WTF: Binance walks away from FTX takeover 😳🥶; Big banks are betting big on the Boring Stuff 🤑; Frictionless institutional DeFi lending? 🤔
FinTech is Eating the World, 9 November
Hey Everyone,
Happy Wednesday! This week just keeps on giving… 🤯 Today we’re looking at what the hell is happening between two crypto giants as Binance walks away from the FTX takeover (a long read!), big banks that are betting big on the Boring Stuff (& why it makes a ton of sense), and frictionless institutional DeFi lending (is it really a good thing?). Let’s jump straight into the hot stuff:
WTF: Binance walks away from FTX takeover 😳🥶
That was fast… 🌪 Just slightly more than 24 hours have passed after Binance announced it’s taking over rival FTX in one of the biggest things in crypto ever. Now the biggest crypto exchange in the world says it will not go ahead with plans to buy FTX, citing the results of due diligence and reports of US regulatory investigations into its rival.
Binance also added: 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.
What a plot twist, right? But if you read yesterday’s newsletter, I wrote that the way the deal was announced implied it shouldn't surprise you if Binance just walks away. FTX crashes and Binance wins without spending a penny. And that’s exactly what happened now.
A refresh ♻️ If you’re not a premium subscriber yet (join the fam now!), here’s a brief summary of the situation that will help us to navigate this forward:
Binance and FTX acquisition was based on a non-binding letter of intent and pending due diligence process. Now I’m pretty sure this deal was never meant to happen (Binance new FTX was secretly insolvent and in massive trouble).
Following the announcement, the Securities and Exchange Commission and the Commodity Futures Trading Commission have been investigating FTX’s relationship with FTX US as well as sister entity Alameda Research for months, as per Bloomberg. Though, as noted yesterday only global entities were on the table here, so it’s really a question as to what regulators could actually do.
The key catalyst to this was Alameda's balance sheet being leaked, which showed a heavy relationship and most importantly - exposure to FTT tokens. Alameda Research is a crypto trading firm run by FTX chief Sam Bankman-Fried.
This effectively made people realize how fragile the FTX/Alameda apparatus is, people started doing withdrawals and it caused Binance to sell its FTT tokens.
This led to a bank run on FTX as a result and a bailout/sale was the only solution (given VCs weren't lending a hand).
With FTX facing a surge in withdrawals over recent days, raising concerns about its ability to survive, Bankman-Fried approached rival Changpeng Zhao aka CZ about a possible deal. They signed an LOI.
However, within hours of that process beginning, Binance found a financial back hole, according to Bloomberg, citing a source suggesting a gap between liabilities and assets at FTX that could top $6 billion. Hence, they walked away.
Important context 👉 As a reminder, these are FTX’s investors and this is how their massing funding was amassed: BlackRock, Ontario Pension Fund, Sequoia, Paradigm, Tiger Global, SoftBank, Circle, Ribbit, Alan Howard, Multicoin, VanEck, Temasek.
Lesson 1: there’s no such thing as smart money.
Now, onto some irony…
The fact that this was said in from of the lawmakers is just next level…
✈️ THE TAKEAWAY
Trying to make sense 2.0 🤷♂️ It’s now clear that FTX was secretly insolvent with a massive hole in its balance sheet. FTX Token FTT is now in free-fall after Binance walked away from the bailout. FTX investors are told that without more capital, bankruptcy is likely (what a surprise, right?). As an effect, FTX CEO SBF’s net worth is now reportedly a negative $200M (he reportedly owes over $650M to lenders while all he has is Robinhood’s stake worth around $450M). This is down from over $16B just yesterday. Wow 😳 So what can we learn from this? A ton of things, actually. In addition to what I said yesterday, here’s something to think about: (1) There’s no such thing as smart money. They are no smarter than you; (2) Always question everything. There are no dumb questions in this world; (3) Don't use tokens that you create as collateral; (4) Keep large treasuries; (5) Don't use your treasury to make extra money. Use your business to make money; (6) Banks run on fractional reserves. Crypto exchanges should not; (7) Everything in crypto is fragile. And most importantly - (8) don’t lose faith and keep building 🚀