The chief executive of Binance, the world’s largest cryptocurrency exchange, said he did not expect the head of rival FTX to phone him to tell the firm had become insolvent amid the collapse of a $16 billion business which has played out in public over the past 10 days.
However, Changpeng Zhao said on Wednesday that the industry would weather the scandal.
FTX chief executive Sam Bankman-Fried — who also had a hedge fund called Alameda Research — lost his fortune in just five days, bankrupting 130 affiliated companies along with the exchange.
Initially, it looked as if Binance might step in and save FTX, but by November 10, a potential deal had collapsed amid concerns about the extent of the problems at the exchange.
Mr Bankman-Fried continues to discuss the FTX collapse on Twitter after stepping down as chief executive. The company is now the subject of allegations of fraud and the subject of several government probes.
All of this is playing out in real time, thanks to blockchain technology and social media.
At Abu Dhabi Finance Week, Mr Zhao discussed the sequence of events that unfolded earlier this month following an article by outlet Coindesk that triggered his decision to sell the FTT digital tokens native to the FTX exchange that Binance had been holding.
Mr Zhao posted on Twitter that Binance had made the transaction, which was visible to the market, and explained his reasons why, including the nature of Mr Bankman-Fried’s antagonistic attitude to his rival’s company. He said he tweeted for the sake of “transparency”.
“I wrote that tweet and went to meet my friends. I didn't expect that Twitter was gonna blow up … it's gonna cause a stir. I also did not expect a day later Sam would call me saying he is insolvent … it was just a very organic sequence of events,” said Mr Zhao.
Following Mr Zhao's tweets, there was a run on FTX that resulted in its collapse.
Despite the potential fallout, which could affect traditional financial institutions and has already resulted in a number of investigations being launched by authorities in the US and the Bahamas, where FTX was based, Mr Zhao is optimistic about the future of the crypto business.
“Crypto doesn't need a saviour … crypto will be fine. And I'm not the saviour, even if there was one,” he said.
Despite short-term volatility, in the long run the industry would be secure, he said.
“We do try to do things to protect our users in the industry … crypto is very decentralised. Bitcoin is not going away, Ethereum is not going away. And they're still growing,” he said.
There was however criticism of crypto companies and their executives at Abu Dhabi Finance Week on Wednesday morning from Nouriel Roubini, the economist who famously predicted the 2008 global financial crisis.
Mr Zhao said there was no magic formula to prevent a repeat of the FTX collapse, but it was about managing risk sensibly.
“FTX was run more like an exchange run by a hedge fund. The auxiliary part was really to facilitate the hedge fund for trading. Whereas we are an exchange, we don't have a hedge fund,” he said.
“So, for us, the easiest way to avoid what happened … [is] user assets, just keep them [as] assets, to make sure that if a user has Bitcoin with you, just keep those Bitcoins for that user. That's it. There's no magic to it.”
Mr Zhao, however, said the fall of FTX shook investors’ confidence in the cryptocurrency industry, which will now be more closely scrutinised by regulators.
“I think, what happened last week, it's not good for anybody. A lot of consumers and investors were hurt and the confidence in the industry is shaken, he told delegates in Abu Dhabi earlier on Wednesday.
“Going forward, we're going to face a lot more challenges. Regulators would want to scrutinise this industry a lot more.”
Industry players will need to be more transparent “in our reserves” and “with our processes” and there should be increased interaction with investors, he said.
“We need to educate people on financial literacy … [to] not chase super high [returns], as you will not be able to differentiate what's a good behaviour,” he said. “There's quite a lot of stuff I want you to do.”
Mr Zhao is now pushing to set up a “global recovery fund” to help troubled cryptocurrency companies.
“I got a lot of interest in the last couple of days from people that want to contribute … for people who need help,” he said.
“So, we've tried to hash everything out and try to push that out. We want strong industry players to protect other good industry players that just may hurt in the short term.”
However, “that’s not to say that we save everybody”, he told delegates in Abu Dhabi.
The other thing Binance is trying to help the industry with is to form a global industry association that will include various exchanges, wallets and blockchain developers, among others.
Multiple regulators around the world are dealing with different companies and “there’s no constant voice” for the industry.
These companies have “different things to say and they all act differently”, and having an association that can establish “best practices” will help both sides, he said.
“This is something that we were planning … [for] a couple of months,” he said. “We want to accelerate this.”
On Wednesday, Binance said it had received permission from the Financial Services Regulatory Authority in the Abu Dhabi Global Market to provide custody services to professional clients.
