Coin Circle Lehman Moment: The top exchange FTX collapsed with a bang, and Coin An announced the termination of the acquisition one day later

A top three cryptocurrency exchange collapsed in just two or three days, which has never happened in history, "a cryptocurrency observer told The Paper. cn

A top three cryptocurrency exchange collapsed in just two or three days, which has never happened in history, "a cryptocurrency observer told The Paper. cn.

On November 9th local time, Zhao Changpeng, founder and CEO of Binance, a cryptocurrency exchange, announced on social media that due to a liquidity crisis faced by competitor FTX, Binance will acquire FTX. This move has attracted the attention of US regulatory agencies and led to a sharp decline in the cryptocurrency market across the board.

However, on November 10th, Coin announced that based on the results of due diligence and news reports of improper handling of customer funds and investigations by US regulatory authorities, the company had decided to abandon its potential acquisition of FTX.

Subsequently, Zhao Changpeng tweeted, 'A sad day, worked hard'.

Previously, Zhao Changpeng stated in a tweet that FTX has a serious liquidity dilemma. In order to protect users, we have signed a non binding letter of intent to fully acquire FTX http://FTX.com And help solve its liquidity crisis. We will conduct a comprehensive Due Diligence in the coming days. On the same day, Sam Bankman Fried, the founder and CEO of FTX, also sent a response stating that he had reached an agreement on strategic transactions with Coin An and was still awaiting due diligence.

Zhao Changpeng tweeted that Coin An will acquire FTX

The "Crash" of a Leading Cryptocurrency Exchange

The cause of the incident can be traced back to a financial document of the FTX "sisters company" Alameda Research. Foreign media Coindesk disclosed the assets of Alameda Research in this financial document on November 2nd local time: as of June 30th, the company has $14.6 billion in assets, most of which are cryptocurrency FTTs issued by FTX.

The report states that the relationship between FTX and Alameda Research is "unusually close". Although both companies operate independent businesses and are giants in their respective industries, out of the latter's $14.6 billion in total assets, $3.66 billion is unlocked FTT and $2.16 billion is FTT collateral; The company's $8 billion debt includes $292 million in locked FTT and over $7.4 billion in loans.

Some foreign media mentioned that the panic in the market began with a tweet by Zhao Changpeng, the founder of Coin An.

One of the tweets released by Zhao Changpeng, founder of Coin An, on November 6th

On November 6th local time, he tweeted that "due to the recently revealed truth, Coin An has decided to liquidate all its own FTTs (which were approximately $530 million at the time)." Since then, the incident has officially "heated up" and FTX has fallen into a liquidity crisis. It is reported that investors' concerns mainly focus on the slow withdrawal of FTX, the leakage of Alameda Research's balance sheet and its dependence on cryptocurrency FTT, as well as the signal that Coin An is about to sell FTT. The nervousness is quickly reflected in the sharp decline in FTT prices. Starting from November 7th local time, FTT prices have continued to decline, with a drop of 84% within a week.

Price fluctuations within one week of FTT. Image from Coinbase

Selling off FTTs by Coin An will definitely exacerbate panic. Because some of the collateral used by the founders of FTX is FTTs. If Coin An sells off FTTs, causing a significant decline in FTTs and insufficient collateral value, there will be risks of exposure and default. The traditional liquidity crisis in the cryptocurrency market is basically solved by spontaneous market liquidation. Therefore, every bear market, there will be the collapse of some large institutions, "said the cryptocurrency observer.

Yu Jianing, Executive Director of the Metaverse Industry Committee of the China Mobile Communications Federation and Co Chairman of the Blockchain Special Committee of the China Communications Industry Association, also believes that the large-scale selling of FTT does to some extent increase the risk of FTX runs. Due to the depreciation of the platform's governance token, holders have to quickly sell their assets to prevent significant economic losses. This will also lead to a further decline in token prices, seriously shaking market confidence in the platform and causing users to actively withdraw to avoid risks. "He said that once a liquidity crisis occurs, it will trigger a chain of panic. If there is no external intervention, The probability of relying on the platform itself to solve the problem in the short term is relatively low.

The founder of Coin An announced the acquisition of FTX and has the right to withdraw from the transaction at any time

On the day before Zhao Changpeng announced that Coin An was about to acquire FTX, FTX founder and young billionaire Bankman Fried posted a tweet stating that FTX's assets were "in good condition" ("FTXisfine. Assetsarefine."), but later deleted the tweet. Foreign media reports suggest that multiple investors have accused the founder of FTX of "blatantly lying" about the asset status of the exchange.

Obviously, FTX is no longer able to cope with this liquidity crisis alone. Finally, after Zhao Changpeng announced his upcoming acquisition of FTX, Bankman Fried expressed on social media on November 9th that he was very grateful to Zhao Changpeng, Coin An, and all FTX supporters, and believed that the acquisition was a user centered development, where users were protected and benefited the entire cryptocurrency industry.

