During the Great Recession, the phrase “too big to fail” was applied to large banks whose implosion posed a systemic risk. It has been interpreted that their collapse could trigger such a deadly spiral that it was more worthwhile to intervene and bail them out with public money than to let them succumb to the mismanagement of managers who took excessive risks. Following the bankruptcy of cryptocurrency buying and selling platform FTX, this universe faces a similar scenario. On a much smaller scale, but with the ability to wreak havoc that millions of retail investors would not be immune to.
Binance is now the too big to fail in the industry, at least to continue to exist as we know it so far. For this reason, in such an interconnected ecosystem that is prone to contagion if poorly communicated, any news that sows doubts about its viability sets off alarm bells. Unlike the post-Lehman Brothers world, where the idea that financial institutions should hold their own sails was banned and government intervention was enshrined, no help is expected here in the event of a disaster.
Red lights flashed this week when it emerged Binance customers had withdrawn $1.14 billion in a single day on Tuesday. Its founder, Canadian Changpeng Zhao, acknowledged the outflow of funds, but was quick to clarify that while the amount was particularly large, it wasn’t even among the five days when most of the money had left its platform. “Some days we have net withdrawals, other days deposits come in. Business as usual for us,” he assures.
CZ, as it’s popularly known, has eight million followers on Twitter, and these days it’s proliferating not only on social networks but also on traditional media to reiterate the idea that Binance will not meet the same fate as FTX. His message is not always successful. “Obtaining licenses is the best way to discredit FUD” [siglas en inglés de Fear, Uncertainty and Doubt, miedo, incertidumbre y duda], he said, sharing the news that his platform just received approval to operate in Guam and American Samoa. In response to that news, someone reminded him that FTX was licensed to operate in multiple markets, but that didn’t prevent its founder Sam Bankman-Fried – who was arrested in the Bahamas this Tuesday at the request of the US – from being charged to have staged fraud on a large scale for misusing their customers’ money.
In this nervous environment, CZ does not hide. He denies rumors and false news about a crisis at his company, makes sure deposits come back and tries to prevent millions of cryptocurrency investors from panicking. However, the calm he exudes from the doorway becomes a little less evident when he is allowed to express himself with the freedom and sincerity of privacy. “Although we expect the next few months to be turbulent, we will get through this challenging time and it will make us stronger,” he wrote in a message to Binance staff.
Knowing the status of Binance accounts and the weapons available to deal with a crisis is not easy. Blockchain analytics firm Nansen this week estimated the net withdrawal of funds from the platform over the past seven days at 3,000 million, but its CEO, Alex Svanevik, qualified that it’s a very small percentage considering it some reserves has been valued at $60,000 million.
One of its biggest competitors, Coinbase, has more transparency obligations since it’s the only one listed on Wall Street. And the news is not good. In the quarter ended September 30, it lost $545 million. And that was before FTX exploded. The company has lost 85% of its value in the stock market since its launch in April 2021: It’s currently worth just over $9,000 million, compared to more than $85,000 million when it started after it was punished by the FTX bust.
crypto winter
The mood in the industry is gloomy. Bitcoin, its main claim to attracting customers, has seen a 75% decline since its all-time high in November 2021. Basim El-Shoura, Vice President of Austrian firm Bitpanda, believes that cryptocurrencies’ bad moment cannot be separated from other assets’ suffering. “The focus is on the crypto winter, but in reality there is a generalized winter. There’s war, high inflation…’, he points to the phone.
The Executive understands that following the fall of FTX, a blanket of doubt is spreading across the crypto world, as has happened to others in the past. “When Lehman went bankrupt, there was distrust over the banking system, in the end we are an ecosystem,” he emphasizes. But he believes there is a need to differentiate. “Everything depends on regulation. We had KPMG among the auditors reviewing our findings so individual investors understand that we are a safe company that is not doing anything questionable with its assets.”
Raúl Marcos, CEO of the company Carbono.com, estimates that bankruptcies and collapses do not change the thesis of the future success of cryptocurrencies. “The case of Celsius, Three Arrows Capital or FTX, companies that have been in the industry but have been traditional continue to appreciate what cryptocurrencies and the ecosystem around them contribute: the need for decentralization, the importance of not trusting third parties no matter how serious they may appear and how valuable the independence they confer is”.
Users can store their cryptocurrencies in cold wallets without an internet connection, thereby avoiding exposure to bankruptcy-prone companies like FTX or Celsius. But there are also risks: if they lose the keys or the device they are kept on, they are left without them. “99% of people who are asked to own cryptocurrencies will end up losing them,” predicts Binance’s Zhao, who, on the other hand, finds it in his pocket that intermediaries continue to be used.
Tip on FTX
The first warning to Bahamian authorities that something was amiss at FTX came from inside the confidant of CEO Sam Bankman-Fried. Executive Ryan Salame, director and president of FTX Digital, alerted regulators on Nov. 9 (four days before the bankruptcy) that client funds “were transferred to Alameda Research to cover their financial losses,” according to an affidavit from the company’s director Regulatory authority, Christina Rolle, referred to the courts. The Alameda fund was founded by Bankman-Fried and its irregular funding with funds from FTX is one of the investigations underway into it. According to Salame, only three people could have made the transfer to Alameda: Bankman-Fried or FTX’s two co-founders, Nishad Singh and Gary Wang. “Such acts can be considered criminal,” Rolle warns in the document. When police received a tip, they were ordered to investigate the matter, which eventually led to Bankman-Fried’s arrest.
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