FTX Contagion: Will Binance give in to pressure from a market slump?

FTX

Cryptocurrency exchange FTX, once ranked third in the world for trading volume among cryptocurrency exchanges, teetered on the verge of bankruptcy for a few days before founder Sam Bankman-Fried declared it bankrupt.

The fallout of Bankman-Fried’s dubious activities at sibling company Alameda Research, which involved crypto coins taken from FTX’s books, sent shockwaves across the cryptocurrency community.

The incident made it clear that centralised exchanges (CEXs), despite how they present themselves to the crypto community, have unlimited control over the digital assets of their customers while keeping their own business practices a secret.

Also Read | Insurers shun FTX-linked crypto firms as contagion risk mounts

With investor confidence in the crypto ecosystem deteriorating at an alarming rate, the collapse of FTX has set off a domino effect that threatens to bring down even well-established crypto enterprises.

Before we dismiss the FTX debacle as the result of the founder's excesses, it is important to determine whether the crypto companies doing business with the exchange were complicit in the wrongdoings.

The role of Changpeng Zhao, the founder of Binance, is frequently forgotten even though US Federal prosecutors have opened numerous investigations into FTX to investigate claims of fraud, market manipulation, and other offences.

Only a few days after announcing his company's intention to sell off all of its holdings in FTX's native FTT token, Zhao, or ‘CZ’ as he is known in the cryptocurrency community, said on Twitter that Binance would purchase FTX when the first cracks showed.

If this seemed suspect, then Zhao’s complete U-turn the following day ought to have raised red flags.

The biggest cryptocurrency exchange in the world not only confirmed that the FTX agreement was abandoned but also reiterated that FTX was irreparably bankrupt.

All of this happened after the digital currency news website CoinDesk published an article hinting at this outcome.

It also seems implausible that Binance was able to carry out its due diligence in less than two days of announcing the takeover, given that FTX had over 130 connected companies in addition to Alameda Research.

It is critical to talk about Binance's current financial situation, leaving aside Zhao’s part in FTX's lightning-fast collapse.

In response to rumors that the US Department of Justice was planning to charge Binance with unauthorised money transfers and conspiring to launder money, the Binance founder has gone so far as to chide US federal officials, cautioning them that accusing it of money laundering could bring down the entire crypto industry.

The rumoured probe could be a result of Zhao’s conduct from 2018 and earlier.

Despite its own assertions that roughly a third of its user base at the time of its inception was based in the United States, the company had neglected to register with the Department of Treasury.

Zhao’s subsequent moves have been just as puzzling, for instance, the move to put anti-money laundering (AML) controls in place only in 2021.

There certainly seems to be more going on than meets the eye, especially for someone like Zhao, who regularly paints himself as the crypto world’s saviour.

There is nothing to indicate that things are going smoothly at Binance, apart from Zhao’s and his team's varied explanations about how they created the strongest company in the cryptocurrency business.

There is enormous power and influence concentrated in the hands of the founders of CEXs like FTX and Binance, and there is enough evidence implying that Zhao may be obstructing investigations or is covering up something much more serious.

For instance, Binance's vague replies to an ongoing investigation that was precipitated by a written request made by US Federal prosecutors in late 2020 or the fact that it refuted Reuters' report that alleged Binance's compliance program facilitated $2.35billion in illicit funds transfer, without providing any facts.

The most recent example is audit firm Mazars suspending its association with crypto firms like Binance, only a few weeks after issuing Binance's proof-of-reserves report.

Due to its position as the largest cryptocurrency exchange by trading volume, any decline in confidence in Binance might trigger a wave of selling pressure that would cause it to go bankrupt and take the cryptocurrency market down with it.

Even though it may seem unlikely that financial issues would cause Binance to fail, it is vital to keep in mind how Bankman-Fried managed to project composure while working to convince American lawmakers to ease the rules. If anything, Zhao has been far superior to the FTX founder in maintaining a very public profile. It remains to be seen what lies behind the facade.