The cryptocurrency industry seems to have a new savior to save it from plunging into an unprecedented slump.
Just over three days after the FTX cryptocurrency exchange filed for Chapter 11 bankruptcy, a new player is emerging to try to reassure investors.
Binance, the world's leading exchange for bitcoin and other digital currencies such as ether (ETH), dogecoin (DOGE), Polkadot (DOT) or Avalanche (AVAX). Binance, founded by crypto billionaire Changpeng Zhao, has just announced the creation of a fund that will serve as a bank for crypto firms facing a liquidity crisis.
The group, however, indicated that only solid projects will be able to benefit from this emergency fund.
"To reduce further cascading negative effects of FTX, Binance is forming an industry recovery fund, to help projects who are otherwise strong, but in a liquidity crisis," Zhao announced on Twitter. "More details to come soon. In the meantime, please contact Binance Labs if you think you qualify."
Binance Labs is the financial arm of Binance.
Zhao has also decided to open this fund to other players and investors who would like to help the crypto industry which is in shock after the debacle at FTX, which was valued at $32 billion in February but found itself a few months later running out of cash.
'Let's Rebuild'
Zhao added that: "Also welcome other industry players with cash who wants to co-invest. Crypto is not going away. We are still here. Let's rebuild."
The billionaire did not give further details on this fund. Zhao has an estimated fortune of $18.2 billion as of Nov. 13, according to Bloomberg Billionaires Index.
Zhao's announcement was greeted with relief by the cryptocurrency market which has stabilized somewhat. Bitcoin, the most popular digital currency, gained 0.7% to $16,757.47 in the past 24 hours after losing 20% in the past seven days, according to data firm CoinGecko. ETH gained 1% to $1,252.29 in the past 24 hours. ETH is down more than 20% over the past week, however.
Even FTX-linked cryptocurrency Solana (SOL) rebounded 2.2% after crashing 57% in the past seven days.
"The impacts of the recovery fund will not be felt in the short term but can help in the general recovery of the industry in the long term," said Vlad Gorbunov, founder and CEO of crypto firm Choise.com. "With other key players like Tron’s Justin Sun already pledging support for the initiative, the industry may rally around to save other bigger projects on the brink of collapse in the long term. This will have an untold effect in retaining trust in the industry, and fuel the highly carved growth of crypto assets."
The emergence of Binance and Zhao, dubbed "CZ" in the crypto sphere, is something of a deja vu. In the summer, during the credit crunch caused by the sudden collapse of sister cryptocurrencies Luna and UST or TerraUSD, FTX and its founder and former CEO Sam Bankman-Fried had then become the white knights of the industry.
They had bailed out many struggling crypto lenders, including Robinhood, BlockFi, Celsius Network, Voyager Digital. Bankman-Fried, who is nicknamed "SBF" in the crypto space, is linked to more than 20 crypto firms in which he has invested. But we now discover that FTX and Bankman-Fried had probably used their clients' money.
Difference Between CZ and SBF
The difference with Binance and Zhao however is that they open their rescue fund to other investors whereas FTX and Bankman-Fried did it alone.
As a crypto exchange, FTX executed orders for their clients, taking their cash and buying cryptocurrencies on their behalf. FTX acted as a custodian, holding the clients’ crypto currencies.
FTX then used its clients’ crypto assets, through its sister company’s Alameda Research trading arm, to generate cash through borrowing or market making. The cash FTX borrowed was used to bail out other crypto institutions in the summer of 2022.
At the same time, FTX was using the cryptocurrency it was issuing, FTT, as collateral on its balance sheet. This represented a significant exposure, due to the concentration risk and the volatility of FTT.
Once this exposure came to light, clients, fearing an FTX collapse, rushed to liquidate their crypto positions and get their money back. Customers on Nov. 6 withdrew a record $5 billion in a run on the exchange. This led to the insolvency of FTX, since it did not have the crypto assets, now on loan or sold, to honor its clients’ sell orders.
As a result, investors fear that FTX's bankruptcy filing will affect many companies, which in turn are expected to go bankrupt. Some firms have already started disclosing their exposure to FTX.
