EXCLUSIVE: Behind FTX’s Fall, Struggle with Billionaires and Failed Attempt to Save Crypto

November 10 (Reuters) – (This story contains language that some readers may find offensive in paragraph 2)

On Tuesday morning, Sam Bankman-Fried, owner of cryptocurrency exchange FTX, caught up with his employees with some bad news.

“Sorry,” he told them, “I’m disappointed.”

The reason for the mea culpa: He announced half an hour earlier that FTX’s arch-rival Binance was planning a shock acquisition to save its main trading platform from a “cash crunch.” Binance founder Changpeng “CZ” Zhao accused the billionaire of sabotage, who will now be his white knight.

The seeds for FTX’s downfall were sown months earlier, stemming from Banker-Fried’s mistakes to save other crypto companies as interest rates rose and the crypto market collapsed, according to interviews with several people close to Banker-Fried. Both previously unannounced companies.

Some of the deals involving Bankman-Fried’s trading arm, Alameda Research, led to a series of losses that eventually led to his undoing, according to three people familiar with the firm’s operations.

The interviews and news stories shine new light on the bitter rivalry between the two billionaires, who have vied for market share in recent months and publicly accused each other of trying to hurt each other’s business. It culminated on Wednesday, when Binance pulled out of its deal and threw FTX’s future into uncertainty.

Stranded without a buyer, Bankman-Fried is now looking for alternative backers, two people close to it said. After Binance left, he said in a message to FTX employees that he had not previously expressed any reservations about the Binance deal and that he was “exploring all options.”

Neither Binance nor FTX responded to requests for comment. Bankman-Fried told Reuters on Tuesday that “I would be very swamped” to be interviewed. He did not respond to further messages.

Finance previously said it decided to pull out of the deal as a result of its due diligence on FTX and news reports about U.S. investigations into the company.

Zhao’s announcement of the planned acquisition marked a stunning reversal for Bankmann-Fried. The 30-year-old founded Bahamas-based FTX in 2019 and led it to become one of the largest exchanges, amassing a fortune of nearly $17 billion.

News of a liquidity crunch at FTX — which was valued at $32 billion in January with investors including SoftBank and BlackRock — reverberated through the crypto world.

Major currencies tumbled, with bitcoin falling to its lowest level in nearly two years, heaping more pain on a sector that has lost more than two-thirds of its value this year as central banks tighten lending.

By pushing the deal, Finance also avoided regulatory scrutiny that could have accompanied the acquisition, which Zhao flagged in a memo to staff he posted on Twitter.

There are financial regulators around the world issued warnings About finance to operate without a license or to violate money laundering laws. The US Department of Justice is investigating Binance for money laundering and criminal sanctions violations. Reuters reported last month that Binance has helped Iranian companies trade $8 billion since 2018 despite US sanctions.

Sour relationship

Zhao and the Bankman-Fried relationship began in 2019. Six months after FTX launched, Zhao bought a 20% stake in the exchange for about $100 million, said a person with direct knowledge of the deal. At the time, Binance said the investment was “aimed at growing the crypto economy together.”

However, within 18 months, their relationship soured.

FTX has grown rapidly and Zhao now sees it as a real competitor with global ambitions, former Binance employees said.

When FTX applied for a subsidiary license in Gibraltar in May 2021, it was required to submit information about its major shareholders, but Binance stonewalled FTX’s requests for help, according to messages and emails between exchanges seen by Reuters.

Between May and July, FTX lawyers and advisers wrote to Binance at least 20 times seeking details about Zhao’s sources of assets, banking relationships and Binance’s ownership.

However, in June 2021, an FTX lawyer told Binance’s chief financial officer that Binance was “not engaging with us properly” and that they risked “seriously disrupting an important project for us.” A Finance Legal official told FTX that they were trying to get a response from Zhao’s personal assistant, but the information requested was “very general” and they couldn’t provide it all.

By July of that year, Bankman-Fried was tired of waiting. He bought back Zhao’s stake in FTX for about $2 billion, said the person with direct knowledge of the deal. Two months later, Gibraltar’s regulator granted FTX a license as finance was no longer involved.

In FTX’s own currency, FTT, the amount was paid to Binance, Zhao said last Sunday – and then he would order Binance to sell, triggering a crisis in FTX.

Reuters Graphics

“Trying to keep us going”

This May and June, Bankman-Fried’s trading arm, Alameda Research, suffered a series of losses from contracts, according to three people familiar with its operations. That includes a $500 million loan deal with failed crypto lender Voyager Digital, the two said. Voyager filed for bankruptcy protection the following month, after FTX’s US unit paid $1.4 billion for its assets in a September auction. Reuters could not determine the full extent of Alameda’s losses.

Seeking to shore up Alameda, which has about $15 billion in assets, Bankman-Fried moved at least $4 billion into the FTX fund, backed by assets including FTT and shares of trading platform Robinhood Markets Inc, the people said. Alameda disclosed a 7.6% stake in Robinhood that May.

Part of these FTX funds were customer deposits, two of the people said, although Reuters could not determine their value.

Bankman-Fried did not tell other FTX executives about the move to prop up Alameda, the people said, because she feared it would leak.

However, on Nov. 2, a report by news agency CoinDesk detailed a leaked balance sheet of Alameda’s alleged $14.6 billion in assets held by FTT. Alameda CEO Carolyn Ellison tweeted that the balance sheet was just “a subset of our corporate entities” and did not reflect $10 billion in assets. Ellison did not return requests for comment.

That didn’t stop growing speculation about what Alameda’s financial health would be for FTX.

Zhao later said Binance would sell its entire stake in FTT worth at least $580 million “due to recent revelations that have come to light.” The token’s price fell 80% over the next two days and outflows from the exchange accelerated, blockchain data shows.

Withdrawal surge

In his message to employees this week, Bankman-Fried said the company had seen a “massive withdrawal surge” as users rushed to withdraw $6 billion in crypto tokens from FTX in just 72 hours. Daily withdrawals are typically in the tens of millions of dollars, Bankman-Fried told his staff.

After Zhao’s tweet that Binance would sell its FTT holding, Bankman-Fried expressed confidence that FTX would withstand its rival’s attacks. He told employees at Slack that the withdrawals were “not spectacular,” but that they were able to process requests.

“We’re getting along,” he wrote. “Obviously, Binance is trying to go after us. So be it.”

But the situation worsened on Monday. Unable to quickly find a backer or sell other non-cash assets on short notice, Bankman-Fried contacted Zhao, a person familiar with the call said. Zhao later confirmed that Bankman-Fried called him.

Bankman-Fried signed a non-binding letter of intent for Binance to purchase FTX’s non-US assets. That’s a multibillion-dollar FTX, two people familiar with the letter said — enough for the exchange to cover all withdrawal requests but a fraction of its January valuation.

Hours after Zhao announced the potential deal, Bankmann-Fried tweeted, “A big thank you to CZ.”

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

His staff were shocked. Even executives were in the dark about the Alamelu deficit and the takeover plan, until Banker-Fried informed them that morning, two people working with him said. Both said they had no idea the withdrawal situation was so serious.

Then came Binance’s announcement on Wednesday to cancel the acquisition. “Problems are beyond our control or ability to help,” Binance said. Zhao tweeted “Sad day. Tried,” with a crying emoji.

Reporting by Angus Berwick in New York and Tom Wilson in London; Additional reporting by Hannah Long in Washington and Elizabeth Howcroft in London; Editing by Paridosh Bansal and Chris Saunders

Our Standards: Thomson Reuters Trust Principles.

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