Before deal with rival, FTX scoured Wall Street, Silicon Valley billionaires for $1 billion lifeline

In the hours before it secured rescue financing from its rival Binance, the crypto exchange FTX sought a bailout of more than $1 billion from Silicon Valley and Wall Street billionaires, people familiar with the matter told Semafor.

Deposits have poured out of FTX since Sunday, when Binance said it would dump hundreds of millions of dollars of FTT, a token FTX created that gives holders a discount on its trading fees. That forced the exchange to sell the assets backing that token to meet redemptions, which it was unable to meet Tuesday morning in a classic bank-like run, the people said.

FTX founder Sam Bankman-Fried — a billionaire himself on paper, at least until recently — tweeted Tuesday that the company had reached an agreement to sell FTX.com, its crypto exchange for non-U.S. residents, to Binance, the same crypto firm that sparked the panic in the first place.

Terms weren’t disclosed. Two of the people briefed on Bankman-Fried’s efforts said the firm was seeking more than $1 billion in financing before the Binance deal was sealed, with one adding that by midday Tuesday the hole appeared far deeper — closer to $5 billion to $6 billion.

It appears to be a classic liquidity crunch, when a bank or brokerage can’t sell securities quickly enough to satisfy redemptions or meet regulatory requirements. A similar dynamic forced Robinhood, the online brokerage, to seek emergency funding from existing investors, and was the root of the 2008 financial crisis.

Bankman-Fried (who is an investor in Semafor) said the deal does not involve FTX.US or Binance.US, which are separate entities. He didn’t return requests for comment and a spokesman for FTX declined to comment beyond Bankman-Fried’s tweets.

Binance CEO Changpeng Zhao tweeted that his firm would now start examining FTX’s books, adding that he can pull out of the deal “at any time.”

The deal has had ripple effects through the entire industry. Bitcoin and Ethereum have fallen by 9% and 12% as of Tuesday afternoon, respectively, and FTT’s market cap is less than half it was at the start of the week.

The Binance lifeline hasn’t slowed the token’s losses; FTT was down more than 50% in the hours since the deal’s announcement.

Bankman-Fried has some explaining to do.

First, here’s how stablecoins like the ones FTX holds work. They are called that because their value is supposed to be pegged to a fiat currency, like the U.S. dollar. The simplest way for their backers to guarantee that is to keep the money that investors give them in cash.

But that doesn’t generate much profit, so most invest that money in other assets — ideally safe things like Treasury bonds and money-market funds — that give a small return without adding a ton of risk. When customers want to exchange their stablecoins for, say, dollars, the platform has to sell those assets for cash, easy enough in the case of Treasury bonds.

Sometimes, as in the case of Tether, they invest in riskier assets like commercial paper, which give them a higher return. Selling those assets in a pinch is harder, and leads to a huge financial hole. Tether said in October it has cut all of its commercial paper holdings.

For the most part, crypto companies, which are lightly regulated, don’t have to tell investors where they’re investing their money, in the same way that a bank doesn’t have to tell you exactly what it’s doing with your deposits (though at a high level, bank balance sheets are publicly disclosed.)

Fast-forward to yesterday. “We don’t invest client assets (even in treasuries),” Bankman-Fried tweeted. That suggests that those assets are sitting in cash and that when investors showed up and wanted money for their tokens, it should have been freely available. FTX’s scramble for cash suggests it wasn’t.

Last year, amid growing scrutiny of the crypto industry around the world, Bankman-Fried announced that FTX was relocating its headquarters from Hong Kong to the Bahamas. The Caribbean nation has emerged as a hub for crypto, and in 2020, became one of the first countries to launch a central bank digital ­currency, dubbed the sand dollar.

FTX has promoted itself as a positive force in the Bahamas, announcing late last year that it had donated over $10 million to organizations throughout the country. In April, FTX broke ground on a $60 million complex that is expected to house its headquarters in the Bahamas, which is supposed to include two hotel towers, offices and an athletics center, according to The Nassau Guardian, a local newspaper.

FTX is also planning to host its second annual Crypto Bahamas conference at the Baha Mar resort in Nassau next April. It’s not yet clear how the event or FTX’s other investments in the Bahamas will be impacted by its deal with Binance.

Online brokerage Robinhood raised money from existing investors during a cash crunch in 2021. A previous version of the story misstated where it got its funding.

FTT is a native token of FTX, not a stablecoin. A previous version of the story misidentified FTT.

Want to pass along a tip or feedback? Write to us at lhoffman@semafor.com, bsaacks@semafor.com and lmatsakis@semafor.com.