What’s the beef between Changpeng Zhao and Sam Bankman-Fried?

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The FTX meltdown was in part kicked off by CoinDesk reporting on the contents of a leaked balance sheet of Alameda Research, showing that of their $14.6 billion in claimed assets, a full $5.8 billion was FTX’s own FTT token. Most importantly, CoinDesk noted that supposed $5.8 billion accounted for 180% of the FTT in circulation.

Though the CoinDesk report raised some heads, it did not immediately send the industry into meltdown. Some reporting on CoinDesk’s leak even noticed that Alameda had sold over a quarter of a billion worth of stablecoins between October 31 and November 2, but linked it more to the ongoing Federal Open Market Committee (FOMC) meeting. Anxiety picked up over the next few days, but nothing which indicated the explosion that was about to take place.

It was the activity of Binance and its CEO Changpeng Zhao which lit the fuse. On November 6, Zhao announced on Twitter that Binance had received ‘roughly’ $2.1 billion worth of FTT and BUSD as part of its exit from FTT in 2021. Most importantly, “due to recent revelations that have came to light,” Binance would be liquidating any FTT left on their books—reportedly $530 millions’ worth.

The impact of the announcement was dramatic: $6 billion worth of assets were withdrawn from FTX in the space of 72 hours, according to Reuters.

Bankman-Fried’s immediate response was to tell Twitter that “a competitor is going after us with false rumors.” The rumors may have turned out to be true, but in light of what followed—turmoil in the markets and a half-hearted and rapidly-withdrawn offer of a bailout from Binance to FTX, the withdrawal of which may have been the coup de grâce for FTX and Alameda—Zhao’s actions should be scrutinized closely.

‘This is definitely NOT an attack against our competitor’

Bankman-Fried and Zhao have been exchanging blows for months, to the point that when announcing the liquidation, Zhao and his cohort were quick to deny any suggestion that the move was an attack on FTX.

“Regarding any speculation as to whether this is a move against a competitor, it is not,” Zhao tweeted. “Our industry is in it’s nascency and every time a project publicly fails it hurts every user and every platform.”

Binance always encourages collaboration between industry players. Regarding any speculation as to whether this is a move against a competitor, it is not. Our industry is in it’s nascency and every time a project publicly fails it hurts every user and every platform. 3/4

— CZ 🔶 BNB (@cz_binance) November 6, 2022

He also explained that Binance generally tries to hold on to what assets it can for the sake of the industry “growing together”—”but there is a limit to hold, lol.”

Patrick Hillmann, Chief Strategy Officer at Binance, appeared in the replies with an assist for his boss.

“I oversee comms at @binance and will reiterate that we DO NOT target other platforms. Transparently, this has been frustrating, especially after learning that a competitor was spreading misinformation to media and US policymakers. But @cz_binance refused to abandon the high road.”

And initially, it seemed that Binance was willing to take the high road on whatever beef it had with Bankman-Fried. Binance apparently had entered into a non-binding agreement to acquire FTX, and both Zhao and Bankman-Fried tweeted about acquisition as though it was a done deal, albeit with a caveat that Binance had the discretion to pull out of the agreement at any time—which it did just 24 hours later, citing a greater than anticipated hole in FTX’s balance sheet and incoming reports that FTX was under investigation by the SEC and the CFTC.

In a message thread apparently leaked from an FTX slack channel, Bankman-Fried told employees that Zhao “probably never really planned to go through with the deal.”

So much for the high road.

What’s the beef?

For Binance’s leadership team to deny suggestions that they had intentionally played a role in FTX’s downfall is unsurprising: potentially billions of FTX customer funds are in jeopardy, and those customers are likely current and future customers of Binance.

But the real tension between Zhao and Binance on the one hand and Bankman-Fried and FTX on the other is undeniable.

A significant part of the discord can be traced to the two founders’ distinct but equally self-serving approaches to digital asset regulation.

Despite some public platitudes, Binance has been contemptuous of its legal obligations, sometimes openly so. A Reuters investigation published in October confirmed speculation that Binance had been going out of its way to mislead global regulators, going as far as backdating company documents in order to escape the reach of incoming financial regulations in the United Kingdom.

