High drama as two crypto titans clash — what it means for Ovex, VALR, Luno in South Africa
In the cryptocurrency world, it’s called whale games.
When two or more large players — “crypto whales” — try to outmanoeuvre each other, the collateral damage doesn’t seem to be a consideration. All that matters is winning.
This week, billionaire Changpeng “CZ” Zhao won, and former billionaire Sam Bankman-Fried, also known by his initials, SBF, lost.
Or rather, the whole crypto industry lost, and Zhao came out on top due to Bankman-Fried’s own missteps.
CZ is the co-founder and CEO of the largest cryptocurrency exchange in the world by trading volume, Binance.
SBF is the founder of one of Binance’s (formerly) largest rivals, FTX, and (former) quantitive cryptocurrency trading firm Alameda Research.
Under a cloud of speculation that FTX could be insolvent, the two giants traded blows on Twitter for 48 hours this week.
Then, out of the blue, SBF confirmed everyone in the industry’s worst fears. It was all true.
To top it off, he asked Binance to bail them out.
The story of how SBF came to bend the knee tells like a business empire telenovela.
It is still rife with speculation, with both players vehemently denying that there is bad blood between them at one stage or another.
We begin in 2019 when Zhao’s Binance invested in Bankman-Fried’s promising cryptocurrency derivatives exchange — FTX.
Changpeng Zhao “CZ”, Binance co-founder and CEO (left) and Sam Bankman-Fried “SBF”, FTX founder and CEO (right), shaking hands
SBF had made a name for himself in the industry with the success of Alameda Research, allowing him to raise more money to launch FTX.
Binance soon launched a derivatives marketplace, and FTX soon established a spot exchange, putting them in direct competition.
In 2021, Binance exited its investment in FTX and received $2.1 billion equivalent in its own BUSD stablecoin and FTX’s token FTT.
Like many other exchanges — including Binance — FTX offers a cryptocurrency token users can buy to get discounts on trading fees and other benefits.
On 2 November 2022, Coindesk published an article stating that of Alameda’s $14.6 billion in assets, $3.66 billion was “unlocked” FTT, and $2.16 billion was “FTT collateral”.
Nearly 40% of the assets on the books of SBF’s trading firm was a token that SBF’s own exchange printed.
There is some speculation about how Coindesk got its hands on the leaked balance sheet, but ultimately it’s irrelevant. It was true.
At the time, it fuelled rumours of FTX’s insolvency while exposing that Alameda could be a house of cards.
When the industry rumblings built to a crescendo, Alameda Research CEO Caroline Ellison took to Twitter to assure investors.
However, she essentially confirmed that the leaked balance sheet was accurate, barring that it omitted over $10 billion in assets and didn’t contain the hedges against their massive long positions in FTT.
– 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— Caroline (@carolinecapital) November 6, 2022
Ellison also said Alameda had returned most of its loans “given the tightening in the crypto credit space this year”.
An hour after her tweet, CZ announced that Binance would unwind its entire holding of FTT.
“Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books,” CZ said.
“We will try to do so in a way that minimizes market impact. Due to market conditions and limited liquidity, we expect this will take a few months to complete.”
CZ immediately contradicted rumours that they were dumping their FTT to put pressure on FTX.
“Binance always encourages collaboration between industry players. Regarding any speculation as to whether this is a move against a competitor, it is not. Our industry is in it’s [sic] nascency and every time a project publicly fails it hurts every user and every platform.”
We typically hold tokens for the long term. And we have held on to this token for this long. We stay transparent with our actions. 4/4
— CZ 🔶 Binance (@cz_binance) November 6, 2022
Ellison quickly offered to buy Binance’s FTT bag at $22 per token.
@cz_binance if you’re looking to minimize the market impact on your FTT sales, Alameda will happily buy it all from you today at $22!
— Caroline (@carolinecapital) November 6, 2022
This led to speculation that Alameda, FTX, or both had borrowed against their FTT holdings and could be hit with a devastating margin call if it dropped too far below $22.
