Binance will abandon its deal to rescue Sam Bankman-Fried’s FTX cryptocurrency exchange, citing concerns about its business practices and investigations by US financial regulators.
The move comes a day after Binance, one of the world’s largest crypto trading venues, tentatively agreed to buy FTX after it suffered a liquidity crunch.
“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 of FTX.com,” Binance said in a statement late on Wednesday.
Bankman-Fried told investors on Wednesday that FTX needed funding of up to $8bn after being inundated with withdrawal requests from customers, as its deal with Binance looked certain to fall apart, according to two people familiar with the matter.
The about-turn came as the Securities and Exchange Commission expanded an investigation into FTX, which includes examining the platform’s cryptocurrency lending products and the management of customer funds, according to a person familiar with the matter.
Wall Street’s top regulator launched the probe months ago but sent additional requests for information after Binance announced on Tuesday that it would acquire FTX amid a liquidity crisis, the person added. The agency is also looking into FTX’s relationship with a US entity, FTX US.
The Commodity Futures Trading Commission was also investigating the company, Bloomberg reported. The SEC and CFTC declined to comment. FTX did not immediately respond to requests for comment on the regulatory probes.
Bitcoin and other crypto-related assets have fallen sharply over the past two days as traders worry about the fallout of a potential collapse of FTX, one of the biggest crypto trading venues, and Alameda Research, a large digital asset trading firm also controlled by Bankman-Fried.
Bitcoin, the most actively traded cryptocurrency, shed more than 14 per cent to below $16,000, its lowest level since late 2020. Solana, a coin that counts Alameda as a major backer, dropped 44 per cent, while shares in US-listed crypto exchange Coinbase fell 9.5 per cent. Coinbase declined to comment.
“Markets have now hit full panic,” said Jon de Wet, chief investment officer at crypto wealth manager Zerocap. “All hell is breaking loose.”
On Wednesday evening, Sequoia Capital told its investors it had written down its stake in FTX to zero. The California-based venture capital firm invested $213mn in FTX companies in 2021 across two of its funds. A fundraising round in October that year valued FTX at $25bn.
“We are in the business of taking risk,” Sequoia’s letter to investors said. “At the time of our investment in FTX, we ran a rigorous due diligence process.” FTX made around $1bn in revenue and more than $250mn in operating income in 2021, Sequoia said.
The collapse of the shortlived deal between Binance and FTX comes months after high-profile failures of once-prominent crypto groups including lender Celsius Network and hedge fund Three Arrows Capital.
Bankman-Fried earned a reputation as a crypto saviour amid the turmoil, supporting struggling companies including lender BlockFi.
The latest phase of the crypto sell-off is more troubling because the “number of entities with stronger balance sheets able to rescue those with low capital and high leverage is shrinking within the crypto ecosystem”, JPMorgan said on a note on Wednesday.
FTX earlier acknowledged it was unable to meet customers’ withdrawal demands without external funds. “It’s bad for FTX’s clients, they have money trapped in FTX and they can’t get it out,” said Jim Bianco, president of Bianco Research, a consultancy.
Binance chief executive Changpeng Zhao reached an agreement to buy FTX and backstop its customer deposits following just a few hours of negotiations on Tuesday, after Bankman-Fried appealed to his former investor turned rival for help.
“Before that, I had very little knowledge of the internal state of things at FTX,” Zhao said in a memo to his staff on Wednesday.
The Binance boss had hoped to prevent more customers suffering losses after this year’s string of high-profile failures hammered confidence in the sector. He also wanted to forestall a chain reaction of damage to firms exposed to FTX and Alameda through lending or trading positions.
“In the beginning, our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help,” Binance said. “Every time a major player in an industry fails, retail consumers will suffer.”
Additional reporting by Tabby Kinder in San Francisco