February 8, 2023

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Cryptocurrencies tumble as Binance abandons deal for rival FTX

NEW YORK – Cryptocurrency prices plunged for the second straight day after crypto exchange Binance announced it was pulling out of a deal to buy failed competitor FTX Trading.

Bitcoin fell to a two-year low after Binance confirmed previous rumors and news that it was ready to exit the FTX deal struck between the two exchanges’ CEOs on Tuesday. The deal was still subject to Binance’s due diligence on FTX’s balance sheet.

After an initial review, Binance said in a statement on Wednesday that it had significant concerns that convinced it to back out of the deal.

“Initially, our hope was to assist FTX clients in providing liquidity, but the issues are beyond our control or ability to assist,” Binance said in a statement.

Bitcoin’s price plummeted more than 13% to $15,840, its lowest level since November 2020, according to CoinDesk, after trading above $20,000 at the start of the week. The other major cryptocurrency, Ethereum, fell 13%.

FTX had agreed to sell itself to Binance after experiencing the cryptocurrency equivalent of a bank run. Clients fled the exchange after worrying about whether FTX had enough capital. The sudden sale was a shocking turn of events for FTX CEO and founder Sam Bankman-Fried, who was hailed as a savior of sorts earlier this year when he helped prop up a string of cryptocurrency companies struggling financially.

FTX’s own crypto token, known as FTT, crashed more than 50% in the reports. The token, now worth around $2.50, was worth 10 times that amount just a week ago. Much of the concern from crypto investors has centered on whether the balance sheet of a subsidiary of FTX, known as Alameda Research, was saturated with increasingly worthless FTT tokens, the total value of which would not exceed the exchange’s liabilities, effectively rendering FTX insolvent.

After Binance had a chance to look at FTX’s books, it became clear that the problem was too big to solve. A person familiar with the matter, who was not authorized to comment publicly, described the books as a “black hole” in which it was impossible to distinguish between the assets and liabilities of exchange FTX and those of the Alameda Research hedge fund.

“The books were a nightmare and the relationship between FTX and Alameda was incestuous at best,” said the person familiar with the matter.

In another illustration of FTX’s financial tightness, Bankman-Fried on Wednesday asked its investors for $8 billion to cover withdrawal requests, according to The Wall Street Journal, citing unnamed sources.

According to Bloomberg News and other media outlets, FTX is now reportedly under investigation by US authorities for how it has handled customer deposits.

Stocks of publicly traded exchanges exposed to crypto also plunged on the developments. Robinhood shares closed around 14% and Coinbase shares lost around 10%.

FTX is the latest cryptocurrency company to come under financial pressure this year as crypto assets have plummeted in value. Other failures include Celsius, a bank-like company that has been taking crypto deposits for returns, and an Asia-based hedge fund called Three Arrows Capital.

Credit: AP/Kin Cheung