Binance bails out on FTX rescue deal, sending shockwaves through crypto sector

The news: The world’s largest cryptocurrency exchange Binance will walk away from its nonbinding rescue deal to buy competitor FTX after a surge in withdrawals led the latter to a liquidity crisis.

Timeline of FTX on the ropes:

  • On Sunday, Binance CEO Changpeng Zhao tweeted that Binance would sell its FTX digital tokens, known as FTT, blaming “recent revelations.”
  • This triggered concerns over FTX’s financial health and caused FTT prices to nosedive amid a surge in withdrawals.
  • On Monday, FTX CEO Sam Bankman-Fried attempted to calm the situation, saying “FTX is fine. Assets are fine.” The tweet has since been deleted.
  • But on Tuesday he was forced to backtrack, saying FTX had agreed to a proposed bailout deal for an unspecified amount, with Binance to buy its non-US business.
  • Zhao confirmed that FTX sought a deal to cover its “significant liquidity crunch.”
  • Late Wednesday, the Wall Street Journal reported that Binance decided not to proceed with the deal after reviewing FTX’s finances and structure, with Binance saying FTX's "issues are beyond our control or ability to help.”
  • The Securities and Exchange Commission and Commodity Futures Trading Commission have reportedly been investigating FTX for months over its handling of customer funds, according to Bloomberg.

Crypto industry in crisis: The near-collapse and will-they-or-won't-they possible bailout of one of the biggest names in crypto has rocked the industry: Prices have fallen abruptly with Bitcoin down by more than 10% to its lowest level since November 2020.

The rescinding of the deal will do little to thaw the crypto winter and adds to fears of price volatility and the need for future bailouts.

What it means for crypto:

  • The fact that a single tweet can trigger the near-collapse of a major crypto exchange shows how strongly market panic can influence the industry. And it highlights how far crypto has to go to overcome underlying flaws and be considered a safe haven for storing assets.
  • FTX’s problems also illustrate that no crypto firm is too big to fail. The crypto exchange was widely viewed as one of the more stable and better-run digital asset firms. Its collapse highlights the inherent risk in trading crypto.
  • The failed bailout is also a major blow for Bankman-Fried. Less than two months ago, he was being hailed as the savior of the crypto industry after winning a bid to buy the assets of bankrupt crypto broker Voyager Digital. But his reputation and personal wealth have taken a battering from FTX’s problems.

The bottom line: Just 16% of adults have some level of trust in crypto. And Binance's dismissal of FTX will do little to improve consumer confidence. To strengthen faith in the crypto industry, clear regulation is needed across countries and markets. But that could still be some way off.