Exclusive: Behind the Fall of FTX, the Struggle of Billionaires and the Failed Bid to Save Crypto

November 10 (Reuters) – (This story contains language that some readers may find offensive in paragraph 2)

On Tuesday morning, Sam Bankman-Fried, the owner of the FTX cryptocurrency exchange, caught up with his employees with a sad message.

“Sorry,” he told them, “I screwed up.”

The reason for the mea culpa: Half an hour earlier, FTX’s main rival, Binance, announced that it planned to take over its main trading platform in order to save it from a “liquidity crisis”. Binance founder Changpeng “CZ” Zhao, the billionaire accused of sabotage, would now be his White Knight.

The seeds of FTX’s downfall were sown months earlier, due to Bankman-Fried’s mistakes after he stepped in to save other crypto companies when the crypto market collapsed amid rising interest rates, according to interviews and communications with several people close to Bankman-Fried. . both companies that have not been previously announced.

Some of those deals involving Bankman-Fried’s trading firm, Alameda Research, led to losses that eventually became its undoing, according to three people familiar with the company’s operations.

The interviews and messages shed new light on the bitter rivalry between the two billionaires, who have competed for market share in recent months and publicly accused each other of trying to harm each other’s businesses. It ended on Wednesday, with Binance pulling out of its deal and throwing FTX’s future into uncertainty.

Stuck without a buyer, Bankman-Fried was looking for alternative backers, two people close to her said. After Binance pulled out, it told FTX employees in a message that Binance had not previously expressed any reservations about the deal and was “exploring all options.”

Binance and FTX did not respond to requests for comment. Bankman-Fried told Reuters on Tuesday that “I’m probably too confused” to do interviews. He did not respond to further messages.

Binance previously said it decided to pull out of the deal following news of FTX and US investigations into the company.

Zhao’s disclosure of the planned takeover was a stunning setback for Bankman-Fried. The 30-year-old founded Bahamas-based FTX in 2019 and built it into one of the largest exchanges, amassing a fortune of around $17 billion.

News of FTX’s liquidity crisis – valued at $32 billion in January, with investors including SoftBank and BlackRock – sent reverberations throughout the crypto world.

Prices of major coins tumbled, with bitcoin falling to a nearly two-year low, further hurting the sector, which has fallen by about two-thirds this year as central banks tighten credit.

Aside from the deal, Binance also avoided the regulatory scrutiny that would likely accompany the acquisition, which Zhao indicated as a possibility in a memo to employees posted on Twitter.

Financial regulators around the world have issued warnings about Binance for operating without a license or violating money laundering laws. The US Department of Justice is investigating Binance for possible money laundering and criminal violations. Reuters reported last month that Binance had helped Iranian companies sell $8 billion since 2018, despite US sanctions, as part of a series of articles this year by the news agency on the exchange’s financial crime compliance.


Zhao and Bankman-Fried’s relationship began in 2019. Six months after FTX launched, Zhao bought 20% of the exchange for about $100 million, a person with direct knowledge of the deal said. At the time, Binance said the investment was “aimed at growing the crypto-economy together.”

After 18 months, however, their relationship became strained.

FTX grew quickly and Zhao now saw it as a real competitor with global ambitions, former Binance employees said.

When FTX applied for a license for a subsidiary in Gibraltar in May 2021, it was required to submit information about its major shareholders, but Binance was surprised by FTX’s requests for help, according to messages and emails between the exchanges seen by Reuters.

Between May and July, FTX lawyers and advisers wrote to Binance at least 20 times to get details about Zhao’s sources of wealth, banking relationships and Binance ownership, the filings show.

In June 2021, however, a lawyer for FTX told Binance’s CFO that Binance was not “engaging with us properly” and that they risked “seriously disrupting an important project for us.” A Binance legal officer responded to FTX saying he was trying to get a response from Zhao’s personal assistant, but the information requested was “too general” and may not provide everything.