After the announcement of the acquisition, the cryptocurrency market experienced volatility. According to Coinbase, the largest cryptocurrency exchange in the United States, Bitcoin has fallen by 12% and Ethereum by 21% in the past 24 hours; FTX's native token FTT fell 73%.

The decline of various cryptocurrencies over the past 24 hours. Image from Coinbase

A trader cited a tweet by Zhao Changpeng stating that the letter of intent between the two parties is not binding, which is one of the reasons for the turmoil in the cryptocurrency market.

Under the announcement of the upcoming acquisition of FTX, Zhao Changpeng continued to respond by saying, "We are evaluating the situation in real-time.Coin An has the right to withdraw from this transaction at any time.We expect that as the situation develops, FTT will be highly volatile in the coming days

Yu Jianing analyzed to Pengpai News (www.thepaper. cn) that, This acquisition has not been truly confirmed, so it is not possible to predict how the future market trend will fluctuate. After the crisis of one of the world's largest cryptocurrency lending platforms, Celsius Networks, in July this year, FTX also hinted that it would provide financial support or negotiate an acquisition with Celsius, but after reviewing its financial situation, it was decided not to continue. Therefore, before the acquisition case was truly implemented, the market volatility in the cryptocurrency field It is bound to be extremely great He said that if the acquisition cannot be successful, there may even be situations where user assets cannot be redeemed. "This event is no less than the impact and destruction on the industry caused by events such as the bankruptcy of the Mt. Gox exchange and the hacker attack on the early Ethereum project TheDAO. This is an important test for the long-term development of the entire encryption market and the confidence of investment institutions, and there will be more chain reactions in the future

It only took two or three days from the liquidity crisis of FTX to its "sudden collapse" and the need to embrace competitors. There have been no similar examples before. A slightly similar one is the massive theft of Bitcoin on the Mt. Gox exchange in 2014, which led to the announcement of bankruptcy. However, it took almost a month for Mt. Gox to suspend coin withdrawals and declare bankruptcy, "said the cryptocurrency observer mentioned above.

Centralized cryptocurrency exchanges have always had security and opacity issues

After the incident, some people claimed that there was no "liquidity crisis" in the cryptocurrency sector. Yu Jianing stated that liquidity is one of the most important factors in any effective market, and the sudden decline in global assets in 2020, including the encryption sector, was due to the liquidity crisis. The field of encryption also operates within the scope of modern financial rules,There is no such thing as a liquidity crisisThe cases of multiple encryption platforms going bankrupt due to liquidity crisis in 2022 are sufficient to illustrate this point

Yu Jianing believes that the current market environment is poor, with insufficient investor confidence. Many crypto investors choose to focus on selling or withdrawing, which leads to internal liquidity tension and even a liquidity crisis on the platform. If the market continues to experience significant fluctuations in the future, there may be more cases of crypto platforms or institutional thunderstorms. In previous cases, platforms that were able to solve problems were generally relieved of short-term liquidity pressure through external institutions providing financial assistance, cooperating institutions relaxing conditions, and platforms selling equity. However, platforms that could not solve the problem were acquired or declared bankrupt

This acquisition incident demonstrates that the security and opacity of centralized cryptocurrency exchanges remain the biggest issues in the industry. After 10 years of development, the industry has still not been able to handle this issue well, "said virtual currency observers, However, starting from 2020, defi (Decentralized Finance) The trend of decentralization has begun to rise, and decentralized exchanges have gradually begun to rise. However, currently limited by the performance issues of infrastructure such as public chain processing speed, the processing capacity and liquidity of decentralized exchanges are not on par with traditional centralized exchanges. And to use decentralized exchanges, one must first learn to use blockchain wallets, which have a relatively high threshold for use. But in the future, decentralized exchanges will definitely be an important development direction for the industry. On the other hand, it is to avoid the risks of centralized exchanges through strengthening regulatory measures

The imminent collapse of FTX is one of the darkest events in the encryption industry this year, "said Mahin Gupta, founder of the digital wallet infrastructure platform Liminal, who said retail investors have been severely affected by this incident, If the user's funds belong to a centralized exchange or custodian, they may always face the risk of bankruptcy due to factors such as hacker attacks, business losses, counterparty risk, software failures, etc. Therefore, the user may lose money

In fact, the coin security chain has also been questioned by centralization.

In October, Coin An was hacked due to a "cross chain bridge" vulnerability, and Zhao Changpeng tweeted that the affected amount was approximately $100 million. According to foreign media reports, hackers successfully utilized the aforementioned vulnerabilities to "create" 2 million BNB tokens, with a total value of $569 million at the time.

