He was once crypto’s golden boy. Now, after a spectacular fall from grace, Sam Bankman-Fried faces a dozen criminal charges that could see him spend decades in prison.
In November 2022, the high-profile collapse of FTX, a cryptocurrency exchange founded by the man who until recently had been a rising star, sent shockwaves through the burgeoning industry. As the company announced it had filed for bankruptcy protection amid a liquidity crisis, many of the platform’s investors and customers felt that they had been duped, while others in the wider crypto world feared the repercussions and the inevitable plummeting of confidence in the sector.
Bankman-Fried has been the focus of the intense media attention surrounding the debacle, with many wanting to know how what had been considered one of the world’s leading crypto exchanges lost over $8 billion of its investors’ and customers’ money.
A Gifted Young Mathematician
Bankman-Fried, nicknamed SBF, was born on November 8, 1992, in Stanford, CA, to two professors at the Stanford Law School. Growing up, he attended Palo Alto High School, where he excelled in academics, particularly in mathematics. He enjoyed solving complex mathematical problems and was fascinated by science experiments. He was also a member of the school’s debate team and participated in sports like tennis and ultimate frisbee.
Bankman-Fried continued to pursue his passion for science and mathematics at the Massachusetts Institute of Technology, where he also developed an interest in finance and economics. He took several courses in these fields and began exploring the world of trading. His academic achievements earned him several awards, including the prestigious Barry Goldwater Scholarship.
Success in the Financial World
After graduating in 2014, Bankman-Fried started working for Jane Street, a New York City-based quantitative trading firm that selects underpriced stocks and identifies assets above their actual worth. The company eliminates human intervention from investment decision-making. He reportedly rose quickly through the ranks and became a senior trader, gaining valuable experience in trading and risk management. He later used this experience to build his own trading firm.
After leaving Jane Street in 2017, Bankman-Fried co-founded Alameda Research, a quantitative trading firm based in Hong Kong that focuses on digital assets. By 2021, Bankman-Fried owned almost 90% of the company.
In 2019, Bankman-Fried co-founded FTX, a cryptocurrency exchange headquartered in the Bahamas, with ex-Google employee Gary Wang. Bankman-Fried’s reputation as a talented trader at Alameda made it easy for him to raise money for his new venture. The company emphasizes derivatives, leveraged trading, and a professional stance, with the objective of “advancing the institutional-grade status of the derivatives market.” In 2020, FTX US was established as a distinct entity to legally serve U.S. clients.
By 2021, FTX had grown to be the second-largest cryptocurrency exchange, valued at roughly $30 billion, trailing only Binance. In February 2022, FTX launched an extended Super Bowl 2022 commercial called “Don’t Miss Out,” starring Larry David and numerous other celebrities.
Bankman-Fried immersed himself in the realm of cryptocurrency, earning accolades as a trailblazer in the field who often advocated for stricter policies and guidelines to govern the industry. He urged the U.S. government to become better informed about it. In fact, he testified before the U.S. House Committee on Financial Services, along with other industry leaders, in December 2021, on the matter of regulating the cryptocurrency industry. He even proposed his own draft of prospective regulations for the industry.
As a prominent advocate of the Effective Altruism philanthropic movement, Bankman-Fried committed to donating most of his fortune publicly. He also wielded substantial influence on Capitol Hill, having ranked as the second-largest contributor to Democratic politicians in recent times. Later, he revealed that he secretly donated to the GOP.
The Downfall
Between May and July 2022, a series of cryptocurrency meltdowns led by Terra-Luna sparked a cascade of insolvencies among cryptocurrency lenders such as Celsius, BlockFi and Voyager. FTX intervened by rescuing BlockFi with the opportunity to purchase the firm, based in New Jersey, and by acquiring Voyager’s assets. For a brief period, these investments seemed to establish FTX as one of the most robust entities in an unstable cryptocurrency realm.
However, FTX’s fortunes took a turn for the worse in early November 2022, when CoinDesk, a leading cryptocurrency news outlet, published a scathing report about Alameda Research. The report revealed that Alameda had a heavy reliance on FTX’s native token, FTT, which constituted the majority of Alameda’s assets on its balance sheet.
The intertwined relationship between the two companies raised concerns about their potential to manipulate and artificially inflate the value of FTT. After this revelation, Changpeng “CZ” Zhao, the CEO of Binance, announced that the crypto exchange would sell off its FTT holdings, which further caused panic among investors, who began withdrawing their funds from FTX.
