Jon Rice

From the moment Changpeng ‘CZ’ Zhao announced that he was looking to acquire Sam Bankman-Fried’s FTX, skeptics noted that there was one question that didn’t seem to have an obvious answer.



Why bother?



After all, CZ had already essentially driven his rival to the point of insolvency, ruined his reputation, and virtually shut down his business.



So what would Binance have to gain from acquiring a balance sheet that allegedly contains a hole somewhere in the vicinity of $6 billion?



Customers, might be the obvious answer. FTX was the third-largest global exchange by volume, prior to its implosion.



But FTX was already in freefall following CZ’s very public campaign against SBF. Customer faith waned fast as the Binance CEO’s litigation of his concerns intensified, and it’s likely that many of them would have found a new home with Binance anyway.



How about a new foothold in the USA? FTX doesn’t admit US customers, so that makes no sense. And although at one point, Binance returned to the table — albeit briefly — to ask SBF to sweeten the deal and <a href="https://cms.blockworks.co/news/1-binance-ftx-deal-is-off-unless-ftx-us-is-part-of-the-package-source/" target="_blank" rel="noreferrer noopener">throw in FTX.US</a>, this was never a realistic possibility given Binance’s multiple legal entanglements in the US.



Maybe he was attempting to spare contagion in the markets that could have undermined his own entity? As the one who propagated the narrative, we’d have to assume Zhao was taken by surprise by the market reaction. And given his masterclass in the Art of War, that feels like a stretch.



<h3>What was CZ really trying to achieve?</h3>



In fact, it’s hard to find a reason why CZ would be interested in FTX. Its tech wasn’t revolutionary, and its overlap with his existing business simply doesn’t make sense.&nbsp;The market dominance he&#8217;d achieve might even make regulators more inclined to pursue him.



So we’re left with a hypothesis.



Despite his denial that Binance had any kind of ‘master plan’ going into this public feud, we might reasonably imagine that the exact opposite is true. And that perhaps CZ intended to decimate his rival, to utterly defeat him in such a way that there could never be any comeback for the one-time wunderkind of crypto.



And perhaps rather than merely speculate, we can examine the actions, not just the words, of a man who <a href="https://twitter.com/cz_binance/status/1538555154508746754?s=20&amp;t=MG8iDNZ0HmeNreJMGQcJtA">tweeted</a> a Sun Tzu quote in June of 2022: “In the midst of chaos, there is also opportunity.”



And boy, was there a whole lot of chaos this week.



We don’t know — and few appear to have asked — where CoinDesk obtained the partial Alameda balance sheet that started this whole thing. (The same reporter broke the story that Binance was considering backing out of the deal a few days later.)



But given what happened after their story appeared, cui bono?



<h3>Using the media to destroy your opponent</h3>



We have previously not reported that Binance reached out via both official and unofficial channels to two reporters at Blockworks to draw attention to negative articles and third-party research about Sam Bankman-Fried, and to discuss that our media outlet “should look into him”.



Two of these contacts were on October 26th, several days before Alameda’s balance sheet was published by CoinDesk. The other was on November 4th, a couple of days later.



And there’s CZ’s weaponization of Twitter to consider too. For someone who has claimed on multiple occasions not to support Fear, Uncertainty, Doubt (FUD), it’s hard to imagine that publicly announcing you’re liquidating hundreds of millions of dollars of your competitor’s exchange token is anything other than a declaration of war…and a precursor to a crypto bank run.



In later tweets he name-checked LUNA, the failed algorithmic stablecoin project — just in case we didn’t get it the first time — and dutifully posted that “we won’t support people who lobby against other industry players behind their backs” in a clear reference to Bankman-Fried’s reportedly less-than-kind comments about Binance to US legislators.



(It’s also worth noting the timing of this whole affair. SBF had just gone through a grueling public battle over his thoughts on DeFi regulation, which had weakened his public standing considerably for the first time.)



Even if Binance didn’t have Alameda’s balance sheet in its possession, and had no part in leaking it to the press, Zhao’s actions led to the value of FTT dropping precipitously, which — given that the token appeared to be backing loans at FTX — created exactly the conditions for lenders to pull back loans collateralized by FTT. (There is no excuse for FTX’s actions here, by the way, especially if customer funds were involved. It’s appalling, stupid, and possibly illegal. But that’s for another story.)



Fast forward to the announcement that Binance had a non-binding letter of intent to purchase FTX. And later that same day, another tweet:



“Two big lessons:&nbsp;



1: Never use a token you created as collateral.&nbsp;



2: Don’t borrow if you run a crypto business. Don&#8217;t use capital &#8220;efficiently&#8221;. Have a large reserve.”



<h3>No intention to buy FTX in the first place?</h3>



According to some sources, Binance was ready to pull out of buying FTX after just half a day of due diligence. And when Binance finally announced that they were pulling out of the deal, the price of FTT crashed by yet another 50%, cratering in total by 90% over the course of a week.



