By Asim Arshad, Head of Crypto & Blockchain Team at Mackrell.Solicitors

Although the crypto market may have been hoping for a smooth and uneventful end to 2022 given the tumultuous year so far, such hopes appear to be far from reality as the crypto market wrestles with the near-collapse of a titan in the crypto exchange world, FTX.

Of the many questions being asked, the common ones are how did we get here? And what happens next?

As a very brief summary of the historic relationship between these two titans in the crypto industry and to provide some context to the current situation Binance was an early investor in FTX. Over time FTX became arguably the second largest exchange after Binance and a rival/competitor.

Binance opted to sell its stake in FTX and as part of said buyout agreed to take around $2bn in “FTT” which is FTX’s own token.

Recent tweets from CZ, the now iconic front man of Binance, appeared to allege that Sam Bankman-Fried, the CEO of FTX (also known as SBF), had been lobbying with regulators in a way that would be antagonistic to the interests of Binance. CZ then publicly announced that Binance would be exiting their holdings of FTT.

The other notable participant in this story is Alameda Research, which is a trading firm started by SBF and appear to be a market maker on FTX. Approximately half of their assets are in FTT tokens. Alameda and FTX have a close but undefined relationship, but it appears likely that Alameda hold and trade FTX customer deposits.

The news of a potential $2 billion sell and the consequential effect that this would have on the price of FTT caused a frenzy of panic selling from FTT holders causing its value to plummet, and FTX users withdrawing funds from FTX fearful of a collapse as we have seen with Celsius and Blockfi earlier this year. The result- circa $1 billion of withdrawal requests whilst FTX experiences a drastic crunch in its liquidity.

Earlier today news broke when SBF announced that FTX would be entering a “strategic transaction” with Binance, which appears to be Binance buying FTX.

We ask our Head of Crypto and Blockchain team, Asim Arshad, for his thoughts on the matter as a whole and why Binance would seemingly want to bailout  a struggling rival.

“I think many FTX users will already want to move to Binance and it would be better for Binance if they are able to withdraw and use their funds otherwise substantial funds will be lost/frozen indefinitely which is bad for the crypto market as a whole and means fewer users with accessible crypto using Binance.

Also, considering FTX are one of the most regulated exchanges in that they expanded in multiple oversea markets typically by buying local exchanges which had already obtained a local license, the intent from Binance to buy FTX could also be a very shrewd move allowing Binance in expanding into overseas markets. This is something they have had a particular focus on recently, demonstrated by their recent spate of obtaining regulatory approvals in Cyprus, Kazakhstan, and France to name a few.”

When asked about key takeaway from this story, Asim said “It is yet another sign that consumers keeping crypto on centralised exchanges holds a considerable risk. FTX was seen as one of the biggest and ‘safest’ exchanges a couple of weeks ago, but now withdrawals and transfers by users have been blocked due to liquidity issues.

Also interesting is that FTX US- which is reportedly unaffected-is supposedly a separate entity to FTX international and FTX does not have any legal relationship to FTX US. However, I anticipate there will be increased scrutiny and challenges to this concept of whether they really are separate legal entities. A case could be made that they are the same entity-particularly if their crypto wallets are interlinked which they appear to be.”

When asked whether h would be keeping an eye on any particular developments, Asim said “It will be interesting to see how this ‘strategic transaction’ takes form. We are talking about two of the biggest industry players so I will be keen to see what view competition authorities both here and overseas will take.”

To find out more about Mackrell.Solicitors’ legal services for the cryptoasset industry, please contact Asim Arshad by calling +44 (0) 20 7240 0521 or emailing asim.arshad@mackrell.com

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