FTX found itself processing more customer withdrawals than it could afford, leading to financial insolvency. As a result, the value of FTT plummeted, having reached an all-time high of around $50 in March 2022 before dropping to a little over $1 a year later.
In the midst of the chaos, Binance expressed interest in acquiring FTX and signed a non-binding letter of intent. However, the very next day, Binance reneged on the deal, citing news reports of mishandled customer funds and allegations of U.S. agency investigations. The Wall Street Journal reported that FTX had allegedly used approximately $10 billion of customer assets to finance high-risk bets at Alameda Research, while Bloomberg reported that U.S. regulators were looking into whether FTX had indeed mishandled user funds.
“We Messed Up Big.”
On Nov. 11, FTX and Alameda Research filed for Chapter 11 bankruptcy, signaling the end of an era for the crypto giants. Bankman-Fried, the former CEO, also resigned from his position. The filing disclosed a number of internal issues at FTX, including the possibility that the company had not verified the number of users on its platform and lacked an “accurate list of bank accounts and account signatories.” Former employees had similar complaints, citing poor record-keeping that left profits and losses unclear, and concerns over risk management and business ethics.
John J. Ray III, who previously helped reorganize the infamous energy giant Enron through its bankruptcy process around two decades ago, took over as FTX’s new CEO. In a bankruptcy court filing, Ray said, “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.” Billions of dollars of customer funds were expected to have been lost.
In a series of tweets, Bankman-Fried addressed FTX’s liquidity crisis and apologized for what happened. He acknowledged that FTX was handling billions of dollars in volume and transfers, but said there had been too much leverage and he had underestimated the risk. He said that this caused a run on the bank, and the market crashed, leading to liquidity exhaustion.
Bankman-Fried also apologized to his employees in a letter obtained by Bloomberg, explaining that FTX’s collateral had decreased significantly from $60 billion to just $9 billion. Although he did not break down the assets that make up that collateral, it is believed that Alameda Research used over $2 billion worth of FTX’s FTT token as collateral for loans.
In late November and early December 2022, he launched a comprehensive media campaign and granted interviews to various media outlets from established brands to relatively unknown YouTubers. Throughout, he portrayed himself and his management of FTX as either naive or negligent but consistently refuted claims of intentional wrongdoing. “Look, I screwed up. I was the CEO of FTX; that means I was responsible,” he told The New York Times on Nov. 30. “We messed up big.”
On Dec. 12, just as he was about to travel to the U.S. for an appearance before the U.S. Congress, he was arrested in the Bahamas following a notification from the U.S. government that fraud charges had been filed against him. Several days later, he agreed to be extradited to the U.S., where he was indicted on eight counts, including wire fraud and money laundering, which carry a maximum sentence of 110 years.
On Dec. 22, he was freed on $250 million bail under the condition he would remain under strict supervision at his parents’ home in Palo Alto. The previous day, Carolyn Ellison, the former CEO of Alameda Research and Wang pled guilty to charges including wire fraud, securities fraud and commodities fraud. Bankman-Fried, however, pled not guilty to the charges against him on Jan. 3.
An unsealed indictment against the fallen crypto mogul on Feb. 23 revealed that Bankman-Fried is facing a new wave of charges, including bank fraud and operating an unlicensed money transmitter. He now has up to 12 counts to defend himself against, with the trial set to begin in October.
Repercussions
FTX listed its top creditors in a court filing dated Nov. 19. The exchange owes a total of almost $3.1 billion to its top 50 creditors, with the top 10 alone accounting for $1.45 billion of the debt. The company could have over a million individual creditors.
More recent court documents introduced at the beginning of March reveal what Ray has called a “massive shortfall” of “highly commingled assets” at FTX, which represent over $8.6 billion in total liabilities across all customer wallets and enterprise accounts.
Overall, more than $2.15 billion in assets were found at FTX, and another $191 million was collected at FTX US, representing less than a third of the total deficit.
It remains to be seen whether the event will spur Congress to create some sort of crypto regulation, with wide gaps still remaining between Republicans and Democrats on what needs to be done to reduce risks for investors.
Regardless of what legislation may be brought in the future, for now, at least, FTX’s collapse seems to have shattered trust in the cryptocurrency sector, constituting a major setback. The industry had promised to deliver a better, safer, and more inclusive financial system, for the people, by the people.
As for Bankman-Fried, the man who was once expected to revolutionize the world of cryptocurrency for the better and make the sector more trustworthy, he is now seen by many as its biggest villain.