Exclusive: Behind FTX’s Fall, Billionaires Fight and Crypto Rescue Failed

NOV 10 (Reuters) – (This story contains language in paragraph 2) that some readers may find offensive.

On Tuesday morning, Sam Bankman-Fried, owner of crypto exchange FTX, caught his employees by surprise with a sad letter.

He told them, “I’m sorry. I got lost.”

The reason for the error was his announcement half an hour ago that FTX’s arch rival, Binance, was planning a sudden takeover of the major trading platform to save it from a “liquidity crunch.” Binance founder Changpeng “CZ” Zhao, who was accused by a billionaire of sabotage, is now his own white knight.

The seeds for the downfall of FTX were sown months ago, due to mistakes made by Bankman-Fried after it intervened to save other crypto firms as the crypto market crashed amid rising interest rates, according to interviews with several people close to Bankman-Fried and communications from both companies that were not reported. about it in advance.

Some of those deals involving Bankman Fried’s Alameda Research business led to a string of losses that eventually led to a downturn, according to three people familiar with the company’s operations.

The interviews and letters also highlight the bitter rivalry between the billionaires, who in recent months have vied for market share and openly accused each other of seeking to hurt each other’s businesses. It culminated on Wednesday, with Binance pulling out of its deal and throwing the future of FTX into uncertainty.

Two people close to him said Bankman-Fried, stuck without a buyer, is now looking for alternative backers. After Binance pulled out, he told FTX employees in a letter that Binance had not previously informed them of any reservations about the deal and that he was “exploring all options.”

Neither Binance nor FTX responded to requests for comment. “I would probably be too overwhelmed” to give interviews, Bankman-Fried told Reuters on Tuesday. He did not respond to more messages.

Binance previously said it had decided to withdraw from the deal as a result of due diligence on FTX and news reports about the US investigation into the company.

Zhao’s revelation of the planned acquisition made a startling reversal for Bankman-Fried. The 30-year-old established FTX in the Bahamas in 2019 and led it to become one of the largest exchanges, amassing a fortune of close to $17 billion.

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News of the liquidity crunch of FTX — which in January was worth $32 billion with investors including SoftBank and BlackRock — sent echoes across the crypto world.

Major currency prices have plummeted, with bitcoin dropping to its lowest levels in nearly two years, inflicting more pain on a sector that has fallen in value by nearly two-thirds this year as central banks tighten credit.

By abandoning the deal, Binance also avoided the regulatory scrutiny that would likely have accompanied the acquisition, which Zhao indicated as a possibility in a memo to employees he posted on Twitter.

Financial regulators around the world have Issuing warnings About Binance for operating without a license or violating money laundering laws. The US Department of Justice is investigating Binance for possible money laundering and criminal sanctions violations. Reuters reported last month that Binance has helped Iranian companies trade $8 billion since 2018 despite US sanctions, as part of a series of articles this year by the news agency on compliance with financial crimes on the exchange.

Relationship sources

Zhao and Bankman-Fried’s relationship began in 2019. Six months after the launch of FTX, Zhao bought 20% of the exchange for about $100 million, a person familiar with the deal said. At the time, Binance said the investment was “aimed at growing the crypto economy together.”

But within 18 months, their relationship soured.

Former Binance employees said that FTX has grown rapidly and is now seen by Zhao as a true competitor with global aspirations.

When FTX applied for a license in Gibraltar in May 2021 for a subsidiary, it had to provide information about its major shareholders, but Binance held off FTX’s requests for help, according to letters and inter-exchange emails seen by Reuters.

Between May and July, FTX lawyers and advisors wrote to Binance at least 20 times seeking details of Zhao’s sources of wealth, banking relationships, and Binance’s ownership, the letters show.

However, in June 2021, a FTX attorney told Binance’s CFO that Binance was not “handling us properly” and that they risked “disrupting a project that is very important to us.” A legal official from Binance responded to FTX saying that it was trying to get a response from Zhao’s personal assistant, but the information requested was “too general” and they might not provide everything.

