Exclusive: Behind the fall of FTX, the fight against billionaires and a failed attempt to save crypto

Exclusive: Behind the fall of FTX, the fight against billionaires and a failed attempt to save crypto

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 message.

“I’m sorry,” he told them. “I failed.”

The reason for the mea culpa: its announcement half an hour earlier that FTX’s big rival, Binance, was planning to mount 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, would now be his white knight.

The seeds of FTX’s downfall were sown months earlier, stemming from mistakes made by Bankman-Fried after it intervened to rescue other crypto firms as the crypto market crashed amid the rise interest rates, according to interviews with several people close to Bankman-Fried and communications from both companies that were not previously disclosed.

Some of those transactions involving Bankman-Fried’s trading company, Alameda Research, led to a series of losses that ultimately caused its loss, according to three people familiar with the company’s operations.

The interviews and posts also shed new light on the bitter rivalry between the two billionaires, who in recent months have fought over market share and publicly accused each other of seeking to harm each other’s businesses. This 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 lenders, two people close to him said. After Binance pulled out, he told FTX staff in a message that Binance had made no reservations to them 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’ll probably be too overwhelmed” to do any interviews. He did not respond to further messages.

Binance said earlier that it decided to pull out of the deal due to its due diligence on FTX and reports of US investigations into the company.

Zhao’s unveiling of the planned takeover capped a stunning reversal for Bankman-Fried. The 30-year-old had established FTX in the Bahamas in 2019 and led it to become one of the biggest exchanges, amassing a fortune of nearly $17 billion.

News of the liquidity crunch at FTX – valued in January at $32 billion with investors including SoftBank and BlackRock – has had repercussions in the crypto world.

The price of major coins has fallen, with bitcoin falling to its lowest level in nearly two years, adding to the pain of a sector whose value has fallen by around two-thirds this year as central banks have tightened credit.

By dropping the deal, Binance had also avoided the regulatory scrutiny that likely would have accompanied the takeover, which Zhao flagged as a likelihood in a memo to employees 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 violations and criminal penalties. Reuters reported last month that Binance has helped Iranian companies trade $8 billion since 2018 despite US sanctions, in a series of articles published this year by the company’s compliance news agency. financial crime scholarship.

RELATIONAL MICE

The relationship between Zhao and Bankman-Fried began in 2019. Six months after FTX launched, Zhao bought 20% of the exchange for around $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 deteriorated.

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

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

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, according to the messages.

In June 2021, however, an attorney for FTX told Binance’s CFO that Binance was “not properly engaging with us” and that they risked “seriously disrupting an important project for us.” A Binance legal official replied to FTX to say that they were trying to get a response from Zhao’s personal assistant, but the information requested was “too general” and might not provide everything.

By July of that year, Bankman-Fried was tired of waiting. He bought out Zhao’s stake 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.

This sum was paid to Binance, in part, in FTX’s own coin, FTT, Zhao said last Sunday – a stake he would later order Binance to sell, precipitating the crisis at FTX.

Reuters Charts

“TRY US AFTER”

In May and June, Bankman-Fried’s trading company, Alameda Research, suffered a series of trading losses, according to three people familiar with its operations. These included a $500 million loan deal with bankrupt 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 at an auction in September. Reuters could not determine the extent of the losses suffered by Alameda.

Seeking to back Alameda, which held nearly $15 billion in assets, Bankman-Fried transferred at least $4 billion in FTX funds, backed by assets including FTT and shares of trading platform Robinhood Markets Inc, people said. Alameda disclosed a 7.6% stake in Robinhood in May.

Some of those 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 decision to back Alameda, the people said, adding that he feared it would leak.

On November 2, however, a report by media outlet CoinDesk detailed a leaked balance sheet that allegedly showed that a large portion of Alameda’s $14.6 billion in assets were held in FTT. Alameda CEO Caroline Ellison tweeted that the balance sheet was only for a “subset of our corporate entities,” with more than $10 billion in 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.

Next, Zhao said that Binance will 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 80% over the next two days and a torrent of outflows from the exchange accelerated, according to blockchain data.

WITHDRAWAL FORCE

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

After Zhao’s tweet that Binance would sell its FTT stake, Bankman-Fried expressed confidence that FTX would withstand attacks from its rival. He told Slack staff that the withdrawals were “not shockingly up” but they were able to process the requests.

“We are moving forward,” he wrote. “Obviously Binance is trying to sue us. So be it.”

But on Monday, the situation became 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 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 “big thanks to CZ.”

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

His employees were shocked. Even executives were in the dark about the shortfall and Alameda’s takeover plan until Bankman-Fried briefed them that morning, two people working with him said. Both people said they were unaware that the withdrawal situation was so serious.

Then came Binance’s announcement on Wednesday to end the takeover. “Problems are beyond our control or our ability to help,” Binance said. Zhao tweeted “Sad day. Tried,” along 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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