Inside the frantic texts exchanged by crypto executives as FTX collapses

The day before cryptocurrency exchange FTX went bankrupt, Changpeng Zhao, CEO of rival exchange Binance, sent a heartbreaking message to Sam Bankman-Fried, founder of FTX.

Mr. Zhao was concerned that Mr. Bankman-Fried was regulating cryptocurrency trades that could send the industry into meltdown. “Stop now, do no more harm,” Mr. Zhao wrote in a group chat with Mr. Bankman-Fried and other crypto executives on November 10. “The more damage you do now, the longer the jail time.”

FTX and its hedge fund sibling, Alameda Research, collapsed after a deposit run exposed an $8 billion hole in the exchange’s accounts. The implosion unleashed a crypto crisis, as companies with ties to FTX teetered on the brink of bankruptcy, calling the future of the entire industry into question.

A series of about a dozen group texts between Mr. Zhao and Mr. Bankman-Fried on November 10, obtained by The New York Times, shows that major cryptocurrency leaders fear the situation could get worse. Their frantic communication offers a glimpse into how business operates behind the scenes in the industry, as at least three senior executives from rival companies exchange messages in a group on the encrypted messaging app Signal.

The texts also show that industry leaders were acutely aware that the actions of a single company or fluctuations in the value of a single virtual currency could destabilize the entire industry. The exchanges become increasingly tense as Mr. Bankman-Fried and Mr. Zhao trade barbs.

Earlier that week, Mr. Zhao had agreed to buy FTX and hold the exchange, before reneging on the deal. In the November 10 texts, he seemed certain FTX wouldn’t stick around, and worried it might bring the rest of the industry down with it. During the cryptocurrency crash in May, two currencies plunged in value, triggering an industry-wide crash and driving several high-profile companies into bankruptcy.

In the Nov. 10 messages, Mr. Zhao specifically accused Mr. Bankman-Fried of using his hedge fund to drive down the price of Tether, a so-called stablecoin whose price is designed to stay at $1.

Tether, which is issued by the company of the same name, is a cornerstone of cryptocurrency trading around the world and is popularly used by digital asset enthusiasts to conduct transactions. Industry insiders have long feared that if the price of Tether falls, it could cause a domino effect that could bring the industry to its knees. (In the end, Tether did not lose its peg to the dollar.)

A Binance spokeswoman declined to comment on the text message exchange. In a statement, Bankman Fred, 30, said Mr. Zhao’s allegations were “ridiculous”.

“Trades of this magnitude would not have a material impact on Tether pricing, and to the best of my knowledge neither Alameda nor I have ever attempted to decrypt Tether or any other stablecoins,” he said. “I’ve made a number of mistakes over the past year but this isn’t one of them.”

A spokeswoman for Tether said in a statement that the company had “demonstrated its resilience in the face of attacks.” She added that FTX’s actions “do not reflect the spirit and commitment of an entire industry.”

FTX, a marketplace where people can buy and sell digital currencies, collapsed early last month when customers scrambled to withdraw deposits, in part because of Mr. Zhao’s tweets that called the company’s finances into question. FTX soon folded, sparking investigations by the Department of Justice and the Securities and Exchange Commission into whether the cryptocurrency exchange broke the law by using its clients’ funds to support Alameda.

The DOJ is also investigating whether Mr. Bankman-Fred engaged in market manipulation in the spring by making deals that contributed to the failure of two high-profile cryptocurrencies.

For years, critics of the cryptocurrency industry have said that Tether could also be vulnerable to a crash. Tether has long claimed that its stablecoins are backed by cash and other traditional assets, and that in the event of a crisis, all of its customers can exchange their coins for the equivalent dollar amount. But regulators have previously accused Tether of lying about the state of its reserves, raising doubts about the currency’s reliability.

In one of the November 10 messages to the group chat, Mr. Zhao referred to a $250,000 deal by Alameda that he said aimed to destabilize Tether. The trade was visible on the blockchain, which is the public ledger of cryptocurrency transactions that anyone can view.

In response to Mr. Zhao’s accusations, Mr. Bankman-Fred sounded unimpressed. “Huh?” He said. “What do I do to stabilize currencies?”

“Are you claiming that you think $250,000 in USD trading would clear it?” He added, using a common acronym to refer to the Tether currency.

Mr. Zhao replied that he didn’t think a deal of this size would succeed in destroying Tether, but it still caused problems.

“My honest advice: stop doing everything,” Mr. Zhao said. “Put on a suit, go back to the capital, and start answering questions.”

“Thanks for the advice!” Mr. Bankman Fried responded.

Emily Flitter Contribute to the preparation of reports.

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