Sam Bankman Fried

Maarten Hoffmann casts a critical eye over the repeated failures of cryptocurrency, its operators, and the regulators in the wake of the FTX crash

FTX and the crypto fraud

Sam Bankman-Fried, often referred to online as ‘SBF’, is a finance and cryptocurrency entrepreneur. He is the co-founder and former CEO of the now-bankrupt crypto exchange FTX, as well as the crypto trading company Alameda Research.

He rose to prominence as head of one of the world’s largest cryptocurrency exchanges, with a personal net worth once exceeding $26 billion, before an abrupt end to his digital currency empire in early November 2022 when he was arrested in the Bahamas. He was extradited to the US in December.

He was indicted on multiple criminal fraud charges levied by the US Attorney of the Southern District of New York, Damian Williams. Williams called Bankman-Fried’s actions “one of the biggest financial frauds” in American history.

It’s ironic that this is what they said after the Bernie Madoff scandal – and here we are again. BACKGROUND TO THE COLLAPSE

On November 11th 2022, BankmanFried resigned from FTX and the company filed for Chapter 11 bankruptcy after the company had collapsed earlier that month following a report by CoinDesk highlighting potential leverage and solvency concerns involving Alameda Research. The failure of FTX shook the volatile crypto market, which lost billions at the time, falling below a $1 trillion valuation. Former associates Caroline Ellison, once Alameda Research CEO, and FTX co-founder Gary Wang pleaded guilty to fraud and are cooperating with federal prosecutors. SBF was released on a record $250 million bond on December 22nd. The 30-year-old former crypto executive will live with his Stanford law professor parents in Palo Alto, California, be confined to the Northern California area (and to his bedroom no doubt) wear an electronic monitoring bracelet, and submit to mental health and substance abuse counselling as part of the agreement between federal prosecutors and a federal judge in New York.

❛❛ The implosion of FTX shows the need to bring the crypto world within the regulatory framework Bank of England Deputy Governor Jon Cunliffe ❜❜ He was born on March 6th 1992, in California. The son of two professors at Stanford Law School, Bankman-Fried grew up in a highly educated family. He attended high school at Crystal Springs Uplands School in Hillsborough, California. He also participated in a summer academic programme for gifted high school students in mathematics.

He graduated from the Massachusetts Institute of Technology (MIT) in 2014 with a degree in physics and a minor in mathematics. In the summer of 2013, he worked as an intern for New York-based Jane Street Capital, where he returned to the proprietary trading firm as a full-time employee after graduating.

FOUNDING OF A CRYPTOCURRENCY EMPIRE

In 2017, Bankman-Fried left Jane Street and founded Alameda Research, a quantitative trading firm making millions of dollars per day actively trading cryptocurrency among various international markets. He founded the cryptocurrency exchange FTX in April 2019 and launched it the next month.

As the cryptocurrency world burst into prominence during the pandemic, Bankman-Fried and his Bahamasbased company thrived. FTX acquired the Blockfolio exchange and platform in 2020 for $150 million.

FTX’s user base expanded, and Bankman-Fried appeared to be on a solid foundation in the otherwise usually turbulent cryptocurrency markets. He then purchased crypto exchange BlockFI, Voyage, Ledger X and the assets of Celsius.

Bankman-Fried told New York Times columnist Andrew Ross Sorkin on November 30th that the sum of his wealth was $100,000 in his bank account. That balance represents quite a fall, if true.

According to Forbes, Bankman-Fried had an estimated peak net worth of $26.5 billion. However, much of that value was tied to the value of FTX and its FTT cryptocurrency token. During a long down market for cryptocurrency that followed, Bankman-Fried saw his net worth fall to around $16 billion as of late September 2022. What money?

With massive investor and customer losses surfacing, FTX and BankmanFried likely will be the targets of many future lawsuits and bankruptcy proceedings. The huge losses and allegations of fraud and cover-up of severe financial troubles could plague Bankman-Fried for years and lead to a stiff prison sentence. WHERE WERE THE REGULATORS?

One of many questions raised here is ‘what happened to the regulators?’ The US trumpet their regulatory prowess far and wide and yet this type of case occurs time and time again. The Bernie Madoff debacle was just one case in point.

