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.
“Sorry,” he told them, “I screwed up.”
The reason for the mea culpa: His announcement half an hour before FTX’s arch-rival Binance planned a 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, following Bankman-Fried’s mistakes after he stepped in to save other crypto companies as the crypto market collapsed amid rising interest rates, according to interviews with several people close to Bankman-Fried and previously undisclosed communications from both companies.
Some of those deals involving Bankman-Fried’s trading arm, Alameda Research, led to a series of losses that eventually became its demise, according to three people familiar with the firm’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 harm 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 looking for alternative backing, two people close to him said. After Binance pulled out, it told FTX staff in a message that Binance had previously told them no 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’ll probably be too busy” to do interviews. He did not respond to further messages.
Binance previously said it decided to withdraw from the deal as a result of its due diligence on FTX and news reports about US investigations into the company.
Zhao’s presentation of the planned acquisition ended in an impressive investment for Bankman-Fried. The 30-year-old had created Bahamas-based FTX in 2019 and led it to become one of the largest exchanges, amassing a fortune of nearly $17 billion.
News of the liquidity crunch at FTX, valued in January at $32 billion with investors like SoftBank and BlackRock, sent reverberations through the crypto world.
The price of major currencies plummeted, with bitcoin falling to its lowest level in nearly two years, adding more pain to a sector whose value has fallen by about two-thirds this year as that central banks reduced credit.
By abandoning the deal, Binance had also avoided the regulatory scrutiny that would likely have accompanied the acquisition, which Zhao had pointed out as a possibility 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 had helped Iranian companies trade $8 billion since 2018 despite U.S. sanctions, part of a series of articles this year by the news agency on compliance of financial crimes of the exchange.
THE SOUTH RELATION
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, 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 saw it as a true 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 major shareholders, but Binance suppressed 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 to get details about Zhao’s sources of wealth, banking relationships and Binance ownership, the messages show.
In June 2021, however, a lawyer for FTX told Binance’s CFO that Binance was not “engaging with us properly” and risked “severely disrupting an important project for us.” A Binance legal officer 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 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 participating, Gibraltar’s regulator granted FTX a license.
That sum was paid to Binance in part in FTX’s own currency, FTT, Zhao said last Sunday, a stake he would later order Binance to sell, precipitating the crisis in FTX.
Reuters charts
“TRYING TO GO AHEAD OF US”
This 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 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 was unable to determine the full extent of the losses suffered by Alameda.
Seeking to prop up Alameda, which had nearly $15 billion in assets, Bankman-Fried transferred at least $4 billion in FTX funds, secured by assets that include FTT and shares of trading platform Robinhood Markets Inc, the people said. Alameda had disclosed a 7.6% stake in Robinhood that May.
Some of those FTX funds were customer deposits, two of the people said, although Reuters was unable to determine the value.
Bankman-Fried did not tell other FTX executives about the move to shore up Alameda, the people said, adding that he feared it might leak.
On Nov. 2, however, a report by news channel CoinDesk detailed a leaked balance sheet that purportedly showed much of Alameda’s $14.6 billion in assets held by FTT. Alameda CEO Caroline Ellison tweeted that the balance sheet was for only a “subset of our corporate entities,” with more than $10 billion of unaccounted assets. Ellison did not return requests for comment.
That didn’t end the growing speculation about what Alameda’s financial health might mean for FTX.
At the time, Zhao said that Binance would sell its entire stake in the token, FTT, worth at least $580 million, “due to the recent revelations that have come to light.” The token’s price collapsed 80% over the next two days, and a torrent of exits from the exchange picked up the pace, blockchain data shows.
WITHDRAWAL INCREASE
In his message to staff this week, Bankman-Fried said the company saw a “giant withdrawal surge” as users rushed to withdraw $6 billion in crypto tokens from FTX in just 72 hours . Daily withdrawals typically amounted to tens of millions of dollars, Bankman-Fried told his employees.
Following Zhao’s tweet that Binance would sell its FTT stake, Bankman-Fried projected confidence that FTX would withstand its rival’s attacks. He told Slack staff that withdrawals “were not surprisingly, very high,” but they were able to process the requests.
“We’re hanging out,” he wrote. “Obviously, Binance is trying to go after us. So be it.”
But on Monday the situation turned serious. Unable to quickly find a backer or sell other illiquid assets in the short term, Bankman-Fried reached out to Zhao, according to a person familiar with the call. Zhao later confirmed that Bankman-Fried had called him.
Bankman-Fried 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.”
“We live to fight another day,” Bankman-Fried told Slack staff.
His employees were shocked. Even executives had been in the dark about Alameda’s deficit and the takeover plan until Bankman-Fried briefed them that morning, two people who worked with him said. Both people said they didn’t know the recall situation was so serious.
Then came Binance’s announcement on Wednesday that it ruled out the acquisition. “The issues are beyond our control or ability to help,” Binance said. Zhao tweeted “Sad day. Tried it,” 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
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