Binance and FTX Face Off—But Which Crypto Exchange Will Come Out On Top?

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

Binance Plans to Clear FTT Exposure

Conflict is brewing between two of crypto’s biggest whales.

Binance founder and CEO Changpeng “CZ” Zhao revealed Sunday his company would liquidate its exposure to FTX’s FTT token, received as part of Binance’s exit from FTX equity 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. However, FTX CEO Sam Bankman-Fried didn’t see it that way. “A competitor is trying to go after us with false rumors. FTX is fine. Assets are fine,” he asserted, explaining his exchange didn’t invest its clients’ assets, that it had been processing all withdrawals, and that it would continue to do so. 

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

There are several possible reasons why Zhao decided to cut Binance’s FTT exposure. Most prominent is the recent revelation that FTX-affiliated trading firm Alameda Research could be facing financial difficulty, per a leaked balance sheet from CoinDesk. The document showed that as of June 30, Alameda held more than $14.6 billion in assets against $8 billion in liabilities. However, as most of the firm’s assets consisted of highly-illiquid tokens such as FTT, SRM, MAPS, and OXY, it raised doubts as to whether Alameda could pay off its debts. 

Additionally, onlookers such as Dirty Bubble Media have alleged that the FTT token, which makes up a sizable chunk of both Alameda’s and FTX’s balance sheets, has a highly inflated value. They explain that using a flywheel scheme, Alameda and FTX have created the illusion of demand, pumping up FTT’s price and allowing both parties to take out large loans against their FTT holdings. However, now that Alameda Research appears to have run out of cash, evidenced by the recently-leaked balance sheet, the FTT flywheel is coming under pressure. 

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

Additionally, Ellison responded to Zhao’s intention to sell Binance’s FTT exposure by offering to buy all his company’s tokens at $22 apiece. This begs the question: Why doesn’t Alameda want FTT to fall below $22? Many have speculated that it’s because a good chunk of Alameda’s liabilities is collateralized against FTT. The firm may start to face margin calls on its loans if FTT drops much below $22. On the other hand, Ellison could have simply picked $22 for her buyout offer because it’s what the token was trading for near the time of her tweet. 

Regardless, Zhao seems to believe that the risk of holding FTT now outweighs the potential rewards. Whether Zhao intended it to or not, his actions have been perceived by Bankman-Fried and the broader crypto community as Binance kicking FTX while it’s down. Whether or not these two crypto whales can put their differences aside and find a resolution to their current feud will likely impact the crypto space significantly going forward. 

A Crypto Cold War

If Bankman-Fried and Zhao cannot resolve their differences soon, it could result in a drawn-out conflict between two of crypto’s biggest exchanges. 

Zhao made it clear in his initial announcement that he wants to eliminate Binance’s FTT exposure in a way that “minimizes market impact.” If he truly has no ulterior motive 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 instead of directly onto the market will give a good indication of his true intentions. 

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

If Zhao did decide to market sell Binance’s FTT, it would likely cause some short-term volatility and force FTX or Alameda to repurchase the amount to shore up the token’s price. However, with the current information at hand, it appears unlikely that this on its own would inflict 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. 

However, what FTX and its connected entities do have that Binance lacks is governmental and regulatory connections. Bankman-Fried has a much better relationship with regulators and U.S. government officials than Binance, previously providing testimony before Congress and leading efforts to draft crypto regulation in Washington, D.C. The FTX CEO has also painted himself as a quirky altruist who plans to donate the vast majority of his wealth to charitable causes. This image has played well with rich 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, Binance has struggled with regulators in the U.S. and abroad until recently. Throughout 2021, the firm had to remove products from its exchange in several jurisdictions when it fell foul of local regulations. In Malaysia, the government even ordered a total Binance ban, telling the exchange to disable its website in the country. Elsewhere, the U.S. Department of Justice requested documents from Zhao and other Binance executives related to the exchange’s anti-money laundering checks and communications handling compliance issues. Earlier this year, a Reuters report alleged Binance had allowed more than $2.35 billion worth of criminal funds to process through its exchange between 2017 and 2021. 

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

Editor’s note: A previous version of this article incorrectly stated that Alameda Research had $7.4 billion in liabilities. The piece has been updated to note that the firm in fact had $8 billion in liabilities, per CoinDesk’s November 2 report. 

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