Exclusive: Behind FTX’s fall, battling billionaires and a failed bid to save crypto

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

On Tuesday morning, Sam Bankman-Fried, owner of cryptocurrency exchange FTX, caught his employees off-guard with a somber message.

“I’m sorry,” he told them. “On you.”

The reason for the mea culpa: His announcement half an hour earlier that FTX’s arch-rival, Binance, planned to stage a shock on its main trading platform to save it from a “liquidity crisis. ” The founder of Binance Changpeng “CZ” Zhao, whom the billionaire had accused of sabotage, will now be his White Knight.

The seeds of FTX’s downfall were sown months earlier, stemming from mistakes made by Bankman-Fried after stepping in to rescue other crypto firms as the crypto market collapsed amid rising interest rates, according to interviews with various people close to Bankman-Fried and previously unreported communications from both companies.

Some of those deals involving Bankman-Fried’s trading firm, Alameda Research, led to a series of losses that eventually led to its cancellation, according to three people familiar with the company’s operations.

The interviews and messages also shed new light on the bitter rivalry between the two billionaires, who in recent months have competed for market share and publicly 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.

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

Neither Binance nor FTX responded to requests for comment. Bankman-Fried told Reuters on Tuesday that “I will probably be too full” to do interviews. He did not respond to further messages.

Binance earlier said it decided to pull out of the deal as a result of its due diligence on FTX and news reports about US investigations into the company.

Zhao’s disclosure of the planned limit take for a stunning Bankman-Fried reversal. The 30-year-old founded Bahamas-based FTX in 2019 and led it to become one of the largest exchanges, amassing a fortune of around $17 billion.

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News of the liquidity crisis in FTX – valued in January at $32 billion with investors including SoftBank and BlackRock – sent reverberations through the crypto world.

The price of major currencies fell, with bitcoin falling to its lowest in almost two years, heaping more pain on a sector whose value has fallen by around two-thirds this year as central banks tightened -credit.

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

Financial regulators around the world have issued 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 firms trade $8 billion since 2018 despite US sanctions, part of a series of articles this year by the news agency on compliance with the financial crime of the exchange.

SOURCES RELATIONSHIP

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

Within 18 months, however, their relationship had soured.

FTX had grown rapidly and Zhao now viewed it as a genuine competitor with global aspirations, former Binance employees said.

When FTX in May 2021 applied for a license in Gibraltar for a subsidiary, it had to submit information about its main shareholders, but Binance dismissed FTX’s requests for help, according to messages and emails between the exchanges seen by Reuters .

Between May and July, FTX’s lawyers and advisers wrote to Binance at least 20 times for details about Zhao’s sources of wealth, banking relationships, and ownership of Binance, the messages show.

In June 2021, however, a lawyer for FTX told Binance’s chief financial officer that Binance was not “engaging with us as it should” and they risked “seriously disrupting an important project for us.” A Binance legal official responded to FTX to say that it was trying to get a response from Zhao’s personal assistant, but the information requested was “too general” and they may not provide everything.

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By July of that year, Bankman-Fried was tired of waiting. He bought back Zhao’s shares in FTX for about $2 billion, the person with direct knowledge of the deal said. Two months later, with Binance no longer involved, the Gibraltar regulator granted a license to FTX.

That sum was paid to Binance, in part, in FTX’s own currency, FTT, Zhao said last Sunday — a holding he would later order Binance to sell, precipitating the crisis in FTX.

Reuters graphic

“TRIES TO COME AFTER US”

In May and June, Bankman-Fried’s trading firm, Alameda Research, suffered a series of deal losses, according to three people familiar with its operations. These included a $500 million loan agreement with failed crypto lender Voyager Digital, two of the people said. Voyager filed for bankruptcy protection the following month, with the US arm of FTX paying $1.4 billion for its assets in a September auction. Reuters could not determine the full extent of the losses suffered by Alameda.

Seeking to shore up Alameda, which had nearly $15 billion in assets, Bankman-Fried transferred at least $4 billion in FTX funds, secured by assets including FTT and shares in trading platform Robinhood Markets Inc, he said the people. Alameda had disclosed a 7.6% stake in Robinhood in May.

A portion of these FTX funds were customer deposits, two of the people said, although Reuters could not determine their value.

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

On November 2, however, a report from news outlet CoinDesk detailed a balance sheet that allegedly showed that most of Alameda’s $14.6 billion in assets were held in FTT. Alameda CEO Caroline Ellison tweeted that the balance sheet was simply for “a subset of our corporate entities,” with more than $10 billion of unreflected assets. Ellison did not return requests for comment.

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

Then Zhao said that Binance will sell its entire stake in the token, FTT, which is worth at least $580 million, “due to recent revelations that have come to light.” The price of the token fell 80% over the next two days and a torrent of exits from the exchange picked up pace, blockchain data shows.

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RETIREMENT INCREASE

In his message to staff this week, Bankman-Fried said the firm saw a “giant surge of withdrawals” as users rushed to withdraw $6 billion in crypto tokens from FTX in just 72 hours . Daily withdrawals typically totaled tens of millions of dollars, Bankman-Fried told his employees.

Following Zhao’s tweet that Binance would sell its FTT holding, Bankman-Fried projected confidence that FTX would withstand its rivals’ attacks. He told staff on Slack that the withdrawals were “not shocking, up,” but they could process requests.

“We are pulling,” he wrote. “Obviously, Binance is trying to go after us. So be it.”

But by Monday the situation became dire. Unable to quickly find backing, or sell other illiquid assets in the short term, 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 FTX’s non-US assets. That valued FTX at several billion dollars, two people familiar with the letter said — enough for the exchange to cover all withdrawal requests but a fraction of its January valuation.

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

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

His employees were shocked. Even executives had been in the dark about Alameda’s absence and the acquisition plan until Bankman-Fried informed them that morning, two people who work with him said. Both people said they were not aware that the withdrawal situation was so serious.

Then came Binance’s announcement on Wednesday that it scrapped the acquisition. “The issues are beyond our control or ability to help,” Binance said. Zhao tweeted “Sad day. They 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; Editing by Paritosh Bansal and Chris Sanders

Our Standards: The Thomson Reuters Fiduciary Principles.

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