Binance plans to buy major rival FTX in latest crypto bailout

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By Hannah Lang and Tom Wilson

WASHINGTON/LONDON (Reuters) -Crypto giant Binance signed a nonbinding agreement on Tuesday to buy FTX's non-U.S. unit to help cover a "liquidity crunch" at the rival exchange, marking an abrupt change in fortune for the digital currency billionaire and FTX CEO Sam Bankman-Fried.

The surprising deal between high-profile rivals Bankman-Fried and Binance CEO Changpeng Zhao raised fresh concerns about the risks investors face in the volatile crypto market after FTX had been hit by billions of withdrawals.

"Liquidity crunch issues continue to haunt the crypto market," said Dan Raju, CEO of Tradier, financial services provider and brokerage. "It's scary to think that FTX, which is one of the largest crypto exchanges in the world, was bitten by liquidity concerns and Binance, their biggest rival, is coming to their rescue."

Binance's Zhao said in a tweet that FTX had "asked for our help" after "a significant liquidity crunch."

He said Binance, the world's biggest crypto exchange, will conduct due diligence in the coming days as the next step toward an acquisition of FTX.com. The U.S. operations of Binance and FTX are not part of the deal, Bankman-Fried said in a separate tweet.

"It has been an open secret for a while now that FTX and Binance were in existential competition; the only surprise today is that things have escalated so quickly to a seeming conclusion," said Joseph Edwards, investment adviser at Securitize Capital.

Two of the most powerful moguls in the crypto industry, Bankman-Fried and Zhao, known by his initials CZ, have had a turbulent relationship.

In late 2019, Binance invested in FTX, then a far smaller exchange, before exiting the investment in July last year. By then FTX had mushroomed into a growing rival to Binance, which dominates the crypto industry with over 120 million users.

Tensions between Zhao and Bankman-Fried had surfaced in recent days, with a public disagreement playing out on Twitter.

"A competitor is trying to go after us with false rumors," FTX's Bankman-Fried tweeted on Monday, without giving further details, a day after Zhao said Binance would sell its holdings of FTX's in-house token. He tagged Zhao in a later tweet, saying "I'd love it, @cz_binance, if we could work together for the ecosystem."

FORTUNES REVERSE

The deal comes as Binance is under investigation by the U.S. Justice Department for possible violations of money-laundering rules, Reuters reported last week, one of a series of investigations this year into Binance's troubled history with financial regulatory compliance.

Last month, Reuters revealed fresh details about Binance's strategy for keeping regulators at arm's length and continuing disarray in its compliance programme. Binance said in response to the news stories that it was helping drive higher industry standards and was seeking to improve its ability to detect illegal crypto activity.

A spokesperson for the U.S. Commodity Futures Trading Commission said the agency is monitoring the situation. The Federal Trade Commission declined to comment.

The Binance move is the latest emergency rescue in the world of cryptocurrencies this year, as investors pulled out from riskier assets amid rising interest rates. The cryptocurrency market has fallen by about two-thirds from its peak to $1.07 trillion.

It also underscores an abrupt turnabout for Bankman-Fried, who had positioned himself as the industry's saviour by rescuing rivals who had gotten into trouble earlier in the year.

Bankman-Fried, 30, ranked with net worth of $16.6 billion according to Forbes only a few months ago, said he and his company still have a "few billion" on hand to shore up struggling firms. In May Bankman-Fried, who is from California but lives in the Bahamas where FTX is based, revealed he had personally taken a 7.6% stake in Robinhood Markets Inc (NASDAQ:HOOD), capitalizing on the trading app's weakened share price.

FTX had seen around $6 billion of withdrawals in the 72 hours before Tuesday morning, according to a message to staff sent by Bankman-Fried that was seen by Reuters.

"On an average day, we have tens of millions of dollars of net in/outflows. Things were mostly average until this weekend, a few days ago," Bankman-Fried wrote in the message to staff sent on Tuesday morning. "In the last 72 hours, we've had roughly $6b of net withdrawals from FTX."

Withdrawals at FTX.com are "effectively paused," he wrote, adding that would be resolved in "the near future."

FTX did not immediately respond to a request for comment on the message to staff.

'LIQUIDITY CRUNCHES'

Amid talk of pressure on FTX's financials, the in-house token of crypto exchange FTX slumped sharply on Tuesday, losing one-third of its value and dragging down other major digital assets.

News of the deal initially buoyed major cryptocurrencies, but those gains were quickly erased.

FTX token - which gives holders discounts on FTX trading fees - was last trading at $5.33, having slumped by more than three-quarters. Bitcoin, the biggest digital token, was down 11%.

Crypto users raised questions on Twitter last week about FTX's token following a report by news website CoinDesk on a leaked balance sheet from Alameda Research, a trading firm founded by Bankman-Fried that has close ties with FTX.

On Sunday, Zhao said his firm would liquidate its holdings of the FTX token due to unspecified "recent revelations."

Bankman-Fried had initially said the exchange was "fine" and that concerns were "false rumours."

In a tweet on Tuesday, he said his teams were working on clearing out the withdrawal backlog: "This will clear out liquidity crunches. This is one of the main reasons we've asked Binance to come in."

"A *huge* thank you to CZ, Binance," Bankman-Fried wrote.