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Cryptocurrency: Why did Binance back out of FTX deal and what is its importance?

Big problems in Binance’s smaller rival convinced the company to walk away. What effect will this have on the rest of the crypto market?

Big problems in Binance’s smaller rival convinced the company to walk away. What effect will this have on the rest of the crypto market?

The cryptocurrency market has been dogged by problems in the last 12 months. The latest seems to be the imminent collapse of one of the largest crypto currency exchanges FTX after a buyout deal with larger competitor Binance seems to be over.

The proposed deal between FTX Chief Executive Officer Sam Bankman-Fried and rival Binance Chief Executive Officer Changpeng Zhao of Binance was supposed to resolve a serious liquidity crisis at FTX. Investors have been unable to receive withdrawals since Tuesday.

Bankman-Fried had originally tweeted that “all assets will be covered 1:1,” by the buyout. Now it is not going ahead it looks like there is little chance the fulfil the $7 billion of withdrawal requests.

A notice on its website said, “FTX is currently unable to process withdrawals. We strongly advise against depositing.”

Lennix Lai, director of financial markets at OKX, said, “If FTX does not get immediate cash injection, they would go bankrupt.”

On Tuesday FTX’s value dropped by 72% as Binance liquidated its holdings in FTX’s native crypto currency token. A leaked balance sheet from CoinDesk suggested that a lot of the money behind FTX and sister companies was held in this native currency; the mass selling from Binance could have played a role in the collapse in its value.

Reuters reported that the US Securities and Exchange Commission (SEC) was investigating FTX for potentially mishandling customer funds as well as tading against them.

Binance said in a statement posted on Twitter that the issues facing FTX were “beyond our control or ability to help”.

How will this affect the cryptocurrency market?

After a boom back in November 2021, the crypto market went into a six-month slump. This was epitomised by the value of the crypto market falling from a high of more than $3 trillion on 10 November 2021 to $843 billion on 6 July 2022. There has since been a slight upturn since then but at this stage there are no signs the market will get back to the peak.

April Joyner, a correspondent at Business Insider in New York, told the BBC that the collapse of FTX would put many people’s investments at risk.

“If FTX were to go under a lot of people could potentially lose their money depending on what’s going on there,” she said,“It’s also led to a lot of turmoil on crypto markets - we’ve seen prices of Bitcoin, Etherium etc fall and so there’s a lot of distress and worries about the crypto markets right now.”

In the immediate aftermath of the FTX news the price of Bitcoin fell from around $20,000 to less than $16,000. This time last year Bitcoin was worth four times as much as today.