The day before embattled cryptocurrency exchange FTX filed for bankruptcy, Changpeng Zhao, the CEO of rival exchange Binance, sent an alarmed text message to FTX founder Sam Bankman-Fried.
Mr. Zhao was concerned that Mr. Bankman-Fried was orchestrating crypto transactions that could plunge the industry into collapse. “Stop now, don’t do more damage,” wrote Mr. Zhao in a group chat with Mr. Bankman-Fried and other crypto executives on November 10. “The more damage you do now, the more jail time.”
FTX and its sister hedge fund, Alameda Research, had just collapsed after a run on deposits 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, casting doubt on the future of the entire industry.
The series of about a dozen group texts between Mr. Zhao and Mr. Bankman-Fried on November 10, which were obtained by The New York Times, show that key crypto leaders feared the situation could get worse. Their frenetic communication offers a glimpse into how business is done behind the scenes in the industry, with at least three top executives from rival companies exchanging messages in a group on the encrypted messaging app Signal.
The texts also show that industry leaders were well aware that the actions of a single company or fluctuations in the value of one virtual currency could destabilize the entire industry. Exchanges became increasingly tense as Mr. Bankman-Fried and Mr. Zhao traded barbs.
Earlier that week, Mr. Zhao had agreed to buy FTX and save the stock before pulling out of the deal. In the November 10 texts, he seemed certain that FTX would not survive, and was concerned that it would drag the rest of the industry down with it. During a crypto crash in May, two coins had plummeted in value, leading to an industry-wide collapse and forcing several leading companies into bankruptcy.
In the Nov. 10 texts, 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 a company of the same name, is a hub of crypto trading worldwide and is often used by digital asset enthusiasts to transact. Industry insiders have long feared that if the price of Tether fell, it would create a domino effect that could bring the industry to its knees. (Tether ended up not losing its $1 peg.)
A Binance spokeswoman declined to comment on the text exchanges. In a statement, Mr. Bankman-Fried, 30, that Mr. Zhao “absurd” were.
“Trades of that magnitude would have no material impact on Tether prices, and as far as I know, neither I nor Alameda have ever attempted to deliberately unpeg Tether or other stablecoins,” he said. “I’ve made some mistakes in the last year, but this isn’t one of them.”
A spokeswoman for Tether said in a statement that the company had “shown its resilience to attacks.” She added that FTX’s actions “do not reflect the ethos and commitment of an entire industry.”
FTX, a marketplace where people could buy and sell digital currencies, collapsed early last month as customers rushed to withdraw deposits, partly in response to tweets from Mr Zhao questioning the company’s finances. FTX soon shut down, prompting investigations by the Justice Department and the Securities and Exchange Commission into whether the crypto exchange had broken the law by using its clients’ money to support Alameda.
The Justice Department is also investigating whether Mr. Bankman-Fried engaged in market manipulation in the spring by executing trades that contributed to the failure of two prominent cryptocurrencies.
For years, critics of the crypto industry have said that Tether could also be vulnerable to a collapse. Tether has long claimed that its stablecoins are backed by cash and other traditional assets, and that in 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 status of its reserves, casting doubt on the currency’s reliability.
In one of the Nov. 10 messages to the group chat, Mr. Zhao pointed to a $250,000 transaction by Alameda that he said was designed to destabilize Tether. The transaction was visible on the blockchain, a public ledger of cryptocurrency transactions that anyone can see.
In response to the allegations of Mr. Zhao seemed to Mr. Bankman-Fried stunned. “Huh?” he said. “What do I do with stablecoins?”
“Are you saying you think $250,000 worth of USDT trading would do the trick?” he added, using a common abbreviation to refer to the Tether currency.
Mr. Zhao replied that he didn’t think a transaction of that magnitude would succeed in destroying Tether, but it could still cause problems.
“My honest advice: stop doing everything,” said Mr. Zhao. “Put on a suit, go back to DC and start answering questions.”
“Thanks for the advice!” Mr. Bankman-Fried returned fire.
Emily Flasher reporting contributed.