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November 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 grim announcement.
“I’m sorry,” he told them. “I screwed up.”
The reason for the mea culpa: His announcement half an hour earlier that FTX’s arch-rival Binance was planning a shock takeover of its main trading platform to save it from a “liquidity crisis.” Binance founder 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 he stepped in to save other crypto firms as the crypto market collapsed amid rising interest rates, according to interviews with several people close to Bankman-Fried and communications from both companies that have not been previously reported.
Some of those deals, involving Bankman-Fried’s trading firm, Alameda Research, led to a string of losses that eventually became his undoing, according to three people familiar with the company’s operations.
The interviews and announcements 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 damage each other’s businesses. It culminated on Wednesday, with Binance pulling out of its deal and putting FTX’s future in limbo.
Left without a buyer, Bankman-Fried is now looking for alternative backers, two people close to it said. After Binance pulled out, he told FTX employees in a message that Binance had not previously told them of any reservations about the deal and he was “exploring all options.”
Neither Binance nor FTX responded to requests for comment. Bankman-Fried told Reuters on Tuesday that “I’ll probably be too overwhelmed” to give interviews. He did not respond to other messages.
Binance previously said it decided to pull out of the deal as a result of FTX’s due diligence and news reports of US investigations into the company.
The revelation of Zhao’s planned takeover led to a stunning turnaround for Bankman-Fried. The 30-year-old founded Bahamas-based FTX in 2019 and led it to become one of the largest exchanges, amassing a fortune of nearly $17 billion.
News of FTX’s liquidity crunch — valued in January at $32 billion with investors including SoftBank and BlackRock — sent shockwaves through the crypto world.
The price of major coins collapsed, with bitcoin falling to its lowest level in almost two years, piling further pain on a sector that has seen its value fall by about two-thirds this year as central banks have tightened lending.
By abandoning the deal, Binance also avoided the regulatory scrutiny that would have likely accompanied the takeover, which Zhao noted as a possibility in a memo to employees that he posted on Twitter.
Financial regulators around the world have issued warnings to 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 had helped Iranian firms trade $8 billion since 2018 despite US sanctions, part of a series of articles this year by the news agency on the exchange’s compliance with financial crimes.
THE CONNECTION IS CONNECTING
Zhao and Bankman-Fried’s relationship began in 2019. Six months after FTX launched, Zhao bought 20 percent of the exchange for about $100 million, said a person with direct knowledge of the deal. At the time, Binance said the investment was “aimed at the collaborative growth of the crypto economy.”
Within 18 months, however, their relationship soured.
FTX has grown rapidly, and Zhao now sees it as a true competitor with global aspirations, former Binance officials said.
When FTX applied for a subsidiary license in Gibraltar in May 2021, it was required to provide information about its major shareholders, but Binance rejected FTX’s requests for help, according to reports and emails between the exchanges seen by Reuters.
Between May and July, FTX lawyers and advisers wrote to Binance at least 20 times for details about Zhao’s sources of wealth, banking relationships and Binance ownership, reports show.
However, in June 2021, a lawyer for FTX told Binance’s CFO that Binance was not “engaging with us properly” and they risked “seriously disrupting a project that is important to us.” A Binance legal official responded to FTX to say he was trying to get a response from Zhao’s personal assistant, but the information requested was “too general” and they may not provide everything.
By July of that year, Bankman-Fried had grown tired of waiting. It bought back Zhao’s stake in FTX for about $2 billion, the person with direct knowledge of the deal said. Two months later, after Binance was no longer involved, Gibraltar’s regulator granted FTX a license.
That amount was paid to Binance in part in FTX’s own coin, FTT, Zhao said last Sunday — a holding that Binance would later order to sell, precipitating the FTX crisis.
“TRIES TO INHERIT”
This May and June, Bankman-Fried’s trading firm, Alameda Research, suffered a series of losing trades, according to three people familiar with its operations. They include a $500 million loan agreement with bankrupt crypto lender Voyager Digital, two of the people said. Voyager filed for bankruptcy protection the following month, with FTX’s US unit paying $1.4 billion for its assets in an auction in September. Reuters could not determine the full extent of the losses suffered by Alameda.
Seeking to shore up Alameda, which held almost $15 billion in assets, Bankman-Fried moved at least $4 billion into FTX funds backed by assets including FTT and shares in trading platform Robinhood Markets Inc, the people said. Alameda disclosed a 7.6% stake in Robinhood in May.
Some of those FTX funds are 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.
However, on Nov. 2, a report from news outlet CoinDesk detailed a leaked balance sheet that it claims shows that much of Alameda’s $14.6 billion in assets is held in FTT. Alameda CEO Caroline Ellison tweeted that the balance was only for “a subset of our corporate entities,” with more than $10 billion in assets not reflected. Ellison did not respond to requests for comment.
That failed to quell growing speculation about what Alameda’s financial health might mean for FTX.
Zhao then said that Binance would sell its entire stake in the token, FTT, worth at least $580 million, “due to recent revelations that have come to light.” The token’s price crashed by 80% over the next two days, and a flood of outflows from the exchange gathered pace, blockchain data showed.
SUCCESS ON WITHDRAWAL
In his announcement to staff this week, Bankman-Fried said the firm saw a “giant spike in withdrawals” as users rushed to withdraw $6 billion in crypto tokens from FTX in just 72 hours. Daily withdrawals typically total tens of millions of dollars, Bankman-Fried told her staff.
Following Zhao’s tweet that Binance would sell its FTT holding, Bankman-Fried projected confidence that FTX would withstand its rival’s attacks. He told Slack employees that the withdrawals were “not shocking, they’re up a lot,” but they were able to process the requests.
“We’re having fun,” he wrote. “Apparently Binance is trying to go after us. So be it.”
But on Monday, the situation turned dire. Unable to quickly find a backer or sell other illiquid assets on short notice, Bankman-Fried contacted Zhao, according to a person familiar with the call. Zhao later confirmed that Bankman-Fried called him.
Bankman-Fried signed a non-binding letter of intent for Binance to purchase FTX assets outside the US. That values FTX at several billion dollars, two people familiar with the letter said – enough for the exchange to cover all withdrawal requests, but only a fraction of its January valuation.
Zhao announced the potential deal a few hours later, and Bankman-Fried tweeted “huge thanks to CZ.”
“Let’s live to fight another day,” Bankman-Fried told Slack staff.
His employees were shocked. Even executives were in the dark about Alameda’s shortfall and the takeover plan until Bankman-Fried briefed them this morning, two people working with him said. Both said they had no idea the recall situation was so serious.
Then came Binance’s announcement on Wednesday canceling the acquisition. “The issues are beyond our control or ability to help,” Binance said. Zhao tweeted, “Sad day. I 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 Trust Principles.
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