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Binance's Crypto Rescue Plan Fails to Quell All the Fears of Post-FTX Contagion

Crypto mogul Changpeng "CZ" Zhao's vow to set up a $2 billion recovery fund to help cash-strapped startups has failed to dispel all fears of contagion in the sector following the collapse of the FTX exchange.

November 25, 2022
8 minutes
minute read

Crypto mogul Changpeng "CZ" Zhao's vow to set up a $2 billion recovery fund to help cash-strapped startups has failed to dispel all fears of contagion in the sector following the collapse of the FTX exchange.

In an interview Thursday with Bloomberg Television’s Haslinda Amin, Zhao discussed the deals his Binance Holdings Ltd. is examining in the wake of rival FTX’s bankruptcy. Key to Zhao’s plan is a fund with co-investors aimed at backing promising crypto projects facing a liquidity squeeze.

"We're taking a loose approach where different industry players will contribute as they wish," he said, flagging a possible $1 billion for the fund. A later blog post explained that the commitment could rise to $2 billion if needed.

Jump Crypto, Polygon Ventures, Aptos Labs, Animoca Brands, GSR, Kronos, and Brooker Group are making an initial combined pledge of $50 million. This pledge will go towards supporting the development of the Polygon network.

Zhao said that he is trying to limit the damage to the crypto sector that would result from FTX's implosion--an event that the Binance chief himself helped accelerate with a Nov. 6 tweet about plans to sell a $530 million holding of FTX's native digital token. Before his empire fell, FTX founder Sam Bankman-Fried had agreed to several deals that are now stranded, such as the purchase of bankrupt lender Voyager Digital.

The industry is still worried about the consequences of FTX's collapse.

Hayden Hughes, chief executive of social-trading platform Alpha Impact, believes that the current market uncertainty is preventing the recovery fund from having its desired effect. "We still don't know the extent of the contagion," he said. "But I think we are at or close to the bottom and I don't expect markets to go down much from here."

Binance's proposed contribution to the Industry Recovery Initiative is significantly higher than the commitments from other companies.

David Adams, portfolio manager of the King River Digital Assets Fund, said that the market will be closely watching the fund's public wallet address to see if it attracts a significant amount of capital from sources outside of Binance. This will give insight into how much support the industry has for stabilization efforts.

Zhao's credibility as an industry savior is a topic of controversy because of his role in FTX's undoing, as well as investigations into the company from Singapore to the US. Members of UK Parliament have asked Binance to explain the circumstances surrounding Zhao's Nov. 6 tweet, and whether the company understood the potential impact it might have.

Another source of tension is that while Binance has licenses in many different jurisdictions, it isn’t formally based anywhere. This lack of a physical base has led to some speculation about the company's motives. In an interview with Bloomberg, Binance CEO Zhao Changpeng demurred when asked about the matter, saying only that Dubai and Paris are now its “global hubs.” The crypto billionaire moved to Dubai last year.

Zhao said that Binance US is planning to revive its bid for the assets of Voyager. This deal came back into focus after FTX filed for bankruptcy. Binance will be competing with crypto exchange CrossTower Inc. and other companies for Voyager.

Binance is also in talks with Genesis Global, a US-based cryptocurrency broker that is seeking emergency funding to stay afloat, Binance CEO Zhao said. The troubled brokerage has $2.8 billion in outstanding loans on its balance sheet, with about 30% of its lending made to related parties including its parent company, Barry Silbert's Digital Currency Group.

Zhao said that a Genesis collapse might only impact some large institutional players, and sought to downplay the potential damage to the industry as a whole.

"There will always be pain when one player gets hurt," he said.

Zhao's interactions with his former competitor are coming full circle now that FTX is in bankruptcy. Binance initially agreed to buy FTX as it started crumbling, but pulled out after Zhao realized how precarious Bankman-Fried's exchange was.

Binance did not have access to all of FTX's books or trading history, which made it difficult to trust the information provided by the exchange, Zhao said in the interview. Binance is now planning to look at FTX's assets as they come through bankruptcy proceedings, he said.

Zhao said that the company has invested in a number of different projects, some of which are doing well and some of which are not. However, he believes that there are certain assets that can be salvaged from the bad projects.

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