January 29, 2023

The day before struggling cryptocurrency exchange FTX filed for bankruptcy, rival exchange Binance CEO Changpeng Zhao sent FTX founder Sam Bankman-Fried a warning text message.

Mr. Zhao fears that Mr. Bankman-Fried is orchestrating a crypto deal that could send the industry into meltdown. On Nov. 10, Mr. Zhao wrote in a group chat with Mr. Bankman-Fried and other cryptocurrency executives: “Stop now, don’t do more damage. The more damage you do now, the more jail time long.”

FTX and its sister hedge fund, Alameda Research, just collapsed after a deposit run exposed an $8 billion hole in the exchange’s accounts. The implosion sparked a cryptocurrency crisis, with companies linked to FTX teetering on the brink of bankruptcy, putting the future of the entire industry in question.

A series of about a dozen group text messages between Mr. Zhao and Mr. Bankman-Fried, obtained by The New York Times on Nov. 10, shows that key leaders in the cryptocurrency space fear that things will get worse. Their frenzied exchanges offered a glimpse into how the industry does business behind the scenes, with at least three senior officials from rival companies exchanging messages in groups on the encrypted messaging app Signal.

The texts also show that industry leaders are acutely aware that the actions of a single company or fluctuations in the value of one virtual currency can destabilize an entire industry. The exchange became increasingly tense as Mr. Bankman-Fried and Mr. Zhao traded barbs.

Earlier that week, Zhao agreed to buy FTX and save the exchange, before exiting the deal. In the Nov. 10 text, he seemed convinced that FTX would not survive and feared it would drag down the industry. During the cryptocurrency crash in May, the value of both tokens plummeted, triggering a collapse across the industry and forcing several high-profile companies out of business.

In the Nov. 10 text message, Mr. Zhao specifically accused Mr. Bankman-Fried of using his hedge fund to drive down the price of Tether, a so-called stablecoin whose price is designed to stay at $1.

Tether, issued by the company of the same name, is the key to global cryptocurrency transactions and a common trading tool for digital asset enthusiasts. Industry insiders have long feared that if Tether’s price fell, it would trigger a domino effect that could paralyze the industry. (Tether didn’t end up losing its $1 peg.)

A spokesman for Binance declined to comment on the text exchange. Mr Bankman-Fried, 30, said in a statement Mr Zhao’s claims were “ridiculous”.

“A transaction of this size would not materially affect Tether’s pricing, and to my knowledge neither I nor Alameda have attempted to intentionally de-peg Tether or any other stablecoin,” he said. I’ve made a lot of mistakes over the years, but this wasn’t one of them.”

A Tether spokeswoman said in a statement that the company had “demonstrated its resilience to attacks.” She added that FTX’s actions “did not reflect the spirit and commitment of the industry as a whole.”

FTX, a marketplace where people can buy and sell digital currencies, collapsed early last month as customers scrambled to withdraw their deposits, in part after Mr Zhao tweeted that the company’s financial health had been called into question. FTX soon collapsed, sparking investigations by the Justice Department and the Securities and Exchange Commission into whether the cryptocurrency exchange broke the law by using its customers’ funds to prop up Alameda.

The Justice Department is also investigating whether Mr. Bankman-Fried engaged in market manipulation in the spring by making trades that resulted in the failure of two prominent cryptocurrencies.

Critics of the crypto industry have said for years that Tether could also be vulnerable to a crash. Tether has long claimed that its stablecoins are backed by cash and other traditional assets, and that in a crisis, all of its customers can exchange their stablecoins for their dollar equivalent. But regulators have previously accused Tether of lying about the status of its reserves, raising questions about the token’s reliability.

In a message to the group chat on Nov. 10, Zhao pointed to a $250,000 transaction by Alameda that he said was designed to destabilize Tether. Transactions are visible on the blockchain, a public ledger of cryptocurrency transactions that anyone can view.

Mr. Bankman-Fried appeared overwhelmed by Mr. Zhao’s accusations. “Huh?” he said. “What have I done with stablecoins?”

“Are you saying you think a $250,000 USDT transaction will depeg it?” he added, using a common shorthand to refer to the Tether currency.

Zhao responded that he didn’t think a transaction of this size would succeed in destroying Tether, but it would still cause problems.

“My honest advice is: stop doing everything,” Mr Zhao said. “Put on a suit, go back to DC, and start answering questions.”

“Thanks for the suggestion!” Mr. Bankman-Fried shot back.

Emily Fleet Contribution report.



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