Q&A in plain English about Binance’s plan to buy FTX

Crypto people have seen everything. They have witnessed massive hacks and mind-bending hoaxes and incredible success stories. But never have they seen a day like Tuesday, when the world’s largest cryptocurrency exchange carried out the equivalent of the murder of its closest competitor.

If you’re not into crypto and are wondering what everyone is saying, here’s the ultimate guide to the madness surrounding Binance and FTX—and why it matters.

What exactly happened?

Binance is a giant overseas crypto exchange run by a wise Chinese-Canadian billionaire called CZ. Binance has been at the top for a while, but in recent years an emerging competitor called FTX has started to follow its heels. FTX was founded by an American young man with curly hair called SBF (abbreviation is a thing in crypto).

Last weekend, CZ started complaining about SBF’s lobbying tactics and then used Binance’s power in the market to destroy its competitors.

Whoa, so how exactly did CZ do it?

The two of them used to be friends, you see, and this included CZ investing in SBF’s new crypto exchange. Over time, CZ decided he didn’t want to own it anymore, and when he sold his stake in FTX, he paid with a cryptocurrency token called FTT. Those tokens are used by customers on the FTX exchange to receive trading discounts, but, unlike Bitcoin, do not have special liquidity.

In retrospect, this was a stupid arrangement by SBF as it resulted in CZ owning a large amount of FTT tokens, thus giving him power over FTX. As if Pepsi gave Coca-Cola a large amount of stock that Coke can sell off anytime it wants. And that’s what happened: CZ got mad at SBF and flooded the market with loads of FTT tokens.

This sucks because SBF also owns an exchange-traded fund that has a lot of FTT tokens on its balance sheet. When the price of the FTT token started to drop, the SBF tried to protect its value by selling other assets to buy the FTT tokens that were flooding the market — but it didn’t work and when the price did As the value of the FTT increased, the SBF discovered that his debts were beginning to exceed his assets. By Tuesday, his companies were facing default, and he had to turn to rivals to get them off the hook.

This is crazy. Why would CZ do such a thing?

It’s likely that CZ did this in part because he wanted to take down a rising opponent. But part of it is personal. In recent months, regulators have been aggressive towards the crypto industry, and both Binance and FTX are trying to stay on their toes. Amidst all this, CZ believes that SBF is whispering poison in the ears of US regulators– apparently hinted to them that CZ had ties to China – and so CZ chose to take revenge.

“We’ve been supportive before, but we won’t pretend to love each other after the divorce. We are not against anyone. But we will not support those lobbying against other industry players behind their backs,” CZ wrote in a fateful tweet on Sunday. Two days later, he destroyed his rival’s company.

So does Binance now own FTX?

At least not yet. All CZ has said is that Binance signed a “letter of intent” to buy back FTX, which means it could happen, but there are no guarantees. Meanwhile, CZ and SBF have indicated that Binance will take care of FTX customers and ensure their funds are not wiped out.

Who to blame?

Well, you could say it’s CZ’s fault because he didn’t use his power on FTX to destroy it. But people are also pointing the finger at SBF for not being transparent about the complete overlap between FTX and his trading company, which owns tons of FTTs. If he had been transparent, people could have raised the alarm about this vulnerability earlier and perhaps FTX could have prevented this mess.

Others also made a more serious allegation: SBF may have used client funds to plug holes in the balance sheets of one or both of his companies. That’s what happened in the case of several other crypto companies that went bust this spring and that’s a very bad thing. But to be clear, these are just allegations and there is no evidence SBF did this.

Okay, but why is this such a big deal? Doesn’t something like this happen in crypto all the time?

Yes, cryptocurrencies have a well-deserved reputation for the scoundrels and the operators who play fast and loose. But this episode stands out because FTX is the second largest company in the crypto space and because SBF is widely considered to be Golden Boy industry, who will help it side with regulators. Too much for it.

So what does this mean for crypto prices?

In short, that’s not good news. The price tumbled on rumors that FTX was struggling but then briefly recovered when Binance announced the rescue, but crashed again on Tuesday.

These events have brought down the price of FTT and a token called Solana is linked to SBF. When there is a massive sell-off for a major token, it usually has an impact on the rest of the market, and that seems to be happening. Bitcoin is down about 10% and Ethereum is down 15%, which is bad but not terrible for the two largest coins by market capitalization.

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