Will A Thinned-Out Market Be The Basis
Will A Thinned-Out Market Be The Basis For Crypto's Resurgence Pixabay

The heated online sparring session that began last week between the CEOs of crypto exchanges FTX and Binance has arrived at an unexpected juncture.

Binance's CEO Changpeng Zhang (CZ) and FTX's CEO Sam Bankman-Fried have now issued joint statements confirming that FTX has accepted a non-binding acquisition agreement from Binance. This latest development comes on the heels of escalating withdrawals at FTX following a recent revelation by CoinDesk and CZ's tweet highlighting Binance's efforts to offload $FTT holdings.

Reigniting Questions That Demand Real Answers

FTX formerly ranked among the top-five cryptocurrency exchanges and was one of the few platforms that stood its ground during the Terra implosion, with CEO Sam Bankman-Fried offering to buy out several companies facing liquidity issues. This leads us to reconsider what happened in a matter of months and how FTX found itself caught in a liquidity crunch — something that it initially denied and later accepted.

"The FTX situation is eerily reminiscent of the crypto contagion that occurred last May when some of the most prominent CeFi players turned out to be under-collateralized," points out Pedro Herrera, the Head of Research at DappRadar. "The current precarious situation with FTX might trigger a domino effect in the market."

Herrera warns, "Alameda Research, also owned by Sam Bankman-Fried, has large positions in FTT, SOL and other DeFi tokens. As FTX looks for liquidity, these positions might suffer as a result. FTX had invested large sums into Solana, Aptos and Near, meaning that those tokens could also face significant selling pressure over the next few days."

More Turbulence Lies Ahead

Besides the selloff that might transpire in FTT, SOL and other tokens, this Binance-FTX buyout only amplifies the industry's challenges, especially for institutional investors and hedge funds.

Over this year, investors took stakes in FTX at valuations of $18 billion and $32 billion. Given the balance sheet situation described by CoinDesk, investors including SoftBank, Third Point, Thoma Bravo and Sequoia Capital face steep losses. Already, crypto companies like Circle, BitPanda, Tether, Genesis Trading and Crypto.com have publicly distanced themselves from FTX and its ongoing liquidity crunch in a shallow attempt to maintain their reputations.

If this continues, investor confidence in the crypto ecosystem will undoubtedly decline further at a time when faith is already waning. The broader market is yet to recover from the aftermath of the Terra blowup, which wiped away billions in investors' capital.

Meanwhile, FTX's decision to halt crypto withdrawals for customers Tuesday, Nov. 8, has drawn strong rebukes from industry peers. Commenting on these moves, Bybit's co-founder and CEO Ben Zhou stresses, "The entire sector has a duty and obligation to do better by our customers. We are here for the long run and must place a strong emphasis on staying focused on strict processes, policies, compliance and our overarching risk management strategy."

The recent experiences are more than enough for users to realize that restricted withdrawals are among the final signals that indicate the platform is about to become insolvent. It is also evident that investors have attempted to defend themselves against another market-wide liquidity crisis, effectively triggering a domino effect that has dragged down other assets and projects connected to FTX or its $FTT token.

"When an entity takes control of your funds, incentives are automatically misaligned. This model encourages companies to trade and gamble customers' funds. The temptation is too great," explains Bitcoin.com Lawyer and General Counsel Joseph Collement. "Businesses systematically use customers' funds as collateral for their failures, while executive teams walk out with millions. This is the legacy financial system as we know it. We've seen that unfolding with Celsius and now live with FTX."

The Legal & Regulatory Outlook

While this unfolding chaos is a win-win deal for Binance, mostly because it can easily absorb one of its strongest competitors or opt to let it fail, the crypto community is largely divided regarding this sudden "acquisition proposal."

Despite both CZ and Bankman-Fried issuing joint statements that this is designed to protect investors, the situation reeks of a pre-planned strategy by Binance CEO Changpeng Zhao to harm one of his closest competitors. He alluded to it when announcing his plans to liquidate all of Binance's $FTT holdings, highlighting his dismay with Bankman-Fried's regulatory push.

The most notable aspect here is that Binance and FTX have had a hot-cold relationship for quite some time. In fact, Binance was an early investor in FTX back in 2019, well before Silicon Valley and Wall Street investors propelled FTX to its current status. In 2021, Binance exited its investor position from FTX, walking away with roughly $2.1 billion of $BUSD and $FTT tokens.

Sam Bankman-Fried has stunned the cryptocurrency world with the rapid turnaround in fortunes of FTX

Fast forward to 2021-22, FTX emerged as one of Binance's fiercest competitors, which is why a lot of market analysts are claiming that this was a premeditated maneuver by CZ to cement Binance as the largest global platform. Even though CZ has held on to his narrative of this decision to liquidate $FTT tokens as a risk-management exercise following the Terra implosion, skeptics believe that there is more to it.

Either way, this mega-merger will definitely attract negative attention from regulators and governing bodies, at least in jurisdictions where Binance and FTX are key players. This is because regulatory bodies have the authority to block major acquisitions if they believe it limits consumers' choices. With Binance and FTX as known rivals, the joint announcement of a possible buyout is drawing heated questions over both platforms' compliance with antitrust laws.

Uncertainty Overshadows The Silver Lining

The early effects of the Binance-FTX drama are now clearly visible across major cryptocurrencies. The total crypto market capitalization sunk back below $1 trillion as investors rushed to dispose of their $FTT tokens and pull any other investments that had anything to do with FTX or its token. Considering that the acquisition process will take time, there is no guarantee that the market will stabilize over the coming weeks.

"The impact of FTX's liquidity crisis has shut down the gradual signs of recovery in the crypto market last week. It will also inevitably attract serious regulatory attention to the market," notes DappRadar's Herrera. "What we are waiting to see is precisely how many retail and institutional investors will be affected by this as Ethereum has lost 20% in value over the last 24 hours, and Bitcoin went below $17.5k at one point this morning."

Irrespective of the ongoing drama, it can't be denied that this is yet another event that highlights the true potential of blockchain technology. For instance, it underlines that despite everything unfolding, the uncompromising transparency of blockchain ledgers reigns supreme. Thanks to on-chain data, users were able to quickly spot massive outflows and transactions.

Once this information reached the public, it became easier for investors to start taking preventive measures, which wouldn't have been the case in centralized models when banks face deposit runs or hide their insolvency from markets. The flip side is that it can transform liquidity rumors into a crisis akin to a self-fulfilling prophecy. Although it might seem like a self-defeating victory for the industry, it realistically proves once again that the foundation of blockchain ledgers functions as intended.

That said, the story isn't even close to completion. Given the non-binding nature of the takeover offer, it isn't 100% certain that CZ will move forward with the process, whether regulators will chime in, or if Wall Street and Silicon Valley will come to the rescue of FTX and Sam Bankman-Fried. Moreover, neither Binance nor FTX have so far disclosed any details regarding deal terms, so there's no way of placing a finger on what is going to happen next.

The one undeniable truth is that this latest situation is bruising investor trust at a time when the industry can ill afford another significant setback.

(Sadie Williamson is the founder of Williamson Fintech Consulting)