Speculation about FTX's financial health that started over the weekend snowballed into $6 billion of withdrawals in the 72 hours before Tuesday morning.
FTX Chief Executive Officer Sam Bankman-Fried told employees he was exploring all options for his firm after a deal with cryptocurrency exchange Binance collapsed on Wednesday after due diligence on the proposed bailout.
The proposed deal between Bankman-Fried and rival Binance Chief Executive Officer Changpeng Zhao of Binance had been the latest emergency rescue in the world of cryptocurrencies this year, as investors pulled out from riskier assets amid rising interest rates. The cryptocurrency market has fallen by about two-thirds from its peak to $1.07 trillion.
Speculation about FTX's financial health that started over the weekend snowballed into $6 billion of withdrawals in the 72 hours before Tuesday morning. Bitcoin revealed a proposal to acquire the rival exchange's non-US assets on Tuesday.
The deal to cover a "liquidity crunch" was non-binding and subject to further due diligence, leading some investors and analysts to question if it would go ahead.
"As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of FTX.com," Binance said in a statement on Wednesday.
A representative for FTX did not immediately respond to a request for comment, but Chief Executive Officer Sam Bankman-Fried told employees in a Slack message viewed by Reuters that Binance had not previously expressed reservations about the deal.
"We obviously just saw Binance's statement," Bankman-Fried said in the message. "They relayed that to the media first, not to us, and had not previously informed us or expressed those reservations."
Bankman-Fried said in the Slack message, "I'll keep fighting for those, as best as I can, as long as it's correct for me to. I'm exploring all the options."
The Wall Street Journal reported on Wednesday that Bankman-Fried told investors he needs emergency funding to cover up to $8 billion of withdrawal requests, citing sources familiar with the situation. FTX did not immediately respond to a request for comment.
Zhao earlier on Wednesday tweeted a letter to staff that there was no "master plan" behind the deal and that "FTX going down is not good for anyone in the industry" and is not a win.
Zhao also urged investors not to trade FTT tokens and to ignore the prices.
Binance had not been the only possible partner sought. Prior to the Binance proposed deal, Bankman-Fried approached cryptocurrency exchange OKX on Monday morning about a deal, but the exchange declined to move forward.
FTX.com is also facing scrutiny from US regulators over its handling of customer funds, as well as its crypto-lending activities. The US Securities and Exchange Commission is investigating crypto exchange FTX.com's handling of customer funds amid a liquidity crunch, as well its crypto-lending activities, a source with knowledge of the inquiry said on Wednesday. Bloomberg first reported the probe.
FTX's woes are the latest sign of trouble in the fast-moving world of cryptocurrencies where prices have slumped this year as a broader downturn in financial markets prompted investors to ditch riskier assets.
After rapid growth in 2020 and 2021, bitcoin is down more than 60 percent in 2022 and was last down 13 percent on the day at $16,277.
FTT, the smaller token tied to FTX, was down a further 67 percent, after collapsing 72 percent on Tuesday.
"It has been a truly a devastating year for the industry," said Ryan Wong, a senior researcher at crypto exchange Huobi. Wong said the turmoil in the industry would "lead to massive distrust from the public towards centralised establishments."