Did CZ really intend to buy FTX? A company that he systematically destroyed, publicly and ruthlessly?&nbsp;



Or is it beyond the realm of imagination to suggest that it was merely a ruse to achieve the complete and permanent annihilation of Sam Bankman-Fried’s reputation? Even SBF appears to acknowledge the possibility that this was all a game, in an unverified series of leaked <a href="https://twitter.com/cobie/status/1590610757334728704?s=20&amp;t=ipb7Ug60dE_kf5-lmBIILw" target="_blank" rel="noreferrer noopener">Slack</a> messages. This is but one theory. Byron Gilliam, master of crypto narratives and Blockworks&#8217; resident newsletter writer (<a href="https://cms.blockworks.co/newsletter/" target="_blank" rel="noreferrer noopener">sign up</a>, it’s great) <a href="https://cms.blockworks.co/newsletter/view/?id=29650985" target="_blank" rel="noreferrer noopener">observed a different possibility</a>: That CZ was as astonished as the rest of us. &#8220;But maybe he was just pissed at SBF?



He may not have had any idea what chain of events he’d set off by publicly casting aspersions at his rival and threatening to market-sell his FTT.”



Observers have suggested that the war has set crypto back three, four, even five years.



Even for CZ and his billions, surveying the wreckage that he and Sam have wrought, this must feel like a Pyrrhic victory.



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Did CZ Really Have Any Intention of Buying FTX?

American cryptocurrency investors, firms, and even those who provide services to them, are going to have some tough questions over the next few days as the proposed Binance deal to acquire FTX takes shape.



While the industry has faced a lack of clear regulation — or even clear regulatory authority — for many years, one thing is abundantly clear: Doing business with Changpeng ‘CZ’ Zhao and many of his related entities is going to be a tough sell to organizations that may have been willing to engage with the more regulator-friendly FTX.



Whatever you thought of Sam Bankman-Fried’s <a href="https://cms.blockworks.co/sam-bankman-fried-proposes-respect-for-ofac-in-crypto-regulatory-framework/" target="_blank" rel="noreferrer noopener">engagement with US legislators and regulators</a>, it’s common knowledge that he had the ear of multiple politicians. (Becoming the <a href="https://www.opensecrets.org/elections-overview/biggest-donors" target="_blank" rel="noreferrer noopener">sixth-largest donor</a> in an election cycle will do that.)



And whether you think his ideas were contrary to the principles of decentralized finance, or simply pragmatic answers to questions that would be decided without the input of crypto natives sans his lobbying, Bankman-Fried was a well-known denizen of the halls of power around Washington. He personally testified before Congress on multiple occasions.



Changpeng Zhao? Not so much.



The Department of Justice and the IRS <a href="https://cms.blockworks.co/irs-justice-department-probing-binance/" target="_blank" rel="noreferrer noopener">opened an investigation</a> into Binance in 2021, while the CFTC was reported to be examining whether Binance users based in the US had access to derivatives trading.



In 2020, US federal prosecutors asked Binance to <a href="https://cms.blockworks.co/binance-under-investigation-over-bank-secrecy-act-report/" target="_blank" rel="noreferrer noopener">hand over communications</a> directly involving Zhao, as they sought to understand its anti-money laundering measures and whether the exchange was in violation of the Bank Secrecy Act.



And just last week, <a href="https://www.reuters.com/business/finance/exclusive-crypto-exchange-binance-helped-iranian-firms-trade-8-billion-despite-2022-11-04/" target="_blank" rel="noreferrer noopener">Reuters</a> reported that Binance helped facilitate close to $8 billion of trades in Iran, predominantly in Justin Sun’s TRON cryptocurrency — possibly in violation of US sanctions.



But now Bankman-Fried’s sly tweet about whether CZ has the ability to even set foot in the United States may prove to be one of the most hubristic takes in a particularly hubristic industry.



What do banks think about crypto exchanges that are under investigation by multiple regulators, the DOJ, the IRS, and potentially exposed to either primary or secondary sanctions violations?&nbsp;



Nothing good, as it happens.



Which means that even if doing business with FTX could be viewed as distasteful (<a href="https://cms.blockworks.co/crypto-industry-will-move-offshore-if-congress-doesnt-act-executives-warn/" target="_blank" rel="noreferrer noopener">but potentially necessary</a>) to many of the institutions, banks and politicians that have begun to cautiously acknowledge that crypto is here to stay…doing business with Binance may be downright impossible.



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<blockquote class="twitter-tweet" data-width="550" data-dnt="true">a lot of companies have their corporate funds sitting in FTX if it takes months to process withdrawals, could be bad news for alot of crypto startups&mdash; tuba 🦈 (@0xtuba) <a href="https://twitter.com/0xtuba/status/1590038741175140352?ref_src=twsrc%5Etfw">November 8, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
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<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Yup. 2022 is not the year for legislation. 2023 is. <a href="https://t.co/5qfwFCsFUb">https://t.co/5qfwFCsFUb</a>&mdash; Kristin Smith (@KMSmithDC) <a href="https://twitter.com/KMSmithDC/status/1590046976615546880?ref_src=twsrc%5Etfw">November 8, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
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With a massive void in Washington, no meaningful legislation likely in this Congress, and an entrepreneur whose very ability to be present in the United States has been questioned now potentially heading up what remains of FTX, the US crypto scene is likely in for a very, very rocky ride.