FTX is crypto's most crushing crash

The headline: Binance, the world's largest crypto exchange, agreed in principle to acquire FTX, the world's third-largest crypto exchange. The deal does not involve either company's U.S. operations, which are structured as separate entities.

• Deal terms weren't disclosed, not even to venture capital funds that invested around $2 billion into FTX and first learned of it via social media. It seems likely that specifics haven't yet been determined; FTX continues to spiral, with many speculating that the merger won't ever close.

What we know: Binance, one of FTX's original investors, announced over the weekend via Twitter that it would sell its holdings in FTT, a token used for trading on FTX, on the open market.

• Alameda Research, a crypto trading firm also founded by FTX CEO Sam Bankman-Fried, said it would defend FTT at $22. But other investors quickly lost confidence — perhaps wondering if Binance knew something they didn't — with FTT soon breaking below $22 and then entering a tailspin.
• An exchange shouldn't have liquidity troubles. It's just an exchange. But FTX appears to have significant financial ties to Alameda, beyond just Bankman-Fried's shareholding, as partially detailed last week in a CoinDesk article.
• Binance founder Changpeng Zhao, known as "CZ," is sure to have read the CoinDesk piece, which made major crypto waves.

What we don't know: CZ's motives or intentions. One possibility is that he just wanted to dent FTX, which had been gaining market momentum.

• Another theory is that CZ recognized that his tweets could cause the crypto equivalent of bank run, allowing him to either buy FTX on the cheap or just let it bleed out. Either way, a major rival vanquished. Or, as one source put it to me yesterday, this was "an assassination by Twitter."
• There are also huge questions about the structure of Bankman-Fried's empire, and what exactly is owned by investors in FTX (which, again, is a different group than those who plugged at least $400 million into FTX US). For example, was money comingled between FTX and Alameda? Is the very active FTX Ventures only Bankman-Fried's personal money, without any FTX ownership, let alone the venture investments also made by Alameda?
• Neither Bankman-Fried nor FTX Ventures chief Amy Wu responded to requests for comment.

The consequences: This is a disaster for some of venture capital's top names, including Sequoia Capital, and may eventually prompt LP litigation threats.

• Venture funds invested around $2 billion into a company, most recently at a $32 billion valuation, without a single board seat in return. In fact, it's unclear if FTX even has a board of directors, audit committee, CFO or chief compliance officer. Instead, it just seems to have some sort of VC advisory committee.
• Either investors knew of the financial interconnectedness between Alameda and FTX and let it slide, perhaps even viewing it as beneficial, or they didn't know because they eschewed oversight. Either way, LPs should be furious.
• FTX backers includes Sequoia (which once sued Binance for unrelated reasons), Paradigm, SoftBank, Tiger Global, BOND, Temasek, BlackRock, Lightspeed, Insight Partners, Ribbit Capital and Race Capital.
• At the very least, the FTX experience will put a major chill on venture investment in crypto, even in unaffected areas like decentralized finance. If FTX can go from $32 billion to (maybe) zero in just 36 hours, who's to say the same can't happen elsewhere? Why would LPs take the chance?
• "This is an indictment on Sam and the VCs," says one senior crypto industry source. "The crypto shit worked just fine."

Politics: Another issue is that Democrats just lost one of their most prolific donors. Bankman-Fried contributed around $37 million to Democrats during the most recent election cycle (plus $235k to Republicans), per OpenSecrets.

• As for Republicans, they also got $19 million from fellow FTX exec Ryan Salame.

The bottom line: This isn't a replay of Enron or Theranos, but it sure has echoes of both.