It’s been almost a year since SBF’s empire collapsed, after twitter users found Alameda Research to be insolvent and unveiled just how much of a mess FTX was in.
But the story doesn’t seem to be over- on the contrary, the FTX saga seems to be a gift that just keeps giving.
This week, a class action lawsuit was filed against Binance founder CZ, for the role that he played in precipitating the collapse of FTX last year.
The case alleges that CZ’s public statements on Twitter declaring his intention to sell FTT played a part in causing panic among FTT holders, and encouraging many holders to liquidate their own holdings of FTT.
Additionally, the plaintiffs claimed that CZ’s proposal to acquire FTX was not made in good faith, and that Binance’s eventual withdrawal from the FTX acquisition also contributed to the collapse.
How much sense does the plaintiffs’ story make?
Admittedly, the plaintiffs have a point that CZ has not exactly been playing straight with everyone.
During the period leading up to FTX’s collapse, FTX was probably Binance’s biggest competitor, and SBF was not exactly on the best terms with CZ. The two had been feuding on Twitter for weeks, and CZ was not exactly a fan of everything that SBF had been saying and doing.
For months, SBF had been pushing for regulation of the cryptocurrency industry, and used his growing influence to criticise CZ.
In an interview, CZ expressed his disapproval of SBF’s political manoeuvring, saying that SBF’s actions were “not a smart thing to do, to bad mouth anybody.” During the interview, CZ also made it known that he was cognisant of Binance’s advantageous position as the larger exchange.
As an early investor into FTX, Binance held a significant amount of FTT, FTX’s native token- and when things came to a head over Alameda’s insolvency, CZ announced publicly on Twitter that Binance would liquidate its entire holding of FTT.
This was an incredibly well-timed play by CZ- he capitalised on existing FUD about Alameda, and by extension FTX, to precipitate a crisis. He had the perfect defence as well as a good offence. As Binance was one of the largest holders of FTT, a collapse in the price of FTT would undoubtedly hurt Binance.
Yet, that amount is a drop in the ocean when we consider that Binance is huge in its own right.
The real victims would be those who were really relying on FTT to survive- in other words FTX’s customers and the companies in SBF’s empire, including Alameda.
And the collapse of FTX would leave Binance as the undisputed leader in the crypto exchange industry. Writing down whatever Binance holds in FTT to zero would be a small price to pay for near monopoly power over the entire industry.
In this case, CZ certainly stands to gain a significant amount from causing FTX to collapse. Why would he then offer to buy FTX from SBF? Because it would then allow him to credibly claim to have seen FTX’s books, and to declare that FTX was unsalvageable- which was what he did when he pulled out of the agreement.
The move would, in a stroke, eliminate one of CZ’s greatest political rivals in SBF, and destroy Binance’s main competitor in FTX, while promoting CZ as a community-minded member of the crypto world.
As Machiavelli once remarked, “there is no avoiding war; it can only be postponed to the advantage of others”. CZ took this philosophy to heart, and seeing the growing threat that SBF and FTX posed, decided to act while he still could, before SBF’s political connections and influence provided him with an unassailable position.
And if he has to sacrifice something in order to obtain that victory, that sacrifice may be well worth it.
A good story does not a legal case make
Yet, while many of the facts of the story may check out, whether or not CZ did any legal wrong is another issue.
Yes, CZ did make statements that can reasonably be construed to be harmful to FTX. But he never did tell anyone to sell their FTT. While he did declare Binance’s intention to sell their holdings of FTT, how people react to the statement is beyond CZ’s control.
Additionally, while the plaintiffs claim that Binance sold a $530 million worth of FTT tokens the day before it indicated that it would liquidate its FTT assets, unless that $530 million was everything that Binance held, it’s questionable if Binance and CZ could be said to have been lying about future plans to liquidate FTT holdings.
The plaintiffs also claim that the offer to acquire FTX was made in bad faith. But unless it can be convincingly proven that CZ never intended to go through with the FTX acquisition, any argument on this basis will likely be moot.
CZ isn’t stupid- and it’s likely that he managed to tread the fine line between making statements that would be detrimental to FTX, and making direct statements that would be ‘false and misleading’ as the plaintiffs claim.
In a case like this, the burden of proof very much lies with the plaintiffs to prove that CZ not only acted with the intention to destroy FTX, but that his actions and statements caused quantifiable damage to FTX.
Let’s not forget, CZ didn’t dig out Alameda’s balance sheet and discover it was insolvent, CZ didn’t sign a binding agreement to acquire FTX, and CZ didn’t tell people to sell FTT. Whether or not CZ is a public figure doesn’t change that.
CZ’s endgame: a perpetual chess game
The great chess master Jose Raul Capablanca once remarked that “in order to improve, you must study the endgame before everything else, for whereas the endgames can be studied and mastered by themselves, the middlegame and opening must be studied in relation to the endgame.”.
Now that CZ has thoroughly destroyed SBF and his credibility, the question remains: what is the endgame that CZ has seen, and why is it advantageous?
Perhaps the clearest result of the entire saga has been the consolidation of power for Binance. Among all centralised crypto exchanges, Binance controls more than half of the market share- and more than 5 times as much as its next largest competitor.
With such an advantage, Binance is clearly a player that cannot be ignored when it comes to regulating crypto or consulting on any such regulation moving forward.
Yet, a year on, CZ’s brilliant checkmate seems to be losing some of its shine.
Since the fall of FTX, Binance has been hit with two lawsuits- one from the US Securities and Exchange Commission, and one from the US Commodities and Futures Trading Commission.
There was also a slew of resignations from high-ranking executives at Binance, and a high profile retreat from the Russian market.
If anything, Binance looks like it’s undergoing a crisis, instead of triumphantly reaping the rewards from the massive amount of power that it wields.
Certainly, far from being seen as the ‘compliant and above board exchange’, Binance’s reputation has suffered quite a bit in recent months, and many have speculated that the wave of resignations was triggered by a lack of compliance by Binance.
But whether these speculations are true or not is besides the point- the point is that CZ’s endgame may not be playing out in the way that he envisioned it, and that his victory is incomplete.
He may have won the battle against SBF and FTX, but whether he has won the war is another question. For now, that question is still open ended.
The American writer and professor Isaac Asimov once remarked: “In life, unlike chess, the game continues after checkmate.”.
There is scarcely a better quote to summarise Binance’s journey over the past year. Having checkmated FTX and SBF, Binance and CZ now find themselves in a quagmire of crises, as foes both new and old emerge. Binance’s future is not secure, and Binance’s story should serve as a warning to leaders everywhere: the victors of today may not always be the victors of tomorrow, and how well one uses a victory may be as important as how one achieves victory.