WASHINGTON/LONDON, Nov 8 (Reuters) – Crypto giant Binance signed a non-binding deal to buy rival FTX’s non-U.S. unit, FTX.com, to help cover a “liquidity crisis” at the cryptocurrency exchange, the companies said on Tuesday, in a surprise move that raised new concerns about the risk investors face in the volatile crypto market.
Binance CEO Changpeng Zhao said in a tweet that FTX, run by billionaire Sam Bankman-Fried, had “asked for our help” after “a significant liquidity crunch.”
He said Binance, the world’s largest crypto exchange, will conduct due diligence in the coming days as the next step toward an acquisition of FTX.com. The US operations of Binance and FTX are not part of the deal, Bankman-Fried said in a separate tweet.
“It’s been an open secret for a while now that FTX and Binance were in existential competition; the only surprise today is that things have escalated so quickly to an apparent conclusion,” said Joseph Edwards, investment advisor at Securitize Capital. “The move should provide relief to consumers in the short term, but creates questions in the long run.”
The deal is the latest bailout in the cryptocurrency world this year, as investors pulled out of riskier assets amid rising interest rates. The cryptocurrency market has fallen by about two-thirds from its peak to $1.07 trillion.
It also underscores an abrupt reversal of fortunes for Bankman-Fried, which had positioned itself as the industry’s savior by bailing out rivals that had run into trouble earlier this year.
“Liquidity issues continue to haunt the crypto market,” said Dan Raju, CEO of Tradier, a financial services and brokerage firm. “It’s scary to think that FTX, which is one of the largest crypto exchanges in the world, was bitten by liquidity concerns and Binance, their biggest rival, is coming to their rescue. This will make for some strange bedfellows.”
FTX had seen about $6 billion in withdrawals in the 72 hours before Tuesday morning, according to a memo to staff sent by Bankman-Fried seen by Reuters.
“On an average day, we have tens of millions of dollars in net inflows/outflows. Things were mostly average until this weekend a few days ago,” Bankman-Fried wrote in the staff message sent Tuesday morning. “In the last 72 hours, we’ve had about $6 billion in net withdrawals from FTX.”
Payouts at FTX.com are “effectively paused,” he wrote, adding that it would be resolved in the “near future.”
FTX did not immediately respond to a request for comment on the message to staff.
‘LEGITIMATE REASON FOR CONCERN’
The deal comes after the internal symbol of the crypto exchange FTX fell, losing a third of its value and dragging down other major digital assets, amid talk of pressure on FTX’s finances.
Binance, which dominates the crypto industry with over 120 million users, is currently under investigation by the US Department of Justice for possible violations of anti-money laundering rules, Reuters reported last week.
A spokesman for the US Commodity Futures Trading Commission said the agency is monitoring the situation.
News of the deal initially bought major cryptocurrencies, but those gains were quickly erased.
The FTX token – which gives holders a discount on FTX trading fees – last traded at 11.83, down 47%.
Bitcoin , the largest digital token, fell 6%.
“People have a legitimate reason to worry about the security of their digital assets if one of the world’s largest centralized exchanges ends up in financial difficulties,” said Pascal Gauthier, CEO and chairman of crypto security firm Ledger. “It’s Time for an Honest, Industry-Wide Account of the Importance of Crypto Custody.”
Crypto users raised questions on Twitter last week about FTX’s token following a report by news website CoinDesk about a leaked balance sheet from Alameda Research, a trading firm founded by Bankman-Fried that has close ties to FTX.
On Sunday, Zhao said his company would liquidate its holdings of the FTX token due to unspecified “recent revelations.”
Bankman-Fried had initially said the exchange was “fine” and that the concerns were “false rumours”.
In a tweet on Tuesday, he said his team was working to clear out the withdrawal backlog: “This will clear out liquidity issues. This is one of the main reasons we have asked Binance to come in.”
“A *big* thank you to CZ, Binance,” Bankman-Fried wrote, referring to the rival CEO who goes by his initials.
Reporting by Tom Wilson in London and Hannah Lang in Washington Additional reporting by Tom Westbrook in Singapore, Prentice in Washington and Angus Berwick in New York Editing by Megan Davies, Catherine Evans and Matthew Lewis
Our standards: Thomson Reuters Trust Principles.