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Sam Bankman-Fried: Destabilize Crypto on Eve of FTX Collapse

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https://www.wsj.com/articles/rivals-worried-sam-bankman-fried-tried-to-destabilize-crypto-on-eve-of-ftx-collapse-11670597311
 
Rivals Worried Sam Bankman-Fried Tried to Destabilize Crypto on Eve of FTX Collapse
 
‘Stop trying to depeg stablecoins,’ Binance’s Changpeng Zhao wrote in a chat to the FTX founder
 
By Patricia Kowsmann, Alexander Osipovich and Caitlin Ostroff
 
Dec. 9, 2022 9:48 am ET
 
A Tether official and the head of the world’s largest crypto exchange grew alarmed that Sam Bankman-Fried was trying to destabilize the stablecoin and with it the broader crypto market last month in a last-ditch attempt to save FTX, according to messages seen by The Wall Street Journal and people familiar with the situation.
 
In a Signal group chat called “Exchange coordination,” Changpeng Zhao, the chief executive of crypto exchange giant Binance, confronted Mr. Bankman-Fried on Nov. 10. 
 
“Stop trying to depeg stablecoins. And stop doing anything. Stop now, don’t cause more damage,” Mr. Zhao told Mr. Bankman-Fried, according to the messages seen by the Journal.
 
Mr. Bankman-Fried denied the claims in the Signal messages and in a statement to the Journal.
 
The confrontation stemmed from trades by Mr. Bankman-Fried’s trading firm, Alameda Research, that the Binance CEO and others feared were aimed at destabilizing tether—a stablecoin pegged to the dollar. Because of tether’s importance in crypto markets, a drop in its price could have pushed down other cryptocurrencies. 
 
Other members of the Signal group included Paolo Ardoino, chief technology officer of the stablecoin’s issuer Tether Holdings Ltd.; Justin Sun, founder of the crypto network Tron; and Kraken co-founder Jesse Powell, among others, according to people familiar with the chats.
 
The confrontation shows the scale of the jitters in the crypto market as FTX was fighting for survival and investors worried about potential contagion. It also underscores the unconventional business practices in the crypto market. Such a chat group would be unthinkable in the world of traditional exchanges, due to concerns about collusion and potential antitrust violations. The New York Times reported on the confrontation between Messrs. Zhao and Bankman-Fried earlier Friday.
 
On Nov. 10, Mr. Ardoino had already expressed concerns that Alameda was trying to push down the price of tether and drag other cryptocurrencies with it, according to one of the people. 
 
The industry players believed Alameda was trying to lower its liabilities, much of which are denominated in volatile tokens whose value would have shrunk in the event of a broad market collapse. 
 
Tether had begun to buckle the day of Mr. Zhao’s rebuke, falling more than 2 cents from its usual $1 level. FTX, meanwhile, was teetering on the brink of bankruptcy, with Mr. Bankman-Fried calling potential rescuers in search of loans to cover a multibillion-dollar hole. Binance had scrapped a potential rescue package a day earlier. FTX and Alameda filed for bankruptcy on Nov. 11. 
 
Public blockchain data show Alameda borrowed more than 1 million tether, also known as USDT, from crypto lending platform Aave across several transactions on Nov. 10, including one transaction for 250,000 tether that caught traders’ attention on social media. The hedge fund appeared to swap some of that tether for rival stablecoin USDC, sparking concerns that Alameda was trying to drive down tether’s value. 
 
Stablecoins such as tether have become integral to cryptocurrency trading over the past two years. Traders prefer to buy and sell coins such as bitcoin using stablecoins, rather than using more volatile digital tokens or waiting days for trades made with government-issued currencies to settle.
 
Mr. Bankman-Fried denied that Alameda attempted to knock tether off its peg, calling Mr. Zhao’s worries unfounded. “The claims are absurd,” Mr. Bankman-Fried told the Journal. 
 
“Trades of that size would not make a material impact on tether’s pricing, and to my knowledge neither myself nor Alameda has ever attempted to intentionally depeg tether or any other stablecoins. I have made a number of mistakes over the past year, but this is not one of them.”
 
A person close to Alameda said the tether trades were aimed at closing down positions and returning money to lenders.
 
A Binance spokesman said it would be inappropriate for the exchange to comment.
 
In the Signal messages reviewed by the Journal, Mr. Bankman-Fried expressed incredulity at the accusations: “Are you claiming that you think that $250,000 of USDT trading would depeg it?” 
 
Mr. Zhao countered that the issue wasn’t the size of the trades but rather the frequency of transactions that, even if small in size, could overwhelm market makers whose trading activity helps keep tether priced at $1. If too many orders to sell a token come in at the same time, market makers could struggle to respond with buying, ultimately resulting in a price drop.
 
“My honest advice: stop doing everything. Put on a suit, and go back to DC, and start to answer questions,” Mr. Zhao told Mr. Bankman-Fried.
 
“Thanks for the advice!” Mr. Bankman-Fried replied, asking Mr. Zhao to clarify: “Did you attempt to accuse me of trying to depeg a stablecoin by doing a $250,000 trade?” 
 
Mr. Ardoino eventually jumped in: “Just to be clear, we’ll redeem whatever amount of money comes to us. We’re solid.” 
 
Tether has a market cap of about $66 billion, according to data provider Messari. It has long been dogged by allegations that it isn’t fully backed and concerns that its issuer, Tether Holdings, doesn’t publish audited financial statements or a complete balance sheet. The company says tether is 100% backed by liquid assets.
 
Messrs. Bankman-Fried and Zhao are longtime rivals who intermittently sniped at each other on Twitter in the year before FTX’s collapse. Mr. Zhao’s early November announcement that Binance would sell its holdings of FTT—a cryptocurrency launched by FTX—unleashed a wave of financial pressure on Mr. Bankman-Fried’s businesses that ended in their unraveling.