Inside the Frenzied Texts Exchanged by Crypto Executives During the FTX Collapse
The day before struggling cryptocurrency exchange FTX filed for bankruptcy, Changpeng Zhao, the chief executive of rival exchange Binance, sent an alarmed text message to FTX founder Sam Bankman-Fried.
Mr. Zhao feared that Mr. Bankman-Fried was orchestrating crypto transactions that could plunge the industry into a meltdown. “Stop now, cause no more damage,” Mr. Zhao wrote during a panel chat with Mr. Bankman-Fried and other crypto executives on Nov. 10. “The more damage you do now, the longer you will spend in jail.”
FTX and its sister hedge fund, Alameda Research, had just collapsed after a run on deposits exposed an $8 billion hole in the exchange’s accounts. The implosion sparked a crypto crisis, as FTX-linked companies were on the verge of bankruptcy, putting the future of the entire industry in question.
The series of about a dozen group texts between Mr. Zhao and Mr. Bankman-Fried on Nov. 10, which were obtained by The New York Times, show that top crypto executives feared the situation could get worse. further aggravates. Their frantic communications offer a glimpse into how business is done behind the scenes in the industry, with at least three senior executives from rival companies exchanging messages in a group on the encrypted messaging app Signal.
The texts also show that industry executives were acutely aware that the actions of a single company or fluctuations in the value of a virtual currency could destabilize the entire industry. The exchanges became increasingly tense as Mr. Bankman-Fried and Mr. Zhao traded barbs.
Earlier in the week, Mr Zhao had agreed to buy FTX and save the exchange, before pulling out of the deal. In the November 10 texts, he seemed certain that FTX would not survive and feared that this would bring the rest of the industry down with it. During a crypto crash in May, the value of two coins plummeted, triggering an industry-wide meltdown and forcing several high-profile companies into bankruptcy.
In the Nov. 10 texts, Mr. Zhao specifically accused Mr. Bankman-Fried of using his hedge fund to drive down the price of Tether, a so-called stablecoin whose price is designed to stay at $1.
Tether, which is issued by a company of the same name, is a central part of crypto trading around the world and is commonly used by digital asset enthusiasts to transact. Industry insiders have long feared that if the price of Tether drops, it would cause a domino effect that could bring the industry to its knees. (Tether ultimately didn’t lose its $1 peg.)
A Binance spokeswoman declined to comment on the text exchanges. In a statement, Mr Bankman-Fried, 30, said Mr Zhao’s claims were “absurd”.
“Transactions of this size would not have a significant impact on Tether’s prices, and to my knowledge, neither I nor Alameda have ever attempted to intentionally unseat Tether or any other stablecoin,” he said. declared. “I’ve made a number of mistakes over the past year, but this is not one of them.”
A Tether spokeswoman said in a statement that the company had “demonstrated resilience in the face of attacks.” She added that FTX’s actions “do not reflect the ethos and commitment of an entire industry.”
FTX, a marketplace where people could buy and sell digital currencies, crashed early last month as customers rushed to withdraw their deposits, in part in response to Mr Zhao’s tweets questioning the business finance. FTX quickly fell back, triggering investigations by the Justice Department and the Securities and Exchange Commission into whether the crypto exchange broke the law by using client funds to support Alameda.
The Justice Department is also investigating whether Mr. Bankman-Fried engaged in market manipulation in the spring by making trades that contributed to the failure of two top cryptocurrencies.
For years, critics of the crypto industry have said that Tether could also be vulnerable to a meltdown. Tether has long claimed that its stablecoins are backed by cash and other traditional assets, and that in the event of a crisis, all of its customers could exchange their coins for the equivalent dollar amount. But regulators have previously accused Tether of lying about its reserve status, casting doubts on the coin’s reliability.
In one of the November 10 messages to the group chat, Zhao pointed to a $250,000 Alameda swap that he said was designed to destabilize Tether. The trade was visible on the blockchain, a public ledger of cryptocurrency transactions that anyone can see.
In response to Mr. Zhao’s accusations, Mr. Bankman-Fried looked puzzled. “Eh?” he said. “What do I do to stablecoins?”
“Are you pretending that you think $250,000 of USDT trading was kicking it out?” he added, using a common shorthand for Tether currency.
Mr. Zhao replied that he did not think a trade of this size would succeed in destroying Tether, but that it could still cause problems.
“My honest advice: stop doing everything,” Mr Zhao said. “Put on a costume, go back to DC and start answering questions.”
“Thanks for the advice!” Mr. Bankman-Fried fired back.
Emily Flitter contributed report.