Binance pulls out of deal to save FTX

Crypto exchange Binance FTX rescue bid reverse course Wednesday, leaving the storied digital firm with an uncertain future as it faces a shortfall of up to $8 billion, according to people familiar with the matter.

Binance chose not to proceed with the non-binding offer after a review of the company’s finances, the exchange said. “Initially, our hope was to be able to support FTX customers to provide liquidity, but the issues are beyond our control or ability to help,” Binance said in a statement.

In a call with investors in FTX on Wednesday, founder and CEO Sam Bankman-Fried said it needed urgent funding because of customer withdrawal requests received in recent days, people familiar with the matter said. These requests caused a debilitating contraction of liquidity.

FTX has told investors it hopes to raise up to $4 billion in equity capital to plug the shortfall, people familiar with the matter said.

The collapse of the Binance bailout deal weighed on financial markets already shaken by the uncertainty surrounding the outcome of the US midterm elections. The Nasdaq was down about 2.5 percent on Wednesday, while the Dow Jones Industrial Average and the S&P 500 were down about 2 percent.

Bitcoin, the largest and best-known cryptocurrency, fell about 16%, dropping below $16,000 for the first time since November 2020. It is now down about 75% from its all-time high reached in November 2021.

Also Wednesday, Securities and Exchange Commission Chairman Gary Gensler

issued a stern warning to crypto platforms, after publicly encouraging them to sign up with his agency for more than a year. He also likened the broader crypto market to a stack of Jenga blocks that get weaker with each failure.

Once seen as a shining survivor in a struggling industry, the fall of FTX sent shock waves through the cryptocurrency industry. Only months ago, Mr. Bankman-Fried committed nearly a billion dollars for bailing out distressed crypto lenders and was an active lobbyist widely regarded as the face of crypto in Washington.

Binance retreat now leaves FTX’s fate unclear; the cause and full extent of FTX’s financial problems are unknown. FTX declined to comment.

In an internal FTX channel, Mr Bankman-Fried on Wednesday wrote: “Apparently we just saw the Binance statement; they took this to the media first, not to us, and did not inform us beforehand or express these reservations,” according to a copy of the message seen by The Wall Street Journal.

Mr. Bankman-Fried wrote that he is working on next steps and doing what he can to protect customers, employees and investors. “I deeply regret that we ended up in this place and my role in it. It’s up to me and me alone and it sucks and I’m sorry, but not that it makes it any better.

FTX founder and CEO Sam Bankman-Fried told investors on Wednesday that the exchange needed urgent funding due to recent customer withdrawal requests.


photo:

Jeenah Moon/Bloomberg News

In addition to the firm and Mr. Bankman-Fried, well-known institutions that have invested in the stock market are at risk of potentially large losses. Among the investors in last year’s $900 million fundraising were

SoftBank Group corp.

,

Sequoia

Capital, hedge fund Third Point and technology-driven private equity firm Thoma Bravo.

IN letter to its investors late Wednesday, Sequoia said it was writing off $150 million that one of its funds had invested in FTX due to “solvency risk” for the crypto company. “The full nature and extent of this risk is not known at this time,” the letter said. “Based on our current understanding, we are marking the investment down to $0.”

Sole traders can also lose funds. FTX has suspended withdrawals of both crypto and fiat currencies from the exchange, according to a pinned post on the official Telegram channel.

Michael Turský, a European crypto trader, said he had been unable to withdraw his nearly $11,000 from FTX since midday on Wednesday. Those funds represent about 70% of his liquid net worth, he said.

He said he tried to withdraw his money several times but to no avail. “Knowing the brand and name of FTX, I would never have thought that it would collapse in a few days,” said Mr. Turský. “Even if it was, I would never expect them to stop all withdrawals”

Losses associated with FTX are spread outside the firm itself. Equity investors dumped shares of publicly traded companies that are tied to cryptocurrencies with holdings from them or who receive fees from trading them.

Shares in

Coinbase Global Inc.

fell nearly 10% despite assurances from its CEO on Twitter that the company had sufficient assets for customer withdrawals and no material exposure to FTX. Coinbase closed at its lowest level since its IPO last year, when it hit a valuation of $85 billion. Its market value on Wednesday was around $10 billion.

Shares of

Silvergate Capital corp.

, the closest US bank to the crypto world, has fallen 12% and lost about 75% of its value this year. Shares of

Micro strategy Inc.,

which morphed from business software to largely a means of buying and holding bitcoins, fell nearly 20%.

Broker application

Robinhood Markets Inc.,

which offers trading in more than just crypto, was burned by fears that one of its biggest shareholders, Mr. Bankman-Fried, would have to divest his shares. Shares of Robinhood fell nearly 14% on Wednesday, bringing losses for the week to more than 30%.

The cause of FTX’s liquidity crunch is still unknown, but some investors and crypto holders are questioning whether ties between the exchange and a related company, Hong Kong crypto trading firm Alameda Research, may have contributed to the crisis. Alameda is majority owned by Mr. Bankman-Fried, and he founded both FTX and Alameda.

Questions about the depth and scope of FTX and Alameda’s financial relationship grew last week after CoinDesk published a report showing that a large portion of Alameda’s balance sheet was made up of FTT, a cryptocurrency created by FTX.

The founder and CEO of crypto exchange FTX spoke on WSJ Tech Live about the company’s dealmaking and focus on leveraging balance. Photo: Nikki Richer for The Wall Street Journal

Cryptocurrency exchanges, like their counterparts in the world of traditional, regulated finance, rely on a combination of partners to provide digital assets for trading, such as Bitcoin or Ether. So-called market makers help traders buy and sell. They get paid by collecting a small difference between the bid price and the bid price.

The existence of links between the exchange and the market maker raised governance issues and the potential for conflicts of interest. In theory, such connections could allow a market maker to potentially trade on inside information or use the exchange to inflate or deflate the prices of a security.

“All of these related-party relationships are red flags that any regulator would recognize,” said Larry Harris, a professor of finance at the University of Southern California’s Marshall School of Business and former chief economist for the Securities and Exchange Commission.

In traditional financial markets for stocks and futures, exchanges are required to be neutral platforms. Regulators discourage them from tying themselves to commercial firms. However, in the unregulated world of crypto, there are no such restrictions.

There were other connections between FTX and Alameda, which, in addition to being a market maker, traded for its own purposes. The firm used FTX’s FTT tokens as collateral for loans it took out from other crypto lenders, according to people familiar with the matter.

FTT went into freefall in the days following CoinDesk’s report, losing about 90% of its value.

Mr. Bankman-Fried previously dismissed the idea that Alameda was intertwined with FTX, telling the Journal in February that none of FTX’s market makers had access to non-public market data. And while Alameda trades on FTX, he said, “their volume is a very small fraction of the total volume of the exchange and their account access is the same as others.”

— Juliet Chung, Alexander Osipovich, Eric Wallerstein, Paul Kiernan, Elliott Brown, Gunjan Banerjee and Elaine Yu contributed to this article.

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