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By July of that year, Bankman Fried was tired of waiting. The person familiar with the deal said he repurchased Zhao’s stake in FTX for $2 billion. Two months later, with Binance no longer participating, the Gibraltar regulator granted FTX a license.

This sum was paid to Binance, in part, with FTX’s own currency, FTT – a possession that he would later order Binance to sell, Zhao said, precipitating the crisis in FTX.

Reuters graphics

“Try to go after us”

In May and June, Bankman Fried’s trading company Alameda Research suffered a string of losses from deals, according to three people familiar with its operations. Two of the people said these include a $500 million loan agreement with failed crypto lender Voyager Digital. Voyager filed for bankruptcy protection the following month, with the US arm of FTX paying $1.4 billion for its assets at an auction in September. Reuters was unable to determine the full extent of Alameda’s losses.

Seeking to prop up Alameda, which has nearly $15 billion in assets, Bankman-Fried has transferred at least $4 billion in FTX funds, secured by assets including FTT and shares in trading platform Robinhood Markets Inc, People said. Alameda revealed a 7.6% stake in Robinhood in May.

Two of the people said that part of this FTX money is customer deposits, although Reuters was unable to determine its value.

People said Bankman-Fried did not tell other FTX executives about the move to support Alameda, adding that he feared it might leak.

However, on November 2, a report by news outlet CoinDesk detailed a leaked balance sheet that allegedly showed that much of Alameda’s $14.6 billion assets are held in FTT. Carolyn Ellison, CEO of Alameda, tweeted that the balance sheet was just “a subset of our corporate entities,” with no more than $10 billion in assets showing up. Ellison did not respond to requests for comment.

That failed to quell growing speculation about what Alameda’s financial position might mean for FTX.

Zhao then said that Binance will sell its entire stake in the token, FTT, worth at least $580 million, “due to recent discoveries that have come to light.” The price of the token collapsed by 80% over the next two days and an influx of outflows from the exchange increased, blockchain data shows.

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withdrawal increase

In his letter to employees this week, Bankman-Fried said the company experienced a “massive withdrawal increase” as users scrambled to withdraw $6 billion in cryptocurrency from FTX in just 72 hours. Bankman-Fried told his employees that daily withdrawals typically run into the tens of millions of dollars.

After Zhao tweeted that Binance would sell its FTT holdings, Bankman-Fried predicted confidence that FTX would beat its rival’s attacks. He told the staff on Slack that the withdrawals “wasn’t surprising, it was difficult,” but that they were able to process the requests.

He wrote: “We are moving.” “It’s clear that Binance is trying to go after us. Let it be.”

But by Monday, the situation had become dire. Unable to quickly find a backer, or sell other illiquid assets at short notice, Bankman-Fried contacted Zhao, according to a person familiar with the call. Zhao later confirmed that Bankman-Fried had called him.

Bankman-Fried has signed a non-binding letter of intent for Binance to purchase non-US FTX assets. Two people familiar with the letter said the FTX is valued at several billion dollars — enough for the exchange to cover all withdrawal requests but a small portion of its January valuation.

Zhao announced the potential deal several hours later, with Bankman-Fried tweeting, “Many thanks to Czechoslovakia.”

“Let’s live to fight another day,” Bankman-Fried told employees at Slack.

His employees were shocked. Two people who work with him said that even the executives weren’t aware of Alameda’s shortfall and acquisition plan until Bankman-Fried informed them that morning. Both people said they were unaware that the withdrawal situation was so dangerous.

Then came Binance’s announcement on Wednesday that the acquisition was cancelled. “The issues are beyond our control or our ability to help,” Binance said. “Sad day. I tried,” Zhao tweeted with a crying emoji.

Additional reporting by Angus Berwick in New York and Tom Wilson in London; Additional reporting by Hannah Lang in Washington and Elizabeth Hawcroft in London. Editing by Baritush Bansal and Chris Sanders

Our criteria: Thomson Reuters Trust Principles.

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