Binance-FTX case: Changpeng Zhao, prince of a crumbling crypto kingdom

It’s not that unusual these days to see powerful corporations rocked by a simple tweet. We knew this power in our hands of eccentric Elon Musk. Changpeng Zhao, alias “CZ”, has it too. On November 6, the head of the cryptocurrency exchange platform Binance, the world’s largest, announces on the social network to “liquidate” its FTT tokens issued by its competitor FTX. The consequences are not long in coming: many Internet users immediately imitate and sell their FTTs. The cryptocurrency drops from $22 to just $4 in a matter of hours. FTX, whose valuation approached $32 billion at the start of the year, quickly found itself strapped for cash and called for help. On Wednesday, November 9, Binance, which was once positioned to acquire its 5 million-user competitor, ruled it out. FTX is panicking for capital, but the prospect of outright bankruptcy has never seemed closer.

Here is the case in broad outline. Since then it has set the entire crypto world on fire and blood. Its star value, bitcoin, is around $17,000, the lowest in two years. Binance chief Changpeng Zhao didn’t want that to happen, he claimed. It is allowed to think differently.

This reversal comes after months of conflict between CZ and FTX boss Sam Bankman-Fried, a rising star in the middle. The two disagreed on the issue of regulating the sector, especially in the United States, where CZ has already suffered some setbacks. It is very likely that Bankman-Fried tried to push the US government to impose stricter regulations on cryptocurrency exchanges, to the detriment of Binance. Which can justify this sentence of Changpeng Zhao’s famous tweet sent on November 6: “We will not support people who put pressure on other players in the sector behind their backs.” It would also explain why CZ didn’t hesitate to FTX as easily as a downed Roman Emperor in the arena. Sam Bankman-Fried, he lost 94% of his personal wealth in a matter of hours Bloomberg. An almost unprecedented collapse in the business world. “I messed up and I should have done better” he in turn posted on Twitter this Thursday afternoon.

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CZ, the conqueror

Zhao, 45, however, does not have the profile of a bloodthirsty autocrat. The baby-faced entrepreneur, respected in the crypto community, has repeatedly assured that he wants to pass on his entire personal fortune, which is currently estimated at more than $17 billion. He often communicates about his simple way of life, holds conferences in shorts and flip-flops, cultivates the image of a simple computer enthusiast who played the right card by betting in 2013 on a bitcoin that few believed in. The Canadian of Chinese descent – his family fled the country when he was a teenager – is nevertheless a strategist of extraordinary ambition. Binance has climbed to #1 in just eight months and controls more than half of the cryptocurrency trading on the planet. According to a survey by ReutersCZ has already told its teams that it wants to “take control of the entire market [des cryptomonnaies]” and eventually become “bigger than Google”.

To do this, the Canadian skillfully advances his pawns. It does not skimp on advertising in emerging markets, as evidenced by its soccer sponsorship of the African Cup of Nations. CZ also invests in the traditional economy. Recently, the entrepreneur saved Twitter up to $500 million, its new boss, Elon Musk, has repeatedly shown his desire to make the social network one of the next giants of Web3 and cryptocurrency payments.

Binance has also established more than 70 entities across the globe to fuel its growth. These allow it to juggle between different legislations in place, not always favorable to cryptocurrencies. Also according to the American press agency, CZ has methodically avoided investigations in the United States and the United Kingdom related to money laundering. The FTX deal is a clear illustration of this general lack of regulation that Binance benefits from. “Imagine for a moment if this deal with FTX had happened in the mainstream economy. It’s like the BNP causing a bank execution, a massive deposit withdrawal, in Société Générale to weaken it…”, comments Vincent Boy, analyst at IG France. On the other hand, CZ knows how to skillfully position itself in Europe wanting to end this Wild West. Binance has announced an investment of $100 million in France while gaining mandatory Digital Asset Service Provider (DASP) status, Zhao also said the new standards brought by EU MiCA regulations to the market were “fantastic” and should be “copied in around the world”.

Changpeng Zhao, the sage

FTX, a recent challenger, had a clear goal to compete with Binance. The platform was in full expansion in the world, especially thanks to some big acquisitions (BlockFI, Voyager Digital…) after the recent cooling in the market, caused by the geopolitical context, inflation and the end of Covid. “The enormous expansion of cryptocurrencies during the health crisis was fueled by excess liquidity in the economy. Therefore, since the beginning of the year, we have witnessed the elimination of less solid projects”, analyzes Nathalie Janson, professor of economics at NEOMA Business School. .

Sam Bankman-Fried and FTX didn’t seem to be among those bad apples. On the contrary, the thirty-year-old was positioned as one of the driving forces behind the “structuring” of the sector around these most powerful players. A “saviour”, even, developing a strong reputation in an environment with few prominent figures at the moment, apart from Satoshi Nakamoto, the inventor of bitcoin, a fictitious personality who has not given any sign of life for almost 10 years. Vitalik Butherin, creator of ethereum with an atypical profile, genius inventor more than a real businessman. “Bankman-Fried’s trading platform was considered one of the most efficient and intuitive by professionals,” says Nathalie Janson. Had this shadow become too big for Binance and CZ? Possible. The market leader had withdrawn its stake in FTX. The split was recorded between two strong players, with the American Coinbase, of this crypto exchange market.

But this was confirmed at the beginning of the month, when an article from the site CoinDesk revealed FTX’s Achilles heel: its heavy reliance on cryptocurrency investment Alameda Research, also founded by Sam Bankman-Fried and backed by FTT. Changpeng Zhao then had considerable leverage, which he immediately activated by selling his FTTs. The sequel is known. The dominoes fell one by one. The situation reminds you in many ways the first cryptocrash that happened in the spring, caused by the fall of a supposedly “stable” asset, TerraUSD, due to the weakness of its backup asset, Luna. Both were owned by the same South Korean contractor, Do Kwon. CZ, like a good prince, lectured on Twitter this Wednesday: “Never use a token you created as collateral. Have a big backup.”

The coming weeks, however, look cloudier for crypto players, including Binance. “There is a high risk of seeing the valuation of cryptocurrencies continue to fall in the coming months, while, on the other hand, blockchain technology is taking root in our economic world”, underlines Vincent Boy. Binance’s boss isn’t happy either. “User confidence has been badly shaken. Regulators will scrutinize crypto exchanges even more carefully. Licenses for cryptocurrency activities around the world will be harder to get. And people now think we are the biggest and they will attack us more,” he commented. to his employees in a letter made public this week. Seated well on his throne and with hundreds of thousands of small investors at risk of losing their capital, CZ laconically tweeted: “Sad day. I would have tried but…”, ending with a smile in tears. Crocodiles?


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