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FTX fire sale to Binance threatens to rock crypto investor confidence

Crypto exchange Binance’s conditional agreement to buy rival FTX is the latest upheaval in the battered crypto sector and a threat to venture investors that have placed bets on the industry.

Crypto exchange Binance‘s conditional agreement to buy rival FTX is the latest upheaval in the battered crypto sector and a threat to venture investors that have placed bets on the industry and the technology that powers it.

“This afternoon, FTX asked for our help. There is a significant liquidity crunch,” Binance CEO Changpeng Zhao wrote on Twitter on Tuesday, adding that Binance had signed a letter of intent to acquire its rival.

The price of bitcoin has fallen more than 70% over the past year. Prominent crypto companies—including Celsius and Voyager Digital—collapsed in a string of bankruptcies over the summer.

Still, VC investment in crypto has remained strong. Companies took in $23.8 billion from investors in the first three quarters of 2022, or 89% of the amount raised in 2021, according to PitchBook data.

The deal, which would combine two of the largest crypto exchanges, is still being negotiated and may not be completed. The purchase price would likely come at a steep discount to the $32 billion valuation that FTX received in late January, according to PitchBook analyst Robert Le. The US arms of FTX and Binance aren’t involved in the transaction.

“If the deal does go through, it’s going to scare a lot of LPs and VCs away from crypto,” Le said. “FTX was viewed as a blue-chip exchange.”

In a letter published in tech journalist Eric Newcomer’s newsletter, FTX CEO Sam Bankman-Fried apologized to investors, writing: “I’m sorry I didn’t do better, and am going to do what I can to protect customer assets, and your investment.”

Binance was an early investor in FTX. The company has also received backing from Temasek, Paradigm, the Ontario Teachers’ Pension Plan, SoftBank and Tiger Global.

News over the weekend that Binance would sell its holdings of FTT, FTX’s digital token, prompted concerns over FTX’s financial health. Users have since faced delays in withdrawing assets.

The decision to sell is a reversal for Bankman-Fried, who has until now been on the other side of the crypto crash. Earlier this year, Bankman-Fried’s trading firm Alameda Research extended $500 million in credit to Voyager Digital. Then in late September, FTX US won a bid to buy the struggling quantitative trading firm out of bankruptcy for $1.3 billion. FTX’s venture arm has also remained a prominent investor through crypto’s latest winter, leading a $300 million round into Mysten Labs in September.

The fire sale of FTX comes at a time when the crypto industry, including Bankman-Fried, has been courting lawmakers for industry-friendly crypto regulation. Some have argued that the ongoing lack of regulation has encouraged irresponsible behavior in the sector.

“Without proper regulatory clarity, there’s actually kind of a financial incentive for people to flout the rules,” Andreessen Horowitz general partner Chris Dixon said last month at the TechCrunch Disrupt conference in San Francisco.

Featured image of Binance CEO Changpeng Zhao by Antonio Masiello/Getty Images

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