After Binance balks, what’s next for SBF and FTX?

The Wall Street Journal reported on Tuesday that Binance was walking away from the acquisition due to reports alleging FTX mishandled customer funds. Earlier, CZ had tweeted that by signing a non-binding letter of intent, Binance always had that option.

“In the beginning, our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help,” Binance said in a statement to the Journal, which along with CoinDesk reported earlier that the deal was looking more doubtful after CZ got a look at FTX CEO Sam Bankman-Fried’s books.

Before reaching an agreement with Binance, FTX had reached out to Silicon Valley and Wall Street billionaires asking for funding, according to Semafor. The exchange also was turned down by other rival crypto exchanges, Coinbase and OKX, according to CoinDesk.

Now that Binance indeed has backed out, FTX will need to find another way to fill what could be a $6 billion (or greater) hole in its balance sheet. This could mean finding a new buyer. This could also mean bankruptcy.

Filing for bankruptcy, though, is a lengthy process that doesn’t guarantee all creditors will be repaid. While some of the big-name venture capital firms like Sequoia, SoftBank, and Tiger Global Management, likely will be prioritized, smaller FTX investors could lose out.

When the crypto lender and exchange Voyager Digital went bankrupt earlier this year, its millions of customers were designated as “impaired” claimants who weren’t entitled to get all their crypto back. Ironically, FTX US, the U.S.-based arm of FTX, was set to pay $1.4 billion for Voyager, after winning a two-week-long auction earlier this year, although other offers may still be considered.

Either way, because of the way the bankruptcy process is structured, FTX would lose control of its assets and likely would find itself under the purview of a bankruptcy judge.

‘The only winners will be lawyers’

Ric Edelman, founder of the Digital Assets Council of Financial Professionals (DACFP) and author of The Truth About Crypto, told Fortune that if FTX faces bankruptcy, investors and account holders could pay dearly.

“Either way, investors are wiped out. Those with dollars, coins, or tokens on the platform may or may not get their assets back. Lawsuits will be flying, and the only winners will be the lawyers,” Edelman told Fortune in an email.

SBF initially vowed in a tweet that “customers would be protected,” but he later deleted it.

In a year full of crypto catastrophes, including the Terra/LUNA debacle, FTX crashing to earth may yet prove the worst. News of FTX’s liquidity crunch and Binance’s apprehension over acquiring its rival exchange has already sent markets spiraling—over 24 hours, the global crypto market cap sank more than 13%, to about $790 billion, falling below $1 trillion for the first time in months. It was $3 trillion a year ago today.

Bitcoin, the largest cryptocurrency by market cap, plummeted more than 14% over 24 hours to around $16,000, its lowest level since November 2020. Meanwhile, Ether, the second-largest, fell more than 16% to about $1,100 in that same span.

“The incident will exacerbate the Crypto Winter,” Edelman added, “deepening crypto prices and delaying the crypto market’s recovery by many months.”

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