Madoff made off with £26 billion through a Ponzi scheme; a fraudulent investing scam promising high rates of return with little risk to investors. A Ponzi scheme generates returns for earlier investors with money taken from

SBF under arrest in the Bahamas later investors. This is similar to a pyramid scheme in that both are based on using new investors’ funds to pay the earlier backers.

The Security and Exchange Commission (SEC) should have stepped in multiple times but didn’t. Why? Bernie was the ‘big cheese’, was once the Chairman of the NASDAQ and played the game better than they did, and was too big to fail. But anyone offering consistent returns should raise a very large red flag and when Goldman Sachs and Solomon Brothers refused to trade with him, that should have been a flare gun going off.

The SBF case was yet another failing for the SEC but this time, due more to their lack of understanding of the Crypto market rather than intimidation by a 30-year-old with no track record. Digital currency is still the wild west with buckets of cash to be made and buckets of cash to be lost.

And there we come to the crux of the matter – GREED.

Greed is what drives people into the clutches of such conmen; pure, unadulterated greed. The old adage ‘if it seems too good to be true, it likely is’ has gone the way of the dinosaurs and now we have just have a wild, headlong dash for the cash.

There will be institutions with great losses no doubt and their fund managers will say, “whoops, pass the losses over and move on…” but there are many individuals caught up in this who will lose their homes, their businesses and their lives.

Such individuals are guilty of greed for sure but they invested with the ‘security’ that the SEC had oversight - the SEC didn’t even know the questions to ask let alone attempt to ask any.

❛❛ Greed is what drives people into the clutches of such conmen; pure, unadulterated greed ❜❜

IS FULL REGULATION COMING?

It is likely that this case will lead to the regulation of digital currencies. The crypto industry and its US regulators have been in something of a Cold War for several years. Dozens of new digital currencies and companies have launched, and the agencies responsible for policing the markets have struggled to keep up.

More than 13 years after Bitcoin was first released, there is still no centralised regime to regulate the industry. “The state of regulation in the US is multi-faceted. You really have a number of different regulatory regimes that address different aspects of digital-asset activity. And you have them at the federal and the state level.” noted an official at the SEC.

Rather than publishing a list of attributes that the SEC believes cause an asset to be categorised as a security, though, the agency’s views have been communicated through myriad channels in a less than precise fashion, at least according to some in the crypto industry. And, anytime something isn’t clearly defined, it creates space for different actors in the market to argue that the regulations don’t apply to them. The Commodity Futures Trading Commission, which regulates the derivatives markets, has also exerted some authority over digital assets that it classifies as ‘commodities’ rather than securities.

The FTX Group did not keep appropriate books and records, nor security controls, with respect to its digital assets. Bankman-Fried used an auto-deleting app to communicate with employees, and encouraged them to do the same.

Those managing the bankruptcy have been unable to figure out who even worked at the company, owing to its “unclear records and lines of responsibility.” The company’s financial statements that were available—the company had not been able to find statements for two of its four business groups — should not be trusted; one of the auditing firms that worked on them is called Prager Metis, and its website describes it as the “first CPA firm to officially open its Metaverse headquarters in the metaverse platform Decentraland.” (In a statement to Money really can buy you some good company

❛❛ One of many questions raised here is ‘what happened to the regulators?’ ❜❜

Bloomberg Tax, Prager Metis defended its financial statements, saying they were “fairly stated.”)

To add further bleak comedy to the situation, at least $372m in ‘unauthorised transfers’ of FTX digital assets and another $300m of unauthorised minting of an FTX-issued token called FTT occurred on the day of the bankruptcy filing, suggesting that other actors in the crypto market were poised to take advantage of FTX’s disarray.

In response, the company has hired forensic analysts, investigators, and cybersecurity experts to try to identify those responsible for potential thefts of assets, as well as to sort out what may be “very substantial transfers” of FTX property in the days leading up to the bankruptcy. According to estimates, FTX owes nearly $3.1 billion to its 50 largest creditors, including to customers who lost money they had in their accounts.

But the real numbers could turn out to be even larger. According to reports, “The debtors have located and secured only a fraction of the digital assets of the FