From the joint statements on Twitter this week from Binance CEO Chengpang Zhao (“CZ”) and FTX CEO Sam Bankman-Fried (“SBF”), it seems clear that FTX has serious solvency problems — so dire that few in the market are willing to save it. As a result, FTX is turning to CZ as a prospective buyer.
After CZ exposed FTX’s problems earlier in the week by announcing his plan to dump $500 million of its token (FTT) on the market, the companies said Tuesday that they had entered into a non-binding agreement for Binance to purchase FTX. It’s a tentative deal that means Binance can withdraw at any time without facing consequences, and I personally believe it is very unlikely the acquisition will ultimately be finalized.
While SBF is the sixth-largest individual political contributor in the United States — he gave a total of $39.8 million to the Democratic Party over the past year — it’s worth noting that the cash didn’t get FTX.com a license to operate in the U.S. Owning FTX wouldn’t gain Binance any access to the market beyond what it already enjoys.
From a market share and platform standpoint, FTX does not offer any unique value to Binance (as a company like Twitter might). For all the business units that FTX holds, Binance holds similar subsidiaries of equal or even greater quality. And Binance will naturally win FTX’s clientele in the event that FTX fails, regardless of whether they make any deal.
The non-binding agreement includes a due diligence period, which gives SBF a bit of breathing room to find other buyers on Wall Street. But the odds of that happening look increasingly slim with Binance involved, because prospective purchasers would be forced to keep the company afloat despite constant poking by CZ.
The reality is that FTX is already practically dead. Its FTT token is trading below $4, down roughly 80 percent in just 24 hours. The company’s branding is beyond repair, and it will be exceedingly difficult to regain consumers’ trust.
Yet, with that being said, it isn’t necessarily a bad thing if the deal doesn’t go through.
Why is that? The answer is that competition in the industry will decline significantly if the companies merge. It would mean an end to FTX’s entire ecosystem.
As a result of FTX’s collapse, there are a few developments we might expect to see in the months and years ahead.
- Exchanges will enter a consolidation phase. With FTX near death, Binance’s leading position is even more solidified. It will be hard to contest Binance’s leading status, and it’s likely that many small exchanges will fail due to the difficulty of gaining users’ trust. The exchange market is going to become more “oligopolistic” as a result.
- There will be new opportunities for decentralized exchanges and lending. After observing three major insolvency events this year, including Luna, Three Arrows Capital, and Alameda Research, the centralized lending business has been further disproven, and people’s trust and demand for “decentralized lending” will further increase, thus ushering in long-term opportunities and innovation for decentralized finance (DeFi). This will lead to the disappearance of most centralised lending businesses.
- Regulation will be strengthened. Countries will have more comprehensive and detailed regulations in terms of regulatory acts, financial licensing, and investor protection, and will focus on strengthening the regulation of centralized exchanges and DeFi, with 2023 being the first year of regulation.
- Cryptocurrency will have more guardrails. The industry will bid farewell to the era of barbaric unregulated growth, and asset management institutions in the industry will generally implement a set of strict risk control systems and complete audits to keep their companies running under a healthy, transparent and open balance sheet. They’ll be more active in seeking compliance licenses and the overall industry will develop in a more benign direction.
- Business mergers and acquisitions will be more cautious. Previously, FTX’s mergers and acquisitions “saved” many companies that were on the verge of bankruptcy due to opaque balance sheets, but these bold moves did not empower their core business, and in turn, to some extent, led to its tightening of cash flow. After this crisis, the leading players in the industry will be more rational and prudent in their mergers and acquisitions, which will allow the good money in the industry to drive out the bad and help build a further regulated environment for development.
Hopefully, all of this will result in the next “crypto summer” coming very soon.
Gracy Chen is the managing director of Bitget, a cryptocurrency exchange. She was previously an executive at XRSPACE, a VR technology company, and also worked for Phoenix TV, one of the largest media conglomerates in China, as an anchor and producer for its technology and finance channel. She graduated from the National University of Singapore and is pursuing an MBA at the Massachusetts Institute of Technology.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are theauthor’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.