What's behind the Binance-FTX collapse

Axios Crypto Reporter Crystal Kim joins Yahoo Finance Live to discuss Binance walking away from its deal with FTX.

Video Transcript

RACHELLE AKUFFO: Binance confirming it's walking away from buying rival FTX, saying, in part, quote, "As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of FTX.com." Well, let's bring in Crystal Kim, Axios crypto reporter, to discuss this. Now, Crystal, in your most recent article, you said this deal already looked increasingly shaky. But it seems like Binance throwing a little extra salt in the wound on the way out of this deal.

CRYSTAL KIM: No kidding, right? I mean, like, part of the statement that we got from the Binance team was that, quote, "there are issues beyond our control or ability to help." But it's kind of a stunning development that at the top of the hour, Binance walked away because just yesterday morning, we had a tentative deal on the table between two crypto giants. Yes, there was only a letter of intent, but it's striking that it would fall apart so shortly after.

DAVE BRIGGS: And Crystal, a lot of questions here, including one from a now deleted tweet from SBF, that said FTX has enough to cover all client deposits. Now deleted is terrifying if you are, in fact, a client. What's your biggest question about the next shoe to drop here?

CRYSTAL KIM: Oh, I mean, the story is developing. The next thing that I'm looking for is the reverberations. And I think that Axios and other publications are still trying to wrap their arms around it, right? There are the early investors like Coinbase Ventures and SoftBank and BlackRock, but there's also just, like, the question of, like, what's going to happen with Tom Brady and Gisele Bundchen's, like, stake? Like, they're getting a divorce. What's going on there?

But also, what's going on with the FTX stadium in Miami? And it's just there are just knock-on effects that we are watching, that we don't know how big those losses are going to be, who's affected. That's still all developing.

RACHELLE AKUFFO: And as we look at some of the domino effects, we're looking at Bitcoin now edging ever closer to the 16,000 mark, down about 12 and 1/2% today. Ethereum down almost 15% today. What does this mean when people try and separate out what happens with the tokens versus what happens with some of these exchanges that are actually holding the keys to people's tokens?

CRYSTAL KIM: Right, right, well, the thing that people need to understand about crypto, right, is there are effectively four tokens that sort of work. There's Bitcoin, there's Ethereum, there are stablecoins, and there are these exchange tokens like FTT. And the problem was, when there was a leaked balance sheet of Alameda, which is associated with FTX.com, and a question of, well, there was no problem that Alameda Research was holding a huge supply of FTT tokens on their balance sheet. There became a concern when there was a suggestion of what they were doing with those tokens.

And so when CZ, the CEO of Binance, just sort of put sort of chum in the water, saying, hey, this looks dicey, and we're going to sell our remaining FTT tokens, that effectively started a panic. In 72 hours, $6 billion flew out of that platform. And to put that in context, the biggest bank run in US history was WaMu. Do you remember Washington Mutual in 2008? And that was a $16.7 billion outflow in nine days. So you can see the magnitude of what this was, which is just really bad. The blood moon was just almost like a coincidental-- like a perfect imagery of what was going on yesterday.

DAVE BRIGGS: Really interesting that SBF had actually become the face of regulation for the industry, with so many reporters and journalists, like yourself, clearly asking questions about the one man propping the industry up. Were there red flags along the way that you saw or that may have been missed?

CRYSTAL KIM: Hmm, that's a very good question. And you're right to highlight that SBF was something of a DC darling. And I'd like to add to that that he was a VC darling, too, right? There were lots of people who were invested. With every new fundraising round, more people were buying in. Were there red flags? I don't know. If we look at, like, in hindsight, all of the tweets and sort of video of SBF talking, in hindsight, it seems like, oh, he was saying something that was completely different than what we know now.

And what that points to is a huge loss of trust. And that's why we're seeing some of the hemorrhaging and bleed spread out from just FTT into Bitcoin. Solana prices are down. And yeah, it's just contagion.

RACHELLE AKUFFO: And in a letter that CZ gave to employees that he also made public, he said he did not master plan the collapse of the rival FTX, and that also, that it's not good for anyone in the industry, saying it shouldn't be viewed as a win for us. Do you believe him?

CRYSTAL KIM: There's a lot of drama around CZ and SBF. The story of the two is about the blush of bromance. It's about the ambitions of two titans of industry and the downfall of one. Their relationship dates back to December 2019 when they struck a deal of what would have been equals at the time. And by the way, this would be the beginning of the crypto bull cycle.

But by the time we get to July 2021, where they both have gotten very, very big, Binance first walked away from the equity stake in FTX, and we saw the signs of a fraying relationship. They had both gotten so big that they were directly competing with each other at times. And so, I can only take what CZ says at face value. And also just pointing back to his principles, which he's published in mid-October-- it's called CZ's Principles. And in it, he describes, like, what is a personal manifesto to say no early, to keep deals simple, and to cut out toxic relationships. It's like, you know, something I'd recommend to my girlfriends.

DAVE BRIGGS: [CHUCKLES] Indeed. This does have some echoes of the early hours after Bernie Madoff. Let's hope that is not the case regarding SBF. Crystal Kim from Axios, thanks so much for being here. We will continue to follow your reporting.