Bankman-Fried, on the other hand, has taken a much more direct approach with regulators and lawmakers and has been vocal about his efforts to lobby for ‘crypto’ in Washington D.C. He also sent waves through U.S. politics when he announced that he would begin pouring millions of dollars into political campaigns on both sides of the aisle, in a move that might be characterized as buttering up lawmakers as they build new legal regimes to cover digital assets. Indeed, the DCCPA, one of the most comprehensive digital asset laws to make its way through Congress, was loudly backed by Bankman-Fried.

Zhao clearly didn’t appreciate the attention Bankman-Fried was getting, or the prospect that SBF-influenced regulations might be impacting his empire sooner rather than later, or both.

Bankman-Fried even alluded to this following a trip to D.C. back in February:

9) I don't want to make uniform statements. Not all of the industry has been supportive, just as not all regulatory efforts are appropriate and thoughtful.

But, by and large, when everyone's come to the table willing to talk, the discussions have been fruitful, at least in DC.

— SBF (@SBF_FTX) February 23, 2022

Zhao also took issue with Bankman-Fried bailing out failing digital asset companies earlier this year, going as far as penning a blog post on Binance website: “Bailouts here don’t make sense. Don’t perpetuate bad companies. Let them fail. Let other better projects take their place, and they will.”

In an exchange illustrative of how much Bankman-Fried’s lobbying had become a point of contention, on October 29, he taunted Zhao in a now-deleted tweet, in response to another tweet praising Zhao moving the industry forward:

“excited to see him repping the industry in DC going forward! Uh, he is allowed in DC, right?” presumably referencing ongoing probes into Binance by the CFTC and Department of Justice.

Just a week later, Zhao would be announcing its FTT liquidation, delivering the ultimate deathblow to Bankman-Fried’s empire. And as much as Zhao and his Chief Strategy Officer might insist that this was not done to ‘attack’ FTX, neither could resist a jab at Bankman-Fried’s efforts in Washington while the FTX empire was burning.

“We are not against anyone. But we won’t support people who lobby against other industry players behind their backs,” he tweeted.

Liquidating our FTT is just post-exit risk management, learning from LUNA. We gave support before, but we won't pretend to make love after divorce. We are not against anyone. But we won't support people who lobby against other industry players behind their backs. Onwards.

— CZ 🔶 BNB (@cz_binance) November 6, 2022

This is especially interesting, because late in September, Binance announced a new advisory board to help further its commitment “to helping create responsible regulation.” Though the announcement doesn’t reference any lobbying by its competitors, the fact that the advisory board is filled with people like David Plouffe (former advisor to Barack Obama), Max Baucus (former senator for Montana) and Lord Vaizey (sitting member of the U.K. House of Lords), it’s hard not to see its creation as a riposte to Bankman-Fried’s own lobbying efforts.

It’s impossible to know where the FTX lobbying ranks on Binance’s list of grievances with FTX, but it’s curious that both Zhao and Hillman honed in on FTX’s activities in Washington. It can’t be denied that Zhao’s catalyzing tweet on November 6 kicked off a chain of events which led to Bankman-Fried’s efforts and influence in Washington DC tanking as fast as FTT.

Even if you put aside these motivations, Binance has greatly benefitted from the FTX fiasco in one undeniable way: the digital asset industry and those who follow it are all talking about Sam Bankman-Fried, FTX and the car crash they partially engineered—while very few people are talking about the shocking Reuters investigation published mere weeks ago. The investigation, compiled from interviews with more than 30 former Binance employees, revealed that Binance was being used to evade sanctions in Iran, had gutted its internal compliance team in favor of speedier user onboarding, and was generally focused on evading legal obligations rather than fulfilling them. That report essentially reads like a RICO charge sheet, yet the industry is likely to remain obsessed with the FTX collapse and the impropriety of Bankman-Fried for the foreseeable future.

Next round coming soon?

With the news that virtually the entire network of Bankman-Fried companies has filed for bankruptcy, the so-called ‘good guy’ of crypto is down, but as the likes of Michael Saylor have shown us, you can never count a corrupt former billionaire out. Which might be a good thing, because there’s clearly more to the Zhao-Fried story—as Bankman-Fried himself hinted yesterday:

“At some point, I might have more to say about a particular sparring partner, so to speak. But you know, glass houses. So for now, all I’ll say is: well played; you won.”

20) At some point I might have more to say about a particular sparring partner, so to speak.

But you know, glass houses. So for now, all I'll say is:

well played; you won.

— SBF (@SBF_FTX) November 10, 2022

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