Mon Nov 21 2022

Sam-Bankman Fried and FTX: Yet Another Crypto Fraud

In 2021, the young billionaire Sam Bankman-Fried – commonly referred to as SBF - was making headlines as “the next Warren Buffett”. His crypto imperium collapsed, in November of the following year. Just like Elisabeth Holmes and Gerald Cotton, his charisma and youthful boldness deceived both powerful politicians and seasoned lenders. Until his house of cards fell.

What did you do in your twenties? Sam Bankman-Fried studied physics at MIT, became one of the youngest billionaires ever, until his company FTX declared bankruptcy in November 2022. SBF enjoyed moving quickly and taking chances. He similarly believed for a while that nothing could possibly happen to him. Only a couple of weeks before the dramatic crash of the FTX exchange, he confidently stated in a popular podcast “What have we at FTX been doing better than our rivals from the start? Simple: risk control”.

The youthful "lord of cryptocurrency" was a master in personal branding -in a world dominated by façades, fueled by the increasing competition to stand out on social media, fragmented news outlets and fast-riding, but short-lasting hypes). He was more aware than anyone that the polished Wall Street CEOs and the rest of the crypto world were an unsettling contrast to his messy head of curls and eccentric clothing style. SBF’s expertly crafted persona as a game junkie, brilliant computer whiz, and charitable do-gooder took care of the rest.

Aged 25, Bankman-Fried entered the cryptocurrency market for the first time in 2017, when he founded Alameda Research with a number of friends. Alameda Research specializes in cryptocurrency arbitrage, which is the practice of purchasing and selling cryptocurrency on various exchanges in order to profit from price fluctuations. They simply buy one cryptocurrency cheaply on one site and sell it longer on another. That went well, but not good enough for SBF. Two years later, he started the online crypto exchange FTX (which stands for Futures Exchange).

Great imagination

All the doors opened at once, and cash rushed in. According to documents that Reuters was able to obtain, FTX's turnover increased from $10 million in 2019 to $1 billion in 2021. SBF was on the Forbes cover of the same year. He was only 29 years old when his personal wealth was estimated to amount to $26.5 billion, propelling him to the 25th spot on the list of the wealthiest Americans. The weekly mused aloud, "Is this the new Warren Buffett?"

SBF tweeted, "At that point, we became overconfident and irresponsible." (https://twitter.com/SBF_FTX/status/1592958063362789378 )The red carpet was not just thrown out in the sporting community; SBF was also made to feel at home in the political community. He quickly overtook President Joe Biden as the second-largest fundraiser to the Democratic Party, which helped him gain access to key positions on Capitol Hill.

His stated objective was to create a user-friendly "FTX Superapp" that would integrate all financial applications, including mobile payments between individuals as well as trading in cryptocurrencies, stocks, and banking services. Making FTX "the cleanest brand in the crypto world" was the aim, according to SBF.

This sales presentation won over Wall Street, where he was regarded as a brilliant visionary by some. The world's largest asset management BlackRock, the Japanese tech fund SoftBank, the Singaporean sovereign wealth fund Temasek, and venture capital juggernaut Sequoia are just a few of the supporters who invested more than $2 billion in his success story. Numerous additional well-known companies, like Fidelity Investments, wrote letters to the CFTC, the regulator of the American crypto industry, endorsing SBF. Even Facebook's parent company Meta and grocery giant Walmart were swayed by the charisma of the self-described crypto hero and considered working together.

Few people recognized the cunning scam artist with unlimited ambition hiding behind Sam Bankman-charming Fried's exterior. As a physics graduate from MIT, his ambitions led him away from Silicon Valley and Wall Street and onto high-risk cryptocurrency trading. He was able to secretly create a billion-dollar empire founded on deceit, hubris, and fraud in that loosely governed virtual environment. In the court documents that are attached to the request for a moratorium, the new FTX CEO John Ray III states that there is no trustworthy financial information accessible. "I have never witnessed such a total collapse of corporate control in my 40-year career." Ray should know because he handled Enron's bankruptcy, which was one of the largest accounting frauds in American history.

