In terms of a possible conspiracy, it might be his pro-regulatory lobbying that sowed the seeds for FTX’s destruction.

Bankman-Fried raised the ire of his crypto peers very recently – including Binance’s Changpeng Zhao, or “CZ” as he is more commonly referred to in the industry – by advocating more intrusive regulation of crypto activity, including the “censoring” of sanctioned parties in blockchain protocols.

If what has transpired over the past few days had occurred in a regulated market, the US Securities and Exchange Commission would have been all over it.

He argued that permitting all crypto transfers to occur opened the door to significant financial crimes. In effect, he was supporting more transparency and the mainstreaming of crypto activity, which is against the libertarian ethos that pervades crypto activity.

His stance produced a backlash that included very aggressive comments from Zhao, who was an early investor in FTX before the two groups became fierce competitors.

“We gave support before, but we won’t pretend to make love after divorce. We are not against anyone. But we won’t support people who lobby against other industry players behind their backs,” Zhao said.

Coincidentally or otherwise, after Bankman-Fried’s lobbying for more regulation (which some argued would kill off decentralised finance), someone leaked a copy of the balance sheet of a crypto hedge fund owned by him, Alameda Research, to the crypto news site CoinDesk last week.

It seemed to show that about $US6 billion of Alameda’s $US14.6 billion of assets were exposed to FTX, either through holdings of FTX’s FTT tokens or as “FTT collateral.” It also had more than $US1 billion of exposures to another cryptocurrency, Solana’s Sol. Bankman-Fried was an early investor in Solana, which was seen to be within his sphere of influence.

The leaked balance sheet raised concern that any fall in the price of FTX could shake the foundations of Bankman-Fried’s entire group.

Zhao responded to/seized on the disclosures (which Bankman-Fried claimed showed only a small part of his larger group) by announcing that he was going to dump the $US580 million of FTT tokens Binance received in a cash-and-shares deal when it sold equity in had in FTX last year “due to recent revelations that came to light.”

Even though Bankman-Fried protested that “a competitor is trying to go after us with false rumours” and said FTX had enough liquid assets to cover all withdrawals, Zhao’s Binance announcement triggered a rush by FTX investors for the exits and a meltdown in its price, which tumbled almost 75 per cent.

Then came the news of the deal between Bankman-Fried and Zhao which, if consummated, would give Zhao and Binance absolute dominance of the crypto exchange sector, with a market share estimated at more than 70 per cent.

Zhao and Binance will be even more powerful players in the crypto world, even though Binance, which has more than 120 million users, has had continued run-ins with regulators that have led to bans in several jurisdictions. It has also been accused of enabling Iran to circumvent US sanctions (which it denies).

There is some irony in Bankman-Fried’s fate, given that FTX had profited from the massive shake-out of the sector this year – the market capitalisation of the entire sector has shrunk from more than $US2.8 trillion a year ago to just over $US900 billion – by rolling up distressed crypto businesses for fractions of their former value.

If what has transpired over the past few days had occurred in a regulated market, the US Securities and Exchange Commission would have been all over it. Two rivals clash, there’s a convenient leak that triggers a run and forces one of the competitors into the arms of the other ... that would raise regulators’ eyebrows.

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Cryptos, of course, are barely regulated. The sector is the Wild West of the financial services sector, full of frauds, rip-offs and the facilitating of criminal activity.

Its participants’ finances aren’t transparent – Binance doesn’t even have headquarters – and it is intensely volatile and inherently vulnerable to the kind of liquidity crunch that destabilised FTX and forced it to find someone to bail it out.

During the market’s crash, FTX was once regarded as the lender of last resort for the sector. Now, it seems, that role is Binance’s. That won’t be reassuring to regulators in the UK, Italy, Hong Kong, Japan and elsewhere that have either banned Binance from operating within their jurisdictions or warned investors to be wary of it.

The entire sector is immature, so the controversies and the wave of collapses and consolidation could be seen as a natural path towards a stronger and more stable asset class.

That would, however, require a level of trust and transparency that doesn’t exist today and will probably only be gained if cryptos are subjected to the same levels of regulatory scrutiny as conventional securities.

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