Nov 10 (Reuters) – (This story contains language that some readers may find offensive in paragraph 2)
Sam Bankman-Fried, the owner of cryptocurrency exchange FTX, caught his employees off guard with a sad message on Tuesday morning.
“Sorry,” he told them, “I fucked up.”
The reason for the security: His announcement half an hour before FTX’s arch-rival Binance planned a shock takeover to save the major trading platform from danger. “liquidity crisis”. Binance founder Changpeng “CZ” Zhao, whom the billionaire accused of sabotage, would now become his White Knight.
According to interviews and communications with several people close to Bankman-Fried, the seeds of FTX’s downfall were sown months ago, stemming from mistakes Bankman-Fried made after stepping in to rescue other crypto firms as the cryptocurrency market collapsed amid rising interest rates. both companies not previously reported.
Some deals involving Alameda Research, Bankman-Fried’s trading company, led to a series of losses that eventually became its undoing, according to three people familiar with the company’s operations.
The interviews and messages shed new light on the bitter rivalry between the two billionaires, who have been competing for market share in recent months while also accusing each other of undermining the other’s business. On Wednesday, Binance pulled out of the deal, throwing the future of FTX into uncertainty.
Bankman-Fried, left without a buyer, was now looking for alternative backers, two people close to it said. After Binance refused, he said in a message to FTX employees that Binance had previously told them no reservations about the deal. “We are exploring all options.”
Neither Binance nor FTX responded to requests for comment. “I’m probably going to get bogged down a lot,” Bankman-Fried told Reuters in an interview on Tuesday. He did not respond to further messages.
Binance previously stated that it decided to pull out of the deal following due diligence on the FTX and reports of US investigations into the company.
Zhao’s announcement of the planned takeover marked a stunning turnaround for Bankman-Fried. The 30-year-old founded Bahamas-based FTX in 2019 and built it into one of the largest exchanges, amassing nearly $17 billion in assets.
News of a liquidity crisis at FTX, which was valued at $32 billion in January with investors including SoftBank and BlackRock, reverberated throughout the cryptocurrency world.
The price of major coins fell, with bitcoin falling to its lowest level in almost two years, further hurting the sector, whose value has fallen by nearly two-thirds this year as central banks tighten credit.
By ditching the deal, Binance also avoided the regulatory scrutiny that would accompany the takeover, which Zhao mentioned as a possibility in a memo to employees posted on Twitter.
There are financial regulators all over the world gave warnings on 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 was helping Iranian companies Despite U.S. sanctions, it has traded $8 billion since 2018, according to a series of articles this year by the news agency about the stock market’s compliance with financial crimes.
RELATIONSHIPS
Zhao and Bankman-Fried’s relationship began in 2019. Six months after FTX launched, Zhao bought 20% of the stock for about $100 million, said a person with direct knowledge of the deal. At the time, Binance said the investment was “aimed at growing the crypto economy together.”
But within 18 months, their relationship deteriorated.
FTX has grown rapidly, and Zhao now sees it as a true competitor with global aspirations, former Binance employees said.
When FTX applied for a license in Gibraltar in May 2021 for the subsidiary, it was required to provide information on its major shareholders, but Binance stonewalled FTX’s requests for help, according to messages and emails between exchanges seen by Reuters.
The messages show that between May and July, FTX lawyers and advisers wrote to Binance at least 20 times seeking details about Zhao’s sources of wealth, banking connections and Binance ownership.
However, in June 2021, an FTX attorney told Binance’s CFO that Binance “didn’t communicate properly with us” and they risked “seriously disrupting a project that is important to us.” In response to FTX, a Binance legal official said he tried to get a response from Zhao’s personal assistant, but the information requested was “very general” and they may not provide everything.
By July of that year, Bankman-Fried was tired of waiting. It bought back Zhao’s stake in FTX for about $2 billion, a person with direct knowledge of the deal said. Two months later, Gibraltar’s regulator granted FTX a license as Binance was no longer involved.
That amount was paid to Binance in part with FTX’s own coin, FTT, Zhao said last Sunday — the holding then ordered Binance to sell, precipitating the crisis in FTX.
“We are trying to go after us”
This May and June, Bankman-Fried’s trading firm Alameda Research suffered a series of losses from deals, according to three people familiar with its operations. These include a $500 million loan deal with failed cryptocurrency lender Voyager Digital, the two people said. Voyager filed for bankruptcy protection the following month, with FTX’s US arm paying $1.4 billion for its assets in a September auction. Reuters could not determine the full extent of Alameda’s losses.
Seeking to shore up Alameda, which has almost $15 billion in assets, Bankman-Fried moved at least $4 billion into the FTX fund, backed by assets including shares of FTT and trading platform Robinhood Markets Inc. In May, Alameda disclosed a 7.6% stake in Robinhood.
Some of those FTX funds were customer deposits, two of the people said, though Reuters could not determine their value.
Bankman-Fried did not inform other FTX leaders about the steps taken to support Alameda, people said, fearing it might leak.
On November 2, however, a report by news outlet CoinDesk detailed a leaked balance sheet that showed most of Alameda’s $14.6 billion in assets were held at FTT. Alameda’s CEO Caroline Ellison tweeted that the balance sheet was just for “a portion of our corporate businesses” and did not reflect more than $10 billion in assets. Ellison did not respond to requests for comment.
That didn’t quell growing speculation about what Alameda’s financial health could mean for FTX.
Later, Zhao said that Binance will sell its entire stake in the FTT token, worth at least $580 million, “according to recent public disclosures.” The token’s price fell 80% over the next two days, and outflows from the exchange accelerated, blockchain data shows.
DRAWING SURGE
In a message to staff this week, Bankman-Fried said the firm had seen a “huge surge in withdrawals” as users agreed to withdraw $6 billion worth of cryptocurrency tokens from FTX in just 72 hours. Bankman-Fried told his employees that daily withdrawals were normally in the tens of millions of dollars.
Following Zhao’s tweet that Binance would sell its FTT holding, Bankman-Fried predicted his belief that FTX would withstand attacks from its rival. He told staff at Slack that the backlog was “not shocking, it went up,” but they were able to process requests.
“We’re going together,” he wrote. “Obviously, Binance is trying to go after us. So be it.”
But on Monday, the situation worsened. Bankman-Fried, unable to quickly find a backer or sell other illiquid assets on short notice, contacted Zhao, according to a person familiar with the call. Zhao later confirmed that Bankman-Fried called him.
Bankman-Fried has signed a non-binding letter of intent for Binance to acquire FTX’s non-US assets. That valued FTX at several billion dollars, two people familiar with the letter said, adding that the exchange was enough to cover all withdrawal requests but a fraction of its January valuation.
Zhao announced the potential deal hours later, with Bankman-Fried tweeting, “Many thanks to CZ.”
“Let’s live to fight another day,” Bankman-Fried told employees in Slack.
His employees were shocked. Even executives were in the dark about the Alameda shortage and the acquisition plan until Bankman-Fried informed them that morning, two people who worked with him said. Both men said they had no idea the situation surrounding the withdrawal was so serious.
Then came Binance’s announcement Wednesday that it was canceling the purchase. “The issues are beyond our control or ability to assist,” Binance said. Zhao tweeted, “Sad day. Tried,” with a crying emoji.
Reporting by Angus Berwick in New York and Tom Wilson in London; Additional reporting by Hannah Lang in Washington and Elizabeth Howcroft in London; Edited by Paritosh Bansal and Chris Sanders
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