The fact that he is not exaggerating, becomes painstakingly clear from the following discovery: it seems like a group of hipsters in the Bahamas effectively ran SBF's entire enterprise. It involves a group of ten pals who shared Bankman-opulent Fried's $40 million mansion on the island. An insider claimed to the website Coindesk that several of them, including CEO Caroline Ellison and SBF itself, were also momentarily in a relationship.

In the court report, Ray states that "control of the corporation was in the hands of a small group of inexperienced and potentially corrupted persons." Moreover, FTX failed to keep accurate books, records, or security codes for the client's digital assets. Even a detailed list of its own bank accounts or workers was missing.

The gang of selected few used unsecured email to converse and to hazardly transmit the crypto currency security keys to one another. Because of these practices, it was simple to utilize client money for unauthorized purposes, such as buying mansions. The payments were authorized by "custom emojis" in an online chat. Internal decisions were purposefully communicated using specialized platforms where messages were automatically encrypted and removed.

Fight until the end

All of this made it very simple for SBF to direct billions of dollars' worth of cryptocurrency from FTX customers first to Alameda Research and then partially to his own businesses or accounts from there. Especially after he persuaded Gary Wang, a 29-year-old co-founder and chief technology officer who had previously worked at Alameda, to incorporate a backdoor into the accounting program. This made it possible to route customer assets without raising any red flags among the rest of the personnel.

Therefore, few people predicted that the FTX empire would disintegrate in six days as a result of a shortage of liquidity. Except possibly for a few prominent members of the crypto community who despised SBF and watched with increasing envy as it imposed its agenda on the Washington political establishment. This even prompted some crisis meetings in New York at the end of September and beginning of October, where Kristin Smith, executive director of The Blockchain Association, reportedly proclaimed, "Sam is in the process of selling out the crypto business in exchange for a monopoly for FTX."

According to The Washington Post, that was viewed as a betrayal and caused his fiercest opponent (despite SBF denying their rivalry on Twitter), Changpeng Zhao, the CEO of Binance, to demolish him with one devastating tweet. After "recent findings," Zhao announced in a post on Sunday, Nov. 6, that he will sell the remaining FTX tokens for around $600 million. What follows is history.

Investors became doubtful about FTX's risk management and pulled out their crypto tokens en masse, fearing that their investments would be blocked. A significant portion of these were invested in the FTX token (FTT), which crashed in value. This led to huge liquidity shortages, billions flowed away and there were no more funds and tokens to pay out to all customers. The parent exchange FTX was forced to file for bankruptcy after only six days.

SBF fought back through an increasingly delusional number of Tweets. In a tweet that has since been deleted, he first denied: “FTX has enough funds to cover all customer deposits. We do not invest customers' money.” Alameda Research CEO Ellison tweeted something similar. But when all customers wanted in their money at the same time, SBF called together its lieutenants and mentor Joseph Bankman (a Stanford University professor who lobbied for FTX in Washington) for an emergency meeting.

A day later, on Monday, the other executives followed suit. Only then did SBF confess that FTX was "running out of money. He showed a spreadsheet that showed there was a $10 billion hole in the books. Since FTX could sell few assets on short notice to generate cash quickly, $7 billion to $8 billion in fresh cash had to be found in a few days to save the capsized company.

Amateur

'That was a real shock to us. Then we knew we were cursed,' several board members testified afterwards. In a desperate attempt to find money, calls were made around to trusted investors, such as Sequoia, as well as to new potential investors from Saudi Arabia and Japan. Rival crypto players such as Coinbase and Kraken were asked to cough up 1 billion each. But for some prospective investors, the slides used looked too "amateurish," while for others the overlap in assets between FTX and Alameda aroused too much suspicion.

In the end, only Binance temporarily took the plunge. When the world's largest crypto exchange also pulled out of the 'non-binding' deal not much later, FTX's fall could no longer be avoided. To the dismay of the regular staff. 'Some employees had all their savings in FTX, an insider testified: “We trusted that everything was fine.”

At exactly 4:30 a.m. on Friday the 11th of November, FTX founder and CEO Sam Bankman-Fried decided to give in. He appointed liquidation expert John Ray III as the new CEO and stepped aside. After which he tweeted: "I fucked up, I'm sorry”.

Sources