After Coin An was hacked due to a "cross chain bridge" vulnerability, Zhao Changpeng continuously posted tweets

Yu Jianing once told Pengpai News about this incident, "Currently, the subsequent impact of this hacking incident has come to an end, but its derivative questioning of BNBChain's security and centralized operation are the more profound impacts in the future

According to the announcement by Coin An, there were a total of 44 validators distributed in different time zones on the BNB smart chain at that time, of which 26 were active validators. Blockchain is not completely tamperable, as long as most of the verification nodes agree to transaction rollback, records can be changed. "The cryptocurrency observer mentioned above believes that" this is also a questionable point of BNB smart chain, which is that there are too few verification nodes, and most of the verification nodes are controlled by Coin Security. Therefore, in a way, BNB smart chain belongs to a chain controlled by Coin Security and is not decentralized enough

The Conflict and Competitive Relationship between Coin An and FTX Cryptocurrency Exchanges

On November 7th local time, Zhao Changpeng tweeted that the liquidation of FTT by Coin An was only a risk management measure after exiting FTX's equity, drawing lessons from the LUNA crash. In May, the stable currency TerraUSD (hereinafter referred to as UST), which is pegged to the US dollar, originally attempted to maintain supply and demand balance by establishing an arbitrage mechanism with its sister token Terra (i.e. LUNA). However, in the face of redemption and selling, both fell into a "dead cycle" and almost collapsed.

A Twitter user stated in the aforementioned tweet that Zhao Changpeng's attempt to bundle the LUNA incident with the FTT situation was "quite malicious".

In response to the "grudges" and competitive relationship between the two companies, Bankman Fried, in his tweet, emphasized that foreign media reports have been rumored to have conflicts between the two large cryptocurrency exchanges. "However, Bankman has repeatedly stated that they are committed to building a more decentralized global economy while striving to improve industry relations with regulatory agencies

The cryptocurrency watcher said, "The contradiction between these two exchanges should be more complex. Coin An is a native enterprise in the blockchain, and the founder and management team have more blockchain spirit. The founder of FTX was born as a trader, more inclined to traditional financial elites, so it has a close relationship with traditional financial capital." The official website shows that Coin An had a litigation relationship with Sequoia Capital due to financing negotiations. "Jin'an has invested in FTX, but FTX eventually turned to Sequoia Capital and traditional financial capital," said the cryptocurrency watcher.

Regulatory and compliance discussions triggered by the collapse of FTX and acquisition news

FTX is relatively good at compliance and has good relationships with Wall Street and US regulatory authorities. "The cryptocurrency observer mentioned above stated that due to Bankman Fried's background as a trader and his familiarity with the needs of traders and investors, he has" done a good job in developing derivatives and deposit and deposit, "which has gained the favor of many investors. And FTX is free on some currencies, which has also sparked a lot of investor goodwill

Yu Jianing added, FTX is a compliant encryption company with a background in Wall Street, and its team also has a relatively high level of traditional financial expertise and excellent resources. In addition, its ecological incubation projects have also performed well in the past, coupled with FTX's frequent philanthropy and massive investment in hot sports events, which has caused some market breaking phenomena. Under the influence of these many factors, the market has a high recognition of FTX and its founder SBF

The founder of FTX has publicly expressed support for regulation, believing that the US Commodity Futures Trading Commission (CFTC) needs to directly supervise and establish rules for any cryptocurrency classified as a digital commodity.

The founder of FTX has indeed supported government regulation of the industry for a long time, "said Yu Jianing, From the current regulatory trends, the blockchain industry will face more and more compliance challenges in the future. However, in any case, compliance development is a necessary prerequisite. The global crypto asset field will move towards mainstream, compliant, and institutionalized development, which is an irreversible trend. In the early stages of crypto asset development, global investors are mainly retail investors. With the gradual maturity of the market system, the proportion of institutional investors has been increasing in the past two years Has become an important participant in this market. The development of compliance can greatly promote the acceptance of crypto assets in mainstream markets and drive more traditional investors to pay attention to the crypto asset industry

Anti monopoly experts say that US antitrust enforcement agencies may insist on investigating this merger. Seth Bloom, an antitrust expert at Bloom Strategic Council, said in an interview with foreign media that "if US antitrust enforcement agencies believe that this has had an adverse impact on US clients, they can file a lawsuit and demand a halt to transactions." According to foreign media on November 4th, Coin An has been investigated by the US Department of Justice for possible violations of anti money laundering regulations, This is one of a series of investigations conducted this year on the issue of financial regulatory compliance by Coin An.

According to foreign media reports on October 9th local time, the US Securities and Exchange Commission (SEC) and CFTC are reviewing the relationship between FTX and FTX.us.

Previously, Bankman Fried emphasized on social media that FTX.us and Binance. us, as two independent companies, have not been affected by the acquisition. The withdrawal on the FTX.us platform has been launched and fully supports 1:1 withdrawal, which is running normally

It is worth noting that according to the aforementioned report, the SEC's investigation began several months ago, mainly targeting FTX.us and its encrypted loan activities, including customer fund processing and loan issues. The US financial regulatory authorities are further investigating the relationship between FTX and Alameda Research.