Around two hours later, CZ confirmed that a “whale alert” tweet from 5 November showing FTT worth $584.8 million being transferred to Binance was “part of it.”
While one must take care not to assume causation from correlation, it would be foolish to discount CZ’s influence. He almost certainly fuelled a bank run on FTX.
A flurry of Twitter activity between the two titans followed.
5) Because I respect the hell out of what y’all have done to build the industry as we see it today, whether or not they reciprocate, and whether or not we use the same methods.
Including CZ.
Anyway – as always – it’s time to build.
Make love (and blockchain), not war.
— SBF (@SBF_FTX) November 6, 2022
Liquidating our FTT is just post-exit risk management, learning from LUNA. We gave support before, but we won’t pretend to make love after divorce. We are not against anyone. But we won’t support people who lobby against other industry players behind their backs. Onwards.
— CZ 🔶 Binance (@cz_binance) November 6, 2022
One of CZ’s posts from 6 November stands out as a stark contrast to previous and subsequent statements where he insists there is no feud between him and Bankman-Fried.
“We gave support before, but we won’t pretend to make love after divorce. We are not against anyone. But we won’t support people who lobby against other industry players behind their backs,” he said.
Industry watchers took the message as a hard no on Ellison’s offer to buy Binance’s FTT bag for $22 per token.
They also quickly connected CZ’s tweet to a backhanded comment Bankman-Fried made a few weeks ago.
Bankman-Fried sarcastically compared CZ spending time debating crypto industry issues on Twitter to his own efforts lobbying lawmakers in Washington.
“Excited to see him repping the industry in DC going forward! Uh, he is allowed to go to DC, right?” Bankman-Fried tweeted on 30 October.
Bankman-Fried deleted the tweet following the events of this past week.
On 7 November, Bankman-Fried posted a now-deleted Twitter thread alleging that an unnamed competitor is trying to harm FTX.
“A competitor is trying to go after us with false rumors,” he tweeted.
“FTX is fine. Assets are fine,” he assured. He would have to swallow his pride a day later and tweet his eternal thanks to CZ for being willing to bail them out.
However, on this day, 7 November 2022, SBF was still telling users not to worry.
“FTX has enough to cover all client holdings. We don’t invest client assets (even in treasuries). We have been processing all withdrawals, and will continue to be.”
Customers were also starting to report that withdrawals from FTX were taking long, and the media had picked up on it.
A CryptoQuant chart started circulating on social media, showing that FTX’s stablecoin reserves had plummeted that week.
Bankman-Fried assured blockchain nodes and banks were the only reasons withdrawals were slow.
“It’s heavily regulated, even when that slows us down. We have GAAP audits, with > $1b excess cash. We have a long history of safeguarding client assets, and that remains true today,” he said.
“I’d love it, @cz_binance, if we could work together for the ecosystem.”
On 8 November, CZ and SBF released separate posts on Twitter announcing a non-binding letter of intent for Binance to acquire FTX’s non-US exchange.
“A huge thank you to CZ, Binance, and all of our supporters. This is a user-centric development that benefits the entire industry. CZ has done, and will continue to do, an incredible job of building out the global crypto ecosystem, and creating a freer economic world,” Bankman-Fried’s statement said.
“I know that there have been rumors in media of conflict between our two exchanges, however Binance has shown time and again that they are committed to a more decentralized global economy while working to improve industry relations with regulators. We are in the best of hands.”
Binance’s offer was conditional on due diligence. The following day the exchange announced it was backing out of the deal.
“As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition FTX,” Binance stated.
CZ has denied that he or Binance orchestrated the run on FTX, saying he only tweeted their decision to dump their FTT bag for transparency’s sake.
He reiterated this in an internal email sent to Binance staff, saying they “did not master plan this or anything related to it.”
