03/28/2024 UPDATE: FTX founder sentenced to 25 years for his role in the massive crypto fraud.
Sam Bankman-Fried was once seen as an altruistic crypto king worth tens of billions of dollars and yet philanthropic and down to earth. But then his fame, reputation, and fortune all collapsed in one of the most catastrophic financial frauds in American history. Fresh from MIT, Sam Bankman-Fried began his financial career at a trading firm and quickly transitioned into the world of cryptocurrency, co-founding Alameda Research in 2017. Alameda Research made its money by buying cryptocurrencies for cheap in American or European markets, and then reselling it for a profit by exploiting price gaps in the Asian markets. At the height of its success, Alameda Research earned three to $4 million a day in trading fees. In 2019, Bankman-Fried and his colleagues founded ftx.com, a crypto exchange platform, largely by reinvesting profits from Alameda Research. On the FTX platform, buyers and sellers could connect with each other and trade different currencies. FTX profited from these transactions by charging trading fees. FTX also had its own token called FTT, which granted buyers perks like discounts on the trading fees on the platform. Market speculators believed the company was an innovative alternative to competitor exchange giants like Binance or Coinbase. Bankman-Fried promised he would donate the majority of his profits to charities dedicating to saving people’s lives, saying he would keep only 1% of earnings from his companies or a minimum of a hundred thousand dollars per year. He even appeared in the Times’ 100 Most Influential People list, where he would be described as, “An effective altruist who believed crypto could help democratize financial markets and reduce poverty and corruption.” Several times, Bankman-Fried was called to testify in front of Congress to discuss whether the crypto market should be more regulated, promoting the idea of blacklists of digital addresses linked to financial crime.
“I have a duty as a member of the industry to try and get us regulated to try and move the industry in a more responsible direction. And I think that requires engagement. I think it’d be irresponsible of me not to engage, with Capitol Hill, with regulators.”
Although many people were skeptical of his motivations, Bankman-Fried’s reputation was largely positive. FTX even had celebrity endorsements from the likes of Tom Brady, Kevin O’Leary, and even Larry David. But FTX’s skyrocketing success was partly due to covertly leveraging Alameda Research resources to facilitate exchanges and attract customers. By 2021, FTX held approximately $15 billion worth of assets and accounted for 10% of the digital transaction volume of crypto on a global scale. In 2022, FTX had a $32 billion valuation.
In 2022, the crypto world began seeing a series of monumental crashes after the Federal Reserve began raising interest rates to fight off inflation. The crypto market overall had lost over $2.1 trillion in less than eight months, which had devastating consequences for many crypto companies. First, FinTech company BlockFi began to struggle. Then Luna and Terra and Three Arrows Capital collapsed. With the crypto contagion spreading, Bankman-Fried saw an opportunity, so he decided to intervene and provide bailouts to several crypto platforms. Alameda Research also provided a $75 million line of credit to Voyager Digital and allowed it to use Alameda’s facilities to “Facilitate customer orders and withdrawals.” FTX appeared to be heading towards a more dominant position in the crypto market. It had become the second largest digital currency exchange behind only Binance.
But behind the scenes at FTX and Alameda Research, things were murkier. The relationship between Voyager Digital and Alameda Research was more complex than Sam Bankman-Fried had disclosed. After Voyager filed for bankruptcy, court documents revealed that Alameda had borrowed $370 million from Voyager and was a major equity investor in Voyager Digital with an 11.56% stake. Alameda Research provided a $500 million bailout for Voyager and both FTX and Alameda positioned themselves to jointly bid for Voyager’s customer accounts. By the following month, its $110 million equity investment in Voyager was worth only about $17 million, and Voyager was facing investigation from Canadian Securities regulators.
“After multiple rounds of bidding, FTX has won the battle to buy Voyager out of bankruptcy.”
The deal was valued at $1.4 billion. Most of that was for Voyager’s assets. Simultaneously and unbeknownst to its users, FTX was using customer deposits to back Alameda Research’s risky bets, something that their own terms of use specifically forbade. Then Alameda Research suffered a series of losses with the prolonged crypto winter and the bankruptcy of BlockFi, Voyager Digital and several other crypto companies, to which they had granted enormous lines of credit. According to Forbes, “Alameda’s accumulated losses prompted someone from Bankman-Fried’s operation to improperly transfer customer funds from FTX to Alameda, which left FTX vulnerable to a withdrawal run that precipitated its sudden bankruptcy. Binance had announced it had reached a non-binding agreement to buy the non-US business of FTX for an undisclosed sum. This agreement was short-lived though as CZ, the then CEO of Binance announced publicly that they were planning to sell their entire collection of FTT tokens after corporate due diligence raised concerns about FTX’s mishandling of customer funds among other issues. Suddenly FTX’s users rushed to salvage their funds, prompting the equivalent of a bank run.
Definitely in panic mode. And at first, everyone thought that it was a glitch. After about 48 hours, everyone started to really realize this is a big problem and started to panic and tried as best they could to extract the funds that they had.
By November of 2022, FTX filed for bankruptcy after its largest competitor, Binance, pulled out of an acquisition deal. In the bankruptcy filing, Alameda Research and FTX show a combined net loss of $3.7 billion since their inception. But the big picture balance loss could be much, much larger. Bankman-Fried, resigned as CEO. The collapse set off investigations by the Justice Department and the Securities and Exchange Commission, which now argue that in what is essentially a Ponzi scheme, FTX and Bankman-Fried improperly used customer funds to prop up Alameda Research. His charges include wire fraud, wire fraud conspiracy, securities fraud, securities fraud conspiracy, and money laundering. After Bankman-Fried resigned, John Ray III, widely known as the person who managed the aftermath of Enron’s account fraud scandal, was appointed the new CEO of FTX. Ray described an unbelievable level of disarray at FTX and said he had never seen, “Such a complete failure of corporate control.” Furthermore, the court filing showed that Alameda Research had made loans of $3.3 billion to Bankman-Fried and additional loans to other FTX executives. As of January 2022, John Ray had secured about $5 billion of liquid assets, but at least $8 billion of customer assets were unaccounted for. And he says it’s unlikely that everything will be recovered. Bankman-Fried’s trial for seven of the eight pre-extradition criminal charges began October 2nd, 2023 and ended on November 1st of the same year. The jury returned guilty convictions on all seven charges. Throughout the trial, executives, customers, and investors testified that Bankman-Fried directed employees or acted in his personal capacity to spend customer deposits for non-business purposes and to make material misstatements about FTX’s solvency and relationship with Alameda Research.
Sam Bankman-Fried now awaits sentencing this March.
