"Beyond Our Ability To Help" - Binance Abandons FTX Deal; SBF Admits $8 Billion Shortfall, Bankruptcy Likely

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by Tyler Durden
Wednesday, Nov 09, 2022 - 08:55 PM

Update (1655ET): The Wall Street Journal reports that Sam Bankman-Fried told investors today that FTX has a shortfall of $8 billion, was seeking emergency liquidity, and that without more capital, bankruptcy is likely.

Some have suggested the hole in the FTX balance sheet is even larger given the assets sloshing around within Alameda...

Given that, it is no surprise that Binance has confirmed in a statement on Twitter that it will walk away from the FTX rescue deal. The decision comes after the initial due diligence...

Binance went on to say: 

"In the beginning, our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help.

Every time a major player in an industry fails, retail consumers will suffer. We have seen over the last several years that the crypto ecosystem is becoming more resilient and we believe in time that outliers that misuse user funds will be weeded out by the free market.

As regulatory frameworks are developed and as the industry continues to evolve toward greater decentralization, the ecosystem will grow stronger."

The headline sparked a new leg lower in cryptos with FTT testing new lows...

And bitcoin testing down to $16,000...

We also note that there is an aggressive panic-bid for USW Treasuries too...

It turns out that FTX was some mutant combo of Lehman (illiquid, undercapitalized) and MF Global (illegally used client funds to fund its own terrible investments).

FTX has halted all withdrawals...

This could be the worst one yet...

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Update (1050ET): Following earlier comments from Binance boss CZ, CoinDesk is reporting the crypto exchange is highly unlikely to go through with its proposed rescue of FTX...

That headline sparked a new leg down in Bitcoin to a $16k handle..

FTX Token (FTT) is trading back to the lows...

Roughly half a day into the process of reviewing FTX’s internal data and loan commitments has led Binance to strongly lean against completing the transaction, according to a person familiar with the matter.

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With all eyes on what the most powerful man in crypto, Binance CEO Changpeng “CZ” Zhao, will do next now that Sam Bankman-Fried (or rather Bankrun-Fraud) has been exposed as just another Ponzi-running fraudster (read this thread for details on how FTX did everything it could to delay the inevitable implosion of his trading group Alameda), and how long until his "non-binding" agreement to acquire FTX collapses, Bloomberg reports that in a memo to employees, CZ said that there wasn’t a “master plan” to take over and the collapse of the rival crypto exchange “is not good for anyone in the industry” (of course he would say that).

“We did not master plan this or anything related to it... It was less than 24 hrs ago that SBF called me. And before that, I had very little knowledge of the internal state of things at FTX,” Zhao wrote in the memo sent Wednesday, which of course is false since Binance - as an existing major investors - had every insight into what was going on and knew precisely what to do to spark a bank run... which it did. Which is also why CZ hedged: "I could do some mental calculations with our revenues to guess theirs, but it would never be very accurate." In retrospect, they were accurate enough.

Still, knowing that regulators will scrutinize his every decision and comment, CZ continued to plead ignorance: “I was surprised when he wanted to talk. My first reaction was, he wants to do an OTC deal… But here we are.”

Zhao noted that “due diligence for the deal is on-going,” and reminded employees not to trade the FTT token. He also told employees not to comment on the transaction.

“Never use a token you created as collateral . . . Don’t borrow if you run a crypto business. Don’t use capital ‘efficiently’. Have a large reserve,” Zhao tweeted.

Zhao also said that the proposed - if hardly completed - bailout, which consolidated Binance’s position as the world’s biggest crypto trading venue, was not “a win for us” adding that “user confidence is severely shaken. Regulators will scrutinize exchanges even more. Licenses around the globe will be harder to get."

The message also laid out the speed of the deal he agreed with his counterpart Sam Bankman-Fried to prevent the total collapse of FTX, which had been valued at $32bn earlier this year. 

The two men shocked the crypto industry when they announced on Tuesday that Binance had agreed to rescue FTX after a surge in customer withdrawals sparked a liquidity crisis after Zhao announced that he was selling a $530 million holding of FTX’s native token. The letter of intent signed is a non-binding agreement. Terms haven’t been disclosed.

In the aftermath of FTX’s near collapse, Binance and other larger exchanges have pledged to publish more proof that they hold their customers’ funds in secure reserves that are readily available to meet withdrawals.

“We must significantly increase our transparency, proof-of-reserves, insurance funds, etc. A lot more to come in this area. We have a lot of tough work ahead of us. Not to mention prices swinging wildly,” he wrote to staff.

The Binance chief also acknowledged that a takeover of FTX, creating by far the largest crypto exchange in the world, would paint a target on the company’s back.

“People now think we are the biggest and will attack us more,” he said.

After it was leaked by the press, CZ posted his full letter on twitter: