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

Exclusive: Behind the fall of FTX, the fight against billionaires and a failed attempt to save cryptocurrencies
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Nov 10 (Reuters) – (This story contains language some readers may find offensive in paragraph 2)

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

“I’m sorry,” he told them, “I screwed up.”

The reason for the mea culpa: His announcement half an hour before FTX’s arch-rival Binance was planning to make a surprise acquisition 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 Bankman-Fried made after it stepped in to save other crypto firms when the crypto market crashed amid rising interest rates, according to interviews with multiple people. close to Bankman-Fried and communications from both companies that have not been previously reported.

Some of those transactions involving Bankman-Fried’s trading firm, Alameda Research, led to a series of losses that eventually became their downfall, 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 damage each other’s businesses. It culminated on Wednesday, when Binance backed out of his deal and threw FTX’s future into uncertainty.

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

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

Binance previously said that it decided to withdraw from the deal as a result of its due diligence on FTX and news reports about the US investigations into the company.

Zhao’s revelation of the planned acquisition capped a surprising turnaround for Bankman-Fried. The 30-year-old had established 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 crisis at FTX, valued in January at $32 billion with investors including SoftBank and BlackRock, sent reverberations through the crypto world.

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

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

Financial regulators around the world have warnings issued On Binance for operating without a license or violating money laundering laws. The US Department of Justice is investigating Binance for potential criminal sanctions and money laundering violations. Reuters reported last month that Binance had helped iranian companies traded $8 billion since 2018 despite US sanctions, part of a series of articles this year from the news outlet on the exchange’s financial crime compliance.

SOURCES OF RELATIONSHIP

Zhao and Bankman-Fried’s relationship began in 2019. Six months after FTX launched, 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.”

However, within 18 months, 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 major shareholders, but requests for help from FTX were blocked by Binance, 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.

However, in June 2021, a lawyer for FTX told Binance’s CFO that Binance was not “properly engaging with us” and that they risked “severely disrupting an important project for us.” A Binance legal officer responded to FTX to say that 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. He bought back Zhao’s stake in FTX for about $2 billion, the person with direct knowledge of the deal said. Two months later, when Binance was no longer involved, the Gibraltar 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 at FTX.

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“TRYING TO GO 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 deal with crypto lender Voyager Digital, two of the people said. Voyager filed for bankruptcy the following month, with FTX’s US division paying $1.4 billion for its assets in a September auction. Reuters was unable to determine the full extent of Alameda’s losses.

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 FTTs and shares on trading platform Robinhood Markets Inc, the people said. 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 was unable to determine their 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 However, on Feb. 2, a report by news outlet CoinDesk detailed a leaked balance that allegedly showed that much of Alameda’s $14.6 billion in assets was 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 assets not reflected. Ellison did not respond to requests for comment.

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

Zhao then said that Binance would sell its entire holding in the token, FTT, worth at least $580 million, “due to the recent revelations that have come to light.” The price of the token crashed 80% in the following two days and a torrent of outflows from the exchange accelerated, blockchain data shows.

REMOVAL EXTRACTION

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

After 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 “weren’t surprisingly very high,” but they were able to process the requests.

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

But by Monday the situation became serious. Unable to quickly find a sponsor 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 had called him.

Bankman-Fried signed a non-binding letter of intent for Binance to purchase FTX’s non-US assets. This 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 “a huge thank you to CZ.”

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

His employees were shocked. Even the executives were unaware of the Alameda shortfall and acquisition plan until Bankman-Fried briefed them that morning, two people who worked with him said. Both people said that they did not know that the withdrawal situation was so serious.

Then came Binance’s announcement on Wednesday ruling out 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 from Angus Berwick in New York and Tom Wilson in London; additional reporting by Hannah Lang in Washington and Elizabeth Howcroft in London; Edited by Paritosh Bansal and Chris Sanders

Our standards: The Thomson Reuters Trust Principles.

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