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

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

Binance Plans to Eliminate FTT Exposure

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

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

On Twitter, Zhao bullied 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, didn’t see it that way. “A competitor is trying to go after us with false rumors. FTX is fine. Assets are fine,” he said claimedexplaining that his exchange was not investing its clients’ assets, that it had processed all withdrawals and 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 equity exit last year. Yesterday, Zhao confirmed that a 22.9 million FTT token transaction, worth $584 million, was just a portion of the exchange’s total FTT holdings. This alone equals 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 company Alameda Research could be in financial trouble, according to a leaked balance sheet from CoinDesk. The document revealed that as of June 30, Alameda had more than $14.6 billion in assets against $8 billion in liabilities. However, since most of the company’s assets consisted of highly illiquid tokens such as FTT, SRM, MAPS, and OXY, doubts arose whether Alameda would be able to pay off its debts.

In addition, spectators such as Dirty Bubble Media supposedly that the FTT token, which is a significant part of both Alameda’s and FTX’s balances, has a highly inflated value. They explain that through a flywheel plan, Alameda and FTX created the illusion of demand, which increased the price of the FTT and enabled both parties to take out large loans against their FTT holdings. However, with Alameda Research appearing to be out of money, as evidenced by its recently leaked balance sheet, the FTT flywheel is coming under strain.

In response to these allegations, Caroline Ellison, CEO of Alameda Research, denied that her trading firm was in such a dire situation. On Twitter, she claimed that the leaked balance sheet was only for a subset of Alameda’s corporate entities, adding that the company had an additional $10 billion in assets.

Besides, Ellison responded on 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 the FTT to fall below $22? Many have speculated that this is because a large portion of Alameda’s liabilities are covered by FTT. The company could face margin calls on its borrowings if the FTT falls well below $22. On the other hand, Ellison could have just picked $22 for her buyout offer since the token was trading for it near the time of her tweet.

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

A crypto cold war

If Bankman-Fried and Zhao can’t resolve their differences quickly, it could result in a long-running 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 really has no ulterior motive for his move, it would make sense to accept Ellison’s offer to buy out his FTT position at $22 per token. Whether or not Zhao decides to sell FTT over-the-counter instead of directly to the market will give a good indication of his true intentions.

However, since the ball is well and truly 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, the public perception of Zhao is much better than Bankman-Fried’s today. Recent discussions of crypto regulation, including a poor performance in one Bankless debate with ShapeShift CEO Erik Voorhees, have weighed in on the image of the FTX CEO.

If Zhao were to decide to sell Binance’s FTT on the market, it would likely create some short-term volatility and force FTX or Alameda to buy back the amount to boost the token’s price. However, with the current information available, it seems unlikely that this alone would cause serious damage. 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 cause a bank run, resulting in a much more dire situation.

What FTX and its affiliates do have that Binance lacks are government and regulatory connections. Bankman-Fried has a much better relationship with regulators and US government officials than Binance, who previously testified before Congress and led the drafting of crypto regulation in Washington, DC. The CEO of FTX has also portrayed himself as a headstrong altruist who plans to give the vast bulk of his wealth to charitable causes. This image has played well with wealthy elites, earning him a spot on several magazine covers and even an audience with the well-connected Bill Clinton and Tony Blair at FTX’s Bahamas-based crypto conference earlier this year.

Conversely, until recently, Binance has struggled with regulators in the US and abroad. Throughout 2021, the company had to delist products in several jurisdictions because it violated local regulations. In Malaysia, the government has even ordered a total ban on Binance, ordering the exchange to shut down its website in the country. Elsewhere, the US Department of Justice 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 in criminal funds processed through the exchange between 2017 and 2021.

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

Editor‘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 was in fact $8 billion in liabilities, according to CoinDeskthe November 2 report.

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