What the heck just happened in crypto?  A Q&A in plain English on Binance’s takedown of FTX

What the heck just happened in crypto? A Q&A in plain English on Binance’s takedown of FTX

Crypto people have seen things. You’ve seen massive hacks and mind-blowing cons and mind-blowing success stories. But they’ve never seen a day like Tuesday when the world’s largest crypto exchange committed the corporate equivalent of murdering its closest competitor.

If you haven’t delved into crypto and are wondering what everyone else is talking about, here’s a basic guide to the madness surrounding Binance and FTX – and why it matters.

What exactly happened?

Binance is a massive offshore crypto exchange run by a wily Chinese-Canadian billionaire named CZ. Binance was at the top for a while, but in recent years an up-and-coming competitor called FTX started to hot on its heels. FTX was founded by a young wild-haired American named SBF (initials are a thing in crypto).

Over the past weekend, CZ began complaining about SBF’s lobbying tactics and then used Binance’s power in the market to destroy its competitor.

Whoa, so how exactly did CZ do that?

The two used to be friends, you know, and that included CZ’s investment in SBF’s new cryptocurrency exchange. Over time, CZ decided he no longer wanted to own it, and when he sold his stake in FTX, he took payment in a crypto token called FTT. These tokens are used by customers on the FTX exchange to get trading rebates, but unlike Bitcoin, they are not particularly liquid.

In hindsight, this was a silly arrangement by SBF as it resulted in CZ owning a massive amount of FTT tokens and thus giving him power over FTX. It’s as if Pepsi gave Coca-Cola a large stake in stock that Coke could sell at any time. And this is what happened: CZ got mad at SBF and flooded the market with tons of FTT tokens.

This was devastating because SBF also owns a trading fund that has quite a lot of FTT tokens on its balance sheet. When the price of FTT tokens started to crater, SBF tried to defend its value by selling other assets to buy out the FTT tokens that were flooding the market – but it didn’t work, and as the value of FTT dropped, when SBF discovered his liabilities began to exceed his assets. As of Tuesday, his companies were facing bankruptcy and he had to go to his rival to take them from him.

That’s crazy. Why would CZ do such a thing?

It’s likely that CZ did this in part because it wanted to crush an up-and-coming competitor. But part of it was personal. In recent months, regulators have become aggressive towards the crypto industry, and both Binance and FTX have struggled to stay on their good side. In the midst of all this, CZ came to believe that SBF was whispering poison in the ears of US regulators – possibly suggesting to them that CZ was linked to China – and so CZ chose revenge.

“We have provided support before, but we will not pretend to make love after the divorce. We are not against anyone. But we will not support people who campaign against other industry players behind their backs,” CZ wrote in a fateful tweet on Sunday. Two days later he had destroyed his rival’s company.

So Does Binance Own FTX Now?

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

Who’s to blame?

Well, you could say it’s CZ’s fault for not being able to use his power over FTX to destroy it. But people are also pointing fingers at SBF for not being transparent about the full overlap between FTX and its trading company, which owned heaps of FTT. If it had been transparent, people probably would have raised alarms about this vulnerability earlier, and maybe FTX could have prevented this chaos.

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

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

Yes, crypto has a well-deserved reputation for gimmicks and executives who play fast and loose. But this episode stands out as FTX is the second largest company in crypto and because SBF was widely viewed as the industry’s golden boy who would help it get on the right side of the regulators. So much for that.

So what does this mean for the price of cryptocurrencies?

This is not good news in the short term. Prices fell on rumors that FTX was in trouble, but then rallied briefly when Binance announced its bailout, only to plunge again later Tuesday.

These events have affected the price of FTT and a token linked to SBF called Solana. Usually, when there is a big sell-off on a large token, it has a domino effect 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 cap.

This story was originally published on Fortune.com

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