However, CZ’s earlier statement about not supporting people who lobby against other industry players behind their backs raises questions about his intentions.
Binance’s refusal to take up Ellison’s offer of an over-the-counter deal for its FTT bag at $22 per token also suggests that it wasn’t about the money — it was about the message.
On 10 November, Sam Bankman-Fried posted a lengthy Twitter thread apologising and giving his version of what went wrong.
6) My sense before:
Leverage: 0x
USD liquidity ready to deliver: 24x average daily withdrawalsActual:
Leverage: 1.7x
Liquidity: 0.8x Sunday’s withdrawalsBecause, of course, when it rains, it pours. We saw roughly $5b of withdrawals on Sunday–the largest by a huge margin.
— SBF (@SBF_FTX) November 10, 2022
Bankman-Fried said he made two major mistakes due to “poor internal labelling of bank-related accounts”.
Firstly he believed the overall leverage from users’ margin was zero, when it was 1.7×.
Secondly, he believed they had 24 times the US dollar liquidity needed to cover average daily withdrawals.
However, when they saw roughly $5 billion in withdrawals on Sunday, they only had 80% of the necessary liquidity ready to deliver.
He also left a cryptic parting shot.
“At some point, I might have more to say about a particular sparring partner, so to speak,” said Bankman-Fried.
“But you know, glass houses. So for now, all I’ll say is: well played; you won.”
20) At some point I might have more to say about a particular sparring partner, so to speak.
But you know, glass houses. So for now, all I’ll say is:
well played; you won.
— SBF (@SBF_FTX) November 10, 2022
Impact on South African exchanges
Jonathan Ovadia, Ovex CEO
FTX bought a stake in local cryptocurrency market maker Ovex in April 2021.
Ovex CEO Jonathan Ovadia told MyBroadband that FTX owns a minority stake of around 8% and that they are in discussions to buy the equity back.
Ovadia said they would have welcomed Binance as a shareholder, had the deal gone through and look forward to working with them in Africa as a partner.
He said they have no exposure to FTT.
“FTX was one of the liquidity venues we utilised, Monday we moved all operations off FTX, and reduced exposure to the platform,” Ovadia said.
“Currently, we have under 5% of company funds (i.e net assets = assets – liabilities ) on FTX, and everything is running smoothly from our end.”
Farzam Ehsani, VALR co-founder and CEO
VALR CEO Farzam Ehsani said they had no exposure to FTX or FTT, and that they run a 100% reserve.
“Crypto exchanges should be running 100% reserve operations, which means that a ‘bank run’ on a crypto exchange should not be possible,” Ehsani stated.
With a 100% reserve, all customer deposits must be secured away and not lent out or used to generate yield in other ways.
“While banks operate on a fractional reserve system which means that they lend out depositors’ money by design, no crypto exchange should be doing this. I’m still waiting to learn more about the liquidity issues and why they happened.”
Ehsani said there are three main reasons a crypto exchange may not have customer assets available and be unable to service withdrawals:
- the exchange has been hacked
- customer assets have been used for something else and are therefore not available for withdrawal
- operational issues within the exchange have led to a loss of funds
“I think there will need to be a lot more transparency in the industry, through things like proof of reserves and more,” he said.
“One needs to exercise caution if one is borrowing or lending in the crypto space. Crypto is volatile, as are many assets in the world right now,” said Ehsani.
“Any deal that uses crypto as collateral needs meticulous risk management.”
Marius Reitz, General Manager for Africa at Luno
Luno Africa GM Marius Reitz said they too have no exposure to the deal, FTX, or FTT.
“Luno supports regulation of crypto, and proof of reserves are a relevant way to create more trust,” Reitz said.
“Luno releases a proof-of-reserves report every quarter, so customers can be sure that their cryptocurrency is safely stored in their name on a 1:1 basis and available to them as and when they choose.”
Reitz said their audit is conducted by Mazars, an independent international audit, tax, and advisory firm.
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