Lawyer's Detailed Explanation: If Binance withdraws from the acquisition, will FTX seek bankruptcy liquidation?

Author: @wassielawyer

Compiled by: GaryMa, Wu Says Blockchain

Regarding the current situation of FTX's funding collapse and its pursuit of acquisition by Binance, crypto lawyer @wassielawyer elaborates on his views from the perspectives of FTX's optional responses and the potential for subsequent liquidation of FTX. Wu Says has compiled and organized the following:

I am quite surprised that among the many options available, FTX chose to be acquired by Binance. SBF had many choices:

• Seek emergency debt financing;
• Seek new capital investment;
• Liquidate assets;
• Buy time.

The first three options could be facilitated by seeking bankruptcy protection, yet SBF chose to be acquired by Binance, knowing that Binance was the instigator of this run.

From this, we can conclude that FTX indeed lent customer funds to a third party, likely Alameda. This means, as I previously speculated, that FTX was operating under a fractional reserve model, in which it was not prepared to handle the run triggered by CZ on FTX. To cope with these runs, FTX needed to unwind its loans at Alameda. Alameda itself did not have enough liquidity to return funds to FTX, so the company had to liquidate any liquid assets it could and return any assets it could to allow FTX to continue to meet withdrawal demands.

But that is not enough, as customer confidence has not been restored, there are no deposits, only withdrawals. Therefore, some external third-party funding is needed to meet cash outflows. SBF did not seek financing from any other parties, nor did he try to buy more time by restricting withdrawals or seeking a pause (there were media reports that he sought help from Coinbase and OKX), but instead knelt to Binance. Does this mean that FTX is in such deep trouble that we are not talking about emergency turnover, but rather comprehensive rescue financing?

Rescue financing would be very expensive, which means SBF does not believe FTX can meet these financing costs. SBF also believes that buying time through a Chapter 11-like process would not be beneficial.

What is the conclusion? There must be a huge hole on FTX's balance sheet (likely Alameda) that cannot be filled by other capital, forcing SBF to kneel. But what now? CZ is simply acquiring FTX, which means that the debts Alameda may owe to FTX still exist. Therefore, customers will be compensated (as CZ is filling the gap), but FTX (under new management) will certainly seek to recover unpaid amounts from Alameda. So, are we now seeing a potential bankruptcy situation for Alameda?

Currently, Binance and FTX have a handshake agreement, with Binance helping FTX through the liquidity crunch. An LOI (Letter of Intent) has been signed, but note that this is not binding, as it still requires due diligence. During the due diligence process, Binance and its legal advisors will have a better understanding of the actions of FTX and Alameda. I think it is quite clear at this point that FTX has a hole on its balance sheet because it lent money to Alameda, possibly to generate returns, or to save Alameda after the collapse in June.

If the answer is the former, it would be much better for all of us, as it would only mean that Alameda's liquidity is very poor, and over time, it can liquidate its assets to repay FTX (under Binance's management); but if it is the latter, then Binance may be less willing to do this deal, as they see that the likelihood of the funds they put in to fill FTX's hole coming back is much smaller.

So how bad are Alameda's bad debts? There are also some speculations that FTX lost money on stocks? I would appreciate any further clarification on this, but all evidence suggests that Alameda currently has huge liabilities to FTX. The further complication of the deal is antitrust and regulatory issues. Many regulators will have objections to the acquisition of the largest CEX potentially being its biggest competitor. Binance is viewed by some as a "Chinese company," which is certainly not a good thing. Further ripple effects can be expected. It sounds like SBF may have already started providing financing to competitors when things unraveled in June, "for the good of the industry" (e.g., Voyager). Therefore, we are likely to have an interesting domino effect. Whether or not FTX is acquired, if Alameda has significant debts to FTX, FTX will seek to recover funds from Alameda. In turn, Alameda will also try to unwind all its investments, including any potential rescue financing for distressed companies.

So, if you are a bad loan platform or exchange, and you went to beg SBF for help in June and succeeded, does Alameda have a way to now withdraw any financing it provided to you? If so, a new round of contagion has already begun.

Now I want to believe that CZ will work hard to complete this acquisition for our industry (and our business), but what happens if it does not materialize?

(On the evening of the 9th, according to CoinDesk, sources revealed that after reviewing FTX's internal data for about half a day, Binance strongly opposed completing the deal. Previously, after FTX sought help and was rejected by other large exchanges Coinbase and OKX, Binance subsequently reached a proposed acquisition agreement. Binance declined to comment on the status of the proposed deal.)

If the acquisition fails, I am quite sure that FTX's next step will be to enter bankruptcy protection (like Voyager), which will give it some time to determine its direction and potentially restructure the company.

We would best avoid this situation, as it would mean that anyone with funds on FTX would be unable to withdraw for months (as they clearly did not safeguard customer funds), while financial advisors and lawyers would receive millions in fees each month. Then, FTX might use this time to seek new investors or buyers.

If the information disclosed in Voyager's bankruptcy protection application is correct, then there should at least be some interest in saving FTX (at a reasonable price) to prevent its liquidation, which would avoid a terrible outcome.

The worst-case scenario is that the hole is ridiculously large (like 3AC), and liquidation is the only possible outcome for FTX and Alameda. If this happens, the funds that depositors can recover will be very few.

If the nightmare of FTX and Alameda liquidation occurs, I suggest we all start working to support ourselves while waiting for the outcome of the litigation.

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