A senior executive at Binance has defended the crypto exchange’s role in the collapse of rival company FTX. More regulation of the sector is needed to avoid such incidents happening in future, a parliamentary enquiry into crypto assets was also told.
FTX, one of the largest crypto exchanges in the world, plunged into bankruptcy last week as investors pulled out of the platform in droves.
Reuters has since reported that at least $1bn in customer funds is missing, and that US authorities are probing the relationship between FTX and Alameda Research, a trading company owned by FTX founder and former CEO Sam Bankman-Fried, to investigate whether funds were handled or transferred inappropriately.
Why Binance pulled out of deal to save FTX
Following reports that FTX was suffering a “liquidity crunch” early last week, Binance, the world’s largest crypto exchange, offered to step in and buy its rival.
But after carrying out due diligence, it pulled out of the deal 24 hours later, selling its stock of FTT, FTX’s proprietary token.
Speaking to MPs on parliament’s Treasury Committee on Monday, Daniel Trinder, vice president for government affairs for Europe and MENA at Binance, said the company cancelled the rescue plan after potential problems were uncovered.
“We started that due diligence process and realized something was very wrong and we pulled out of it,” Trinder said. “The reason why Binance was looking at potentially rescuing FTX was because we realised the implication [of its collapse] more broadly on the industry.”
He added: “We were doing our due diligence on a potential transaction, which we thought would be good for users more generally, not just FTX users, but our users, because some people would be with more than one exchange.”
When asked whether Binance’s move to sell its FTT triggered FTX’s collapse, Trinder said the company took the decision “because of the realisation that [the tokens] were not worth their value” and that it “certainly wasn’t the intent” to take down a competitor. He said he would share correspondence relating to the proposed takeover with the committee.
Does the UK government need a crypto tsar?
Trinder said he believes the failure of FTX and other problems experienced by cryptocurrencies in recent months reflect bad governance rather than inherent flaws with the decentralised finance technology.
“The key failures have been around governance, risk management, excessive leverage and, if we believe reports, inappropriate use of client assets,” he said. “These are traditional failures which have plagued traditional finance, I don’t think there’s anything inherent around crypto and the technology per se at this moment.”
The committee also heard from Ian Taylor, CEO of trade organisation CryptoUK, who said: “What this shows is we need some regulation around these central actors, such as audits, proof of reserves on assets and liabilities.
“Because it seems at the moment what we’ve seen in this example [FTX] is the organisation using its clients’ assets to go and then take risk and leverage and lend out, which is a practice that the industry doesn’t want to see.”
The UK is one of several countries looking at how crypto assets can be regulated. In April, Prime Minister Rishi Sunak, at the time Chancellor of the Exchequer, said he wanted the UK to become a “global crypto-asset technology hub”, and the government has since introduced regulation for stablecoins, a type of cryptocurrency as part of the finance bill which was announced over the summer.
Further consultation on wider regulation of crypto assets is likely to follow, but Taylor described the UK’s approach to data as “piecemeal” and said more joined-up thinking is required.
“We’ve been advocating for the last four years in the UK for a more joined-up collaborative approach at government,” he said. “Perhaps a ‘tsar’, somebody who can move across different departments and understands the complex nature of some of the technology to bring together all of the departments looking at regulating the sector.”