FTX, the #2 crypto exchange, is experiencing a bank run. With rumors of a debt crisis and a shocking announcement from its #1 competitor, Binance, about $1b has bled out from the platform in the last few days. What’s happening?

Our cast is predominantly made up of two characters, with pretty much everyone else being peripheral to the situation.

• Sam Bankman-Fried (SBF): the CEO of FTX, an ‘effective altruist’ who has spent much of the last few years getting cozy with lobbyists and politicians in the US
• Chanpeng Zhao (CZ), speculated to be the richest man in crypto, the founder and CEO of Binance

SBF has been under fire for a few weeks now, after making some unpopular statements about crypto regulation. He went on to debate Erik Voorhees, a crypto advocate/ entrepreneur, where public sentiment shifted around the CEO.

Almost simultaneously, the balance sheet of FTX sister company, Alameda Research was leaked. SBF reportedly owns about 90% of this proprietary trading confirm, and the two firms work very closely together. We don’t know the extent of their arrangement, but as of now it’s looking like there was meaningful co-mingling of funds, not a great look for FTX. And the balance sheet leak took things from bad to worse.

The glaring problem? Over $2b of Alameda’s borrower collateral is denominated in $FTT, a crypto token that FTX launched to raise funds for the exchange. FTX gave a huge chunk of that token to Alameda, lenders allowed Alameda to use it as collateral.

You can read more about the details of the balance sheet here:

But Alameda and FTX more or less ignored the fact that the token is highly illiquid. So, when Alameda and FTX experienced liquidity crunches over the last few days, and the lenders came to collect, they weren’t able to sell the token to repay debts. A lot hinged on the price of the exchange token.

Meanwhile, rumors of insolvency for the customer deposits of the exchange itself kicked off.

That’s where CZ and Binance came in. When FTX was a young upstart, Binance actually incubated the exchange; they were one of the earliest investors. But after the leaking of the balance sheet, Binance made the public decision to exit their holding of $2.1b in $FTT.

With CZ ready to market dump a couple billion in FTT tokens, the situation at Alameda and FTX went from bad to worse. The bank run rumors kicked into high gear, which created even more problems for the exchange. Now they had to service loans against FTT that were about to go bust, as well as shovel stablecoins over to their exchange to pay out customers. There was plenty of evidence on-chain showing the desperation, with Alameda exiting positions with heavy losses seemingly to cover customer deposit withdrawals.

​Last night, it appeared that FTX stopped servicing customer deposits. The liquidity crisis turned into apparent insolvency:

Then, this morning, utter chaos on social media, with complete silence from the FTX team. And then, the bombshell: Binance and CZ had decided to acquire FTX.

And depending on how distressed FTX is, the acquisition price might be as low as $1. A mighty fall for SBF, a huge political donor, one of the worlds’ youngest billionaires (not anymore), just weeks after he appeared on the cover of Fortune. But the news was absolutely shocking, especially since FTX was seen as an impermeable fortress, the new elite of crypto. Thankfully, deposits should be made whole, so consumers are protected from the fallout.

​There are still many, many questions to be answered

• Will the acquisition go through?
• What will happen to the FTT token?
• What will become of FTX?
• How will the government respond to industry consolidation?
• How will this massive shakeup impact crypto markets?
• How will this affect the bailout of Voyager?

All things to pay attention to in coming days, and it’s worth paying attention to. Stay safe out there.