Binance and FTX face off, but which crypto exchange will come out on top?

A feud between Changpeng Zhao and Sam Bankman-Fried could spark a crypto cold war between the two largest exchanges in the space.

Binance plans to eliminate FTT exposure

A conflict is brewing between two of crypto’s biggest whales.

Binance founder and CEO Changpeng “CZ” Zhao revealed on Sunday that his company would liquidate its exposure to FTX’s FTT token, received as part of Binance’s exit from FTX stock last year.

On Twitter, Zhao teased that the liquidation was due to “recent revelations,” and assured his followers that removing Binance’s FTT token exposure was not done as a move against its competitor. FTX CEO Sam Bankman-Fried, however, did not see it that way. “A competitor is trying to chase us with false rumors. FTX is fine. The assets are fine,” he says claimedexplaining that his exchange had not invested its clients’ assets, that it had processed all withdrawals and that it would continue to do so.

While the value of the FTT tokens held by Binance is unknown, the exchange received a total of $2.1 billion in Binance USD (BUSD) and FTT from the FTX stock exit last year. Yesterday, Zhao confirmed that a token transaction of 22.9 million FTT, worth $584 million, was only a portion of the exchange’s total FTT holdings. This alone equates to 17.2% of the total FTT in circulation.

There are several possible reasons why Zhao decided to reduce Binance’s FTT exposure. Most notable is the recent revelation that FTX-affiliated trading firm Alameda Research could be in financial trouble, according to a leaked balance sheet from Coin Bureau. The document showed that Alameda had more than $14.6 billion in assets as of June 30, compared to $8 billion in liabilities. However, because most of the company’s assets consisted of highly illiquid tokens such as FTT, SRM, MAPS and OXY, doubts were raised as to whether Alameda could service its debts.

Moreover, spectators like Dirty Bubble Media have so-called that the FTT token, which makes up a significant portion of both Alameda and FTX’s balance sheets, has a very high value. They explain that by using a flywheel system, Alameda and FTX have created the illusion of demand, driving up the price of the FTT and allowing both parties to take out large loans against their FTT holdings. But now that Alameda Research appears to be running out of money, as evidenced by its recently leaked balance sheet, the FTT flywheel is coming under pressure.

In response to these allegations, Caroline Ellison, CEO of Alameda Research, denied that her trading firm was in such dire circumstances. On Twitter, she claimed that the leaked balance sheet only covered a portion of Alameda’s business entities, adding that the company owned another $10 billion in assets.

Besides, Ellison responded to Zhao’s intention to sell Binance’s FTT exposure by offering to buy all of his company’s tokens for $22 each. This begs the question: why doesn’t Alameda want FTT to drop below $22? Many have speculated that this is because a large portion of Alameda’s liabilities are covered by the FTT. The company could face margin calls on its loans if the FTT falls much below $22. On the other hand, Ellison could have simply chosen $22 for her buyout offer, since that’s where the token was trading around the time of her tweet.

Regardless, Zhao seems to believe that the risk of holding FTT now outweighs the potential benefits. Whether Zhao intended it or not, his actions are seen by Bankman-Fried and the broader crypto community as Binance kicking FTX while it is offline. Whether or not these two crypto whales can put aside their differences and find a resolution to their current feud will likely have a significant impact on the crypto space in the future.

A crypto cold war

If Bankman-Fried and Zhao cannot resolve their differences quickly, it could result in a long-term conflict between two of the largest crypto exchanges.

Zhao made it clear in his initial announcement that he wants to eliminate Binance’s FTT exposure in a way that “minimizes the impact on the market.” If he truly has no ulterior motives for his move, it would make sense to accept Ellison’s offer to buy out his FTT position for $22 per token. Whether or not Zhao decides to sell FTT over-the-counter rather than directly to the market will provide a good indication of his true intentions.

However, because the ball is in Zhao’s court, he is under no obligation to accept the most favorable outcome for Alameda and FTX. From the start, Binance has undoubtedly been in a stronger position: the exchange has the most liquid crypto markets in the world and the most users. Despite past controversies, Zhao’s public perception is much better than Bankman-Fried’s today. Recent discussions surrounding crypto regulation, including poor performance in a Bankless debate with ShapeShift CEO Erik Voorhees, have influenced the image of the FTX CEO.

If Zhao decided to sell Binance’s FTT on the market, it would likely cause some short-term volatility and force FTX or Alameda to buy back the amount to support the token’s price. However, with current information it seems unlikely that this in itself would cause serious harm. A bigger concern for FTX is the market’s perception of such an event. If enough FTT holders and FTX customers lose faith in the exchange and its token, it could trigger a bank run, which could lead to a much more dire situation.

However, what FTX and its affiliates have that Binance lacks are government and regulatory connections. Bankman-Fried has a much better relationship with regulators and US government officials than Binance. He has previously provided testimony before Congress and led crypto regulatory efforts in Washington, DC. The FTX CEO has also portrayed himself as a quirky altruist who plans to donate the huge amount of money most of his wealth goes to charities. This image has played well with the wealthy elites, earning him a spot on the covers of several magazines and even an audience with the well-connected Bill Clinton and Tony Blair at FTX’s crypto conference in the Bahamas earlier this year.

Conversely, Binance has struggled with regulators in the US and abroad until recently. Throughout 2021, the company had to delist products from its exchanges in several jurisdictions due to violations of local regulations. In Malaysia, the government even ordered a total ban on Binance, ordering the exchange to disable the website in the country. Elsewhere, the US Department of Justice has requested documents from Zhao and other Binance executives regarding the exchange’s anti-money laundering controls and communications on compliance issues. Earlier this year, a Reuters report claimed that Binance had more than $2.35 billion worth of criminal funds processed through its exchange between 2017 and 2021.

While Zhao may have the upper hand at this point, Bankman-Fried’s connections could turn the tables if the current feud develops into a full-blown conflict. While both parties have expressed a desire to work together, it is not yet clear whether they will be able to put aside their differences for the sake of the broader crypto ecosystem.

Editor‘s note: An earlier version of this article incorrectly stated that Alameda Research had $7.4 billion in liabilities. The piece was updated to note that the company actually had $8 billion in liabilities, according to CoinDeskThe November 2 report.

Disclosure: At the time this piece was written, the author owned FTT and several other cryptocurrencies.