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FTX Practices Called into Question – Binance to Liquidate FTX Holdings

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The crypto community is shaking over concerns that Alameda, a giant crypto trading firm related to the second-largest exchange FTX, might be insolvent. The fight between FTX founder and Binance CEO has brought clouds on the entire crypto market, with Bitcoin and Ethereum losing 5% each.

Here is the FTX-Binance saga that started with a leaked balance sheet report:

FTX-Alameda Relationship Explained

It all started with a Coindesk report discussing the balance sheet of FTX’s sister company Alameda Research. FTX and Alameda were founded by billionaire Sam Bankman-Fried.

Both companies are huge, but the questions raised with respect to Alameda, which might have the greatest chunk of its assets in illiquid tokens, can put both crypto behemoths at risk.

FTX and Alameda are supposed to be separate businesses, but they have more in common than initially thought. The leaked private document shows that Alameda’s balance sheet relies very much on FTT, the native token of FTX, the second-largest crypto exchange by trading volume. It turns out that Alameda, whose total assets exceeded $14.5 billion as of the end of June, is sitting on a foundation made up of a token that its sister company can generate out of thin air, something that could shake both giants if FTT nosedives at any point.

As it stands today, the situation gives Sam Bankman-Fried unlimited powers in the crypto market, as he can leverage the FTT token to grow his empire on both fronts. The leaked document showed that Alameda’s biggest asset was $3.66 billion of ‘unlocked FTT,’ while the third-largest asset was $2.16 billion of ‘FTT collateral.’

Moreover, Alameda sits on $8 billion in liabilities, of which almost $300 million are ‘locked FTT.’

Other significant assets on its balance sheet are $3.37 billion of crypto, including unlocked SOL, locked SOL, and SOL collateral. It’s worth noting that Sam Bankman-Fried was an early investor in Solana.

Cory Klippsten, CEO of investment platform Swan Bitcoin, reportedly said:

“It’s fascinating to see that the majority of the net equity in the Alameda business is actually FTX’s own centrally controlled and printed-out-of-thin-air token.”

Given that FTT is a relatively illiquid asset with a market cap of only $3 billion before the balance sheet leak, investors have been worried that any major FTT selling order would lead to a crash in the token price, potentially damaging the financial health of FTX too. 

Alameda CEO Caroline Ellison initially declined to comment, but FTX founder Sam Bankman-Fried tweeted that FTX was fine and its assets were fine, although a competitor was trying to spread false rumors.

Binance to Liquidate FTT Holdings, Potentially Triggers Fight with Competitor FTX

The competitor Sam Bankman-Fried (SBF) was referring to is Binance, with its founder and CEO Changpeng Zhao (CZ). FTX is currently the second-largest exchange and the only to potentially challenge Binance. The fact that the two giants are fighting publicly doesn’t bode well for the crypto market in general.

On Sunday, CZ tweeted that Binance was about to liquidate all of its FTT holdings, referring to ‘recent revelations.’

“As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books,” the tweet says.

CZ explained that the move would take several months to avoid market impact. He also turned down speculation that it was a move against a competitor. The Binance boss later said that he reflected on lessons learned from Luna, the cryptocurrency that collapsed in the first half of 2022, along with its sister stablecoin Terra USD. Binance has FTT positions as it is an early investor in FTX.

Even though CZ says he doesn’t want to fight, the reference to LUNA is enough to spark controversy, as he potentially hints at Alameda’s insolvency. Speaking about that, Dirty Bubble Media, which was the first to spot the problems with Celsius Network, claimed that FTX rested on the same scheme used by Celsius.

With billions in liabilities, some crypto market players are concerned that SBF is creating and pumping FTT to borrow multiple assets from counterparties. There is a risk that Alameda won’t be able to cash in a significant portion of its FTT holdings to pay its debt. What’s even worse is that Sam reportedly had dubious ties with Celsius itself.

Alameda CEO Carline Ellison eventually responded in a tweet, saying that the leaked balance sheet reflected only a subset of the company’s assets and that it had over $10 billion that wasn’t shown in that document.

“The balance sheet breaks out a few of our biggest long positions; we obviously have hedges that aren’t listed. Given the tightening in the crypto credit space this year, we’ve returned most of our loans by now,” she added.

However, the panic has already started. There are two camps forming. One says that FTX and Alameda are involved in shady schemes and that CZ is right, and the other one claims that CZ is simply augmenting unfounded concerns to attack the only major rival. So far, the former seems to have more adepts.

There is more to the story, as SBF was the second-biggest donor to the Democratic Party to support it in the mid-term elections that take place today. As part of his political interests, SBF had apparently supported the draft of the Digital Commodities Consumer Protection Act (DCCPA), dubbed DeFi-killer. The draft was leaked in October. The public image of Sam was hit again when he was squeezed by Erik Voorhees during an interview.

Bitcoin, Ethereum Under Bearish Pressure, Fall 5%

When two giants are fighting, the rest of the market suffers. FTT itself has dropped 30% over the month to trade at over $17.

But the largest crypto market has also been under bearish pressure after Binance CEO tweeted about his plans to dump FTT.

Both Bitcoin and Ethereum have lost over 5% on Tuesday to trade at around $19,700 and $1,485, respectively. Solana’s token price was slashed by over 10% to trade at 28%.

The crypto market will bounce back eventually, but it remains to be seen how SBF will handle the situation.

Anatol is an experienced crypto/blockchain/DeFi journalist and analyst. Prior to joining the crypto space in 2017, he covered major forex pairs and US stocks, working for asset managers and brokerage firms, among others. He likes to dive deeper into each subject while maintaining professional conduct.