is for a subset of our corporate entities, we have more than US$10bn of assets that aren’t reflected there.”
Proactive has reached out to all relevant parties for comment. News regarding on-chain withdrawals will be updated as necessary.