By July of that year, Bankman-Fried was tired of waiting. Zhao bought his stake in FTX for about $2 billion, the person with direct knowledge of the deal said. Two months later, with Binance not involved, the Gibraltar regulator granted a license to FTX.

That amount was paid to Binance, in part, in FTX’s coin, FTT, Zhao said last Sunday – a holding he would later order Binance to sell, triggering a crisis in FTX.

Reuters Graphics


This May and June, Bankman-Fried’s trading firm, Alameda Research, suffered multiple losses from the deals, according to three people familiar with its operations.

These included a $500 million loan agreement with the private crypto lender Voyager Digital, two of the people said. The following month Voyager filed for bankruptcy protection, FTX’s US military paid $1.4 billion for its assets in a September auction. A Voyager spokeswoman said the company had used only $75 million of Alameda’s line of credit.

Reuters could not determine the extent of the damage suffered by Alameda.

In an effort to protect Alameda, which had nearly $15 billion in assets, Bankman-Fried transferred at least $4 billion in FTX funds, backed by shares in trading platform FTT and Robinhood Markets Inc, the people said. Alameda expanded its 7.6% stake in Robinhood in May.

Part of those FTX funds were customer deposits, two of the people said, although Reuters could not determine their value.

Bankman-Fried did not tell other FTX executives about the move to protect Alameda, the people said, adding that she feared she might flee.

On Nov. 2, however, a report by news outlet CoinDesk detailed a leaked balance sheet that purportedly indicated that a large portion of Alameda’s $14.6 billion in assets were in FTT. Alameda CEO Caroline Ellison tweeted that the balance sheet was just “a subset of our corporate entities,” not reflecting more than $10 billion in assets. Ellison did not return a request for comment.

That dashed growing speculation about what Alameda’s financial health might mean for FTX.

Zhao then said that Binance would sell its entire stake in the token, FTT, which is worth at least $580 million, “due to recent revelations that have come to light.” The token’s price fell 80% over the next two days and the exchange’s massive outflows picked up pace, blockchain data shows.


In a message to employees this week, Bankman-Fried said the firm had seen a “huge surge in withdrawals” with users withdrawing $6 billion in crypto tokens from FTX in 72 hours. Daily withdrawals were typically in the tens of millions of dollars, Bankman-Fried told her employees.

After Zhao’s tweet that Binance would sell its stake in FTT, Bankman-Fried believed that it would counter attacks from rival FTX. He told Slack employees that the withdrawals were “not shocking, very high,” but that they were able to process the requests.

“We’re spitting,” he wrote. “Obviously, Binance is trying to go after us. So it will be.”

But by Monday the situation had turned dire. Unable to quickly find a sponsor or sell other illiquid assets on short notice, Bankman-Fried contacted Zhao, according to a person familiar with the call. Zhao later confirmed that Bankman-Fried called him.

Bankman-Fried signed a non-binding letter of intent for Binance to purchase FTX’s non-US assets. This valued FTX at several million dollars, two people familiar with the letter said: enough to cover all of the exchange’s withdrawal requests, but only a fraction of the January valuation.

Zhao announced the potential deal several hours later, with Bankman-Fried tweeting “thanks to CZ.”

“Let’s live to fight another day,” Bankman-Fried told Slack employees.

His staff were shocked. Executives were also in the dark about Alameda’s shortage and takeover plan until Bankman-Fried informed them that morning, two people who worked with her said. Both said they had no idea the withdrawal situation was so serious.

Binance then canceled the announcement it took on Wednesday. “Problems are beyond our control or ability to assist,” Binance said. Zhao wrote, “Sad day. Try,” with a crying emoji.

Reporting by Angus Berwick in New York and Tom Wilson in London; Additional reporting by Hannah Lang in Washington and Elizabeth Howcroft in London; Editing by Paritosh Bansal and Chris Sanders

Our standards: Thomson Reuters Trust Principles.

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