FTX turmoil causes deal concern, crypto prices slide

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By Selena Li, Tom Westbrook and Elizabeth Howcroft

SINGAPORE/LONDON/NEW YORK (Reuters) - Investors fretted on Wednesday about the financial health of major cryptocurrency exchange FTX with some questioning whether a rescue deal from bigger rival Binance would materialize.

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, but the deal was subject to further due diligence.

The Wall Street Journal on Wednesday reported that Binance will likely walk away from the deal, citing a source familiar with the situation.

In addition, the U.S. Securities and Exchange Commission is investigating crypto exchange FTX.com's handling of customer funds amid a liquidity crunch, as well its crypto-lending activities, a source with knowledge of the inquiry said on Wednesday. Bloomberg first reported the probe.

A representative for FTX did not immediately respond to requests for comment on the deal or the SEC investigation.

The proposed deal for FTX followed week-long speculation that snowballed into $6 billion of withdrawals from FTX in the 72 hours before Tuesday's deal, raising questions about the solvency of one of the world's largest crypto exchanges.

FTX and Binance did not disclose the terms of their agreement, and markets face fresh uncertainty over whether it will proceed.

"We believe the debacle is far from over," wrote Daiwa Capital Markets analyst Carlton Lai.

A spokesperson for Binance, when asked about the prospect of the deal closing, said earlier on Wednesday that the company is still just 36 hours into due diligence.

The turmoil over FTX has hit crypto prices. Bitcoin, the biggest cryptocurrency by market value, was last down 11.41% on the day at $16,571, falling to two-year lows. Ether, the next largest, extended losses on Wednesday to hit its lowest since July.

FTT, the smaller token tied to FTX, was down a further 50.06%, after collapsing 72% on Tuesday. Its market cap dropped to around $400 million, down from around $3 billion at the start of the week, according to CoinGecko data.

"What if the deal doesn’t go through, or (Binance CEO Changpeng Zhao) comes back and says I’ll give 10c on the dollar. That’s the blind spot the market is not ready for," said Scottie Siu, investment director at Axion Global Asset Management in Hong Kong.

Zhao tweeted a letter to staff that there was no "master plan" behind the deal and that "FTX going down is not good for anyone in the industry" and is not a win.

Zhao also urged investors not to trade FTT tokens and to ignore the prices.

Prior to the Binance proposed deal, Bankman-Fried approached cryptocurrency exchange OKX on Monday morning about a deal, but the exchange declined to move forward.

FTX's woes are the latest sign of trouble in the fast-moving world of cryptocurrencies where prices have slumped this year as a broader downturn in financial markets prompted investors to ditch riskier assets. After rapid growth in 2020 and 2021, bitcoin is down more than 60% in 2022.

Binance coin, the token used on Binance, was not spared. The world's fourth biggest cryptocurrency, was at $278.3, down 15.15% on the day.

"It has been a truly a devastating year for the industry," said Ryan Wong, a senior researcher at crypto exchange Huobi. Wong said the turmoil in the industry would "lead to massive distrust from the public towards centralized establishments."

CONTAGION RISKS

Some analysts drew parallels with the collapse of stablecoin TerraUSD, and linked token Luna, earlier this year, which set off a series of bankruptcies at Singapore fund Three Arrows Capital and U.S. crypto lenders Voyager Digital and Celsius.

FTX allows users to buy and trade cryptocurrencies, which can be held on the platform. Bankman-Fried also runs crypto trading firm Alameda Research, which maintains close ties with FTX.

Daiwa's Lai said Alameda was not part of a deal with Binance and it remained to be seen whether it will be impacted and has to sell any assets.

"This could be a major source of risk to crypto markets," Lai wrote.

UK-based crypto lender Nexo told Reuters it had withdrawn roughly $200 million worth of crypto from FTX's exchange in the past 7 days and liquidated a loan to Alameda worth "low double digit millions", recovering the principal and interest.

FTX and Alameda did not respond to requests for comment.

It is not clear how regulators would regard a deal between FTX and Binance. U.S. antitrust enforcers could insist on looking into the merger, antitrust experts said.

The U.S. operations of Binance and FTX are not part of the deal, said Bankman-Fried, who is from California but lives in the Bahamas, where FTX is based.

    Binance is also 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.

Singapore state investor Temasek Holdings, an FTX shareholder, said in emailed comments to Reuters: "We are aware of the developments between FTX and Binance, and are engaging FTX in our capacity as shareholder."

Bitcoin so far in 2022 https://fingfx.thomsonreuters.com/gfx/mkt/dwpkdgwbevm/Bitcoin%20in%202022.png