The crypto community received a shocker on Sunday when Changpeng Zhao (CZ), the CEO of Binance, said that the crypto exchange had decided to sell off all its $FTT holdings.
Note that $FTT is a native token of FTX, the second largest crypto exchange by trading volume after Binance.
Different reactions have followed that statement, with $FTT, $BNB and even $BTC plummeting in what looks like the biggest-ever war between industry players.
But what is the origin of this messy situation? What implications may it have on the general crypto market, and where do we go from here?
Background of the Binance vs FTX drama
CZ of Binance announced on Sunday that his company would be liquidating its entire $FTT token portfolio as post-exit risk management. But that was just an immediate cause; remote causes go as far back as 2019.
When FTX was launched in 2019, Binance invested in the centralised exchange because CZ foresaw its huge potential. The Sam Bankman-Fried (SBF) founded exchange grew rapidly, dominating the United States market.
Following that accelerated development, CZ’s Binance decided to divest from its FTX investment in 2021, receiving around $2.1 billion in remuneration in BUSD and FTT, which it had held until now.
Before the divestment, SBF was labelled ‘an enemy of DeFi and crypto’ in the community due to his romance with regulators in the United States. He is a huge political donor and has pledged almost $40 million to pro-crypto Democrat campaigns and candidates in the US electoral cycle.
A Coindesk report emerged last week stating that Alameda Research, the SBF-founded leading principal trading firm held a total of $14.6 billion in assets and had around $8 billion in liabilities, including $7.4 billion worth of loans. Among its assets, Alameda Research listed that it had $3.66 billion in unlocked $FTT, the FTX exchange’s native token.
Concerns around FTX insolvency arose from the fact that a significant chunk of Alameda’s holdings were in FTT, a token created by the firm itself, rather than in traditional fiat currencies or stablecoins.
According to analysts, the main issue is that the $FTT token has zero utility and probably no demand. Consequently, the coin may become an illiquid asset putting investors at significant financial losses, similar to the case of Terra LUNA.
This made CZ announce the financial decision to liquidate the significant chunk of the $FTT tokens Binance got after exiting FTX equity last year.
Although Alameda Research’s CEO later clarified that the leaked document only presented a portion of the firm’s holdings and added that the firm held a further $10 billion in assets, the clarification could not quell investor fears and prevent a response from the market. As the report reached more users, significant investors began pulling their funds from the exchange.
Also, FTX Founder Sam Bankman-Fried took to Twitter yesterday to assure users and investors that the exchange was functioning normally. He called the rumours unfounded, adding that FTX maintains audited financials and is highly regulated. SBF also added that the exchange had already processed billions of dollars worth of deposits and withdrawals.
Notably, In his initial tweet, Zhao said Binance’s sale would be executed in a way that “minimizes market impact” and could take “a few months to complete.”
Impact on the market
The unpleasant encounter between two giants, Binance and FTX, continues to rage, and the loser, at least for the moment, appears to be the latter. The native token for the FTX exchange has tanked over 22% over the past 24 hours.
FTT had stabilized around the $22 range for most of yesterday but began to drop sharply this morning. It currently sits at $17, according to data from Coinmarketcap. It has dropped 81% from its September 2021 all-time high of $84.
The exchange has seen a huge surge in withdrawals, leading to a substantial drop in its stablecoin reserves. According to blockchain analytics platform PeckShield, a whale has withdrawn $284 million worth of crypto from the FTX exchange. Also, Nansen data says over $451 million in stablecoins has been withdrawn from FTX over the past seven days.
This shows that FTX is under severe pressure amid growing but unsubstantiated rumours around the balance sheet of its sister firm, Alameda Research.
On the broader scene, the price of Bitcoin plunged below the $20,000 support level for the first time in around two weeks because of the open spat between FTX and Binance.
The crypto community has barely recovered from the Terra debacle of May. However, a much bigger problem seems to be beckoning as FTX stablecoin reserve is decreasing substantially.
Read also: Meta suffers 3 billion loss.
With $FTT, $BNB and other token prices declining, the crypto drama of 2022 seems far from over. It is even more disturbing that this is coming at a fraught time for an industry which has been rocked by scandals this year; ranging from the collapse of the TerraUSD stablecoin to a string of bankruptcies among crypto lenders like Celsius, BlockFi and 3ac.
As interesting as the drama may look, it will only play into the hands of global regulators. Negative sentiment caused by the infighting will do the industry no good but further paint the burgeoning sector in a bad light, making everyone a loser.
Going forward, the FTX financial situation needs to be clarified so the sector can return to continuing the market rally.
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