The clash of two giants Binance and FTX rocked cryptocurrency markets

FTX and its sister trading company Alameda Research started facing scrutiny after CoinDesk’s article alleged that the FTT token was Alameda’s largest asset on its $14.6 billion balance sheet as of June 30. Both companies belong to 30-year-old now former billionaire and the second-largest individual donor to the US Democratic Party in 2021-2022 election cycle, Sam Bankman-Fried (SBF), who has been recently advocating for stricter DeFi regulations.

The FTT token is issued by the FTX exchange, which had about $8.5 billion in daily trading volume before the implosion, according to CoinGecko. The value of FTT was maintained by FTX’s program of allocating a third of the exchange’s trading commissions to buying back and burning the token, similar to Binance’s rolling program to buy and burn BNB.

After the CoinDesk revelations, the CEO of Binance announced that the exchange will liquidate remaining FTT tokens from its books over the next few months, additionally accusing FTX of lobbying “against other industry players behind their backs”. Binance made a strategic equity investment in FTX in 2019 and exited in 2021. Relationship between two giants have since soured.

Alameda offered to buy Binance’s FTT holdings over-the-counter to defend the token price from a major dump, with no clear reply to the offer from Binance, which sparked more public uproar from the FTX team.

Amid market uncertainty, FTX experienced unprecedented outflow of capital from the exchange, which resulted in withdrawal issues. In an attempt to raise liquidity, SBF tried to find a buyer for FTX with a potential deal with its rival Binance, but the latter backed out of the rescue acquisition after researching FTX’s books.

The final nail in the coffin was Wall Street Journal’s article that alleged that FTX lent billions of customer funds to its affiliated trading company Alameda to fund risky bets.

After failed attempts to find a buyer, the troubled cryptocurrency exchange suspended withdrawals. FTX, FTX US, and Alameda Research started proceedings to file for bankruptcy in the US, and FTX CEO SBF resigned from his position.

The FTT price collapsed over 95% in 2 weeks. Another large asset on Alameda’s balance sheet, Solana blockchain’s native token SOL, plunged over 55%.

On that note, having two companies with unusually close ties is nothing new for the crypto industry. For example, Bitfinex lost $850 million in 2018, so its affiliated stablecoin issuer Tether lent $750 million to the crypto exchange, which accounted for around one-third of total USDT supply at that time. However, both companies were able to survive a bear market and Bitfinex fully repaid the loan to Tether in 2021.

The FTX aftermath

Many crypto exchanges responded to the collapse of FTX by trying to restore customers’ confidence and slow down mass withdrawals.

Some major centralized exchanges such as Kraken and Gate.io rushed to publish most recent audited Merkle tree proofs of reserves. While such proofs can prevent a bank run caused by panic, they don’t provide any provable information about liabilities. Only a proper audit can prove solvency and only during the time period when the audit was conducted.

Other exchanges such as Binance, Bitfinex, Huobi, and Crypto.com decided to simply share blockchain addresses of their hot and cold wallets as a proof of current holdings, until they will be able to produce fully audited Merkle tree proofs of reserves in the future.

A Merkle tree is a cryptographic tool that allows exchanges to generate a proof of reserves without exposing sensitive customer information.

Interestingly, publicly sharing blockchain addresses of current holdings sparked many questions about Crypto.com’s activities. The on-chain investigation revealed that the exchange didn’t disclose that it “accidentally” sent $400M of user funds to Gate.io, held a quarter of a billion dollars on Binance, and was potentially arbitraging against its customers.

In other news

• The US SEC won its case against LBRY, Inc., the company behind blockchain-based sharing network LBRY. According to the US regulator, the company sold unregistered securities. LBRY-based video-sharing platform Odysee became popular amid YouTube’s wide-spread censorship during the COVID pandemic.

• According to MEV Watch, the amount of OFAC-compliant blocks that censor sanctioned transactions has grown to 77% since Ethereum transitioned to proof-of-stake (PoS). Earlier in August, the US Office of Foreign Assets Control (OFAC) sanctioned Ethereum-based DeFi mixer Tornado Cash and addresses associated with the protocol.

• The EU is considering to ban banks and crypto providers from interacting with monero (XMR), zcash (ZEC), dash (DASH) and other privacy-focused coins in its jurisdiction, according to a draft bill obtained by CoinDesk.