Did Binance save FTX from insolvency?

Binance's surprise purchase may have saved the industry from another major crash.
Looking for a deal.
Looking for a deal.
Photo: Pedro Nunes (Reuters)
We may earn a commission from links on this page.

Crypto has avoided one more major crash. On Tuesday, crypto exchange Binance announced that it intended to purchase its competitor FTX. The move may have saved FTX from a run on its exchange as depositors raced to withdraw their holdings.

Binance CEO Changpeng Zhao announced on Twitter that FTX had “asked for our help” after a significant liquidity crunch. Despite threatening to cut ties with the firm earlier this week, Binance signed a non-binding agreement to purchase the struggling exchange, potentially ensuring depositors’ assets.

Both Binance and FTX act as brokers, lenders, and exchanges to transact a range of cryptocurrencies. (This deal only affects non-US entities of FTX and Binance). FTX did not return a request for comment by press time and Binance declined to comment.

The deal, if finalized, must still clear major anti-trust hurdles. Binance and FTX are the first and fourth largest crypto trading platforms by volume. Binance also noted it “could pull out from the deal at any time.

From rivals to bailout buddies

The proposed acquisition was announced days after a public spat between the two rivals over FTX’s solvency. Binance cited reports that FTX’s sister company, Alameda Research, was holding billions of FTX’s tokens on its balance sheet, suggesting it had few valuable assets. Zhao then announced Binance would liquidate FTX’s FTT token sparking even more withdrawals (Both FTX and Alameda are run by Sam Bankman-Fried.)

Steven McClurg, chief investment officer of Valkyrie Investments, rejected using FTX for trading. “We never onboarded [FTX] because we couldn’t understand what it was,” he said.

While the immediate cause of the liquidity crunch is unknown, multiple underlying weaknesses could have led to the problem, McClurg said. A portion of FTX’s balance sheet had been invested in private companies. Another portion of its crypto assets may be held in illiquid reserves to facilitate trading on decentralized exchanges. Still another portion could be tied up in a practice called rehypothecation whereby a lender loans out collateral that was given for a separate loan.

While FTX may have had the assets to pay its liabilities, the perception that it wasn’t able to pay its debts would have been enough to tip it over the edge as people rushed to withdraw holdings. “I don’t think they are at risk of being insolvent,” McClurg said. “The issue was the amount of illiquid assets they had, and their ability to redeem any type of customer withdrawals.”

McClurg is confident, however, that this will be the last big scare in crypto for a while because Binance already knows how to survive a crypto winter.“This seems to be the last big deleveraging,” McClurg said. “Binance has been around for a long time [and] I have a lot of confidence in their ability to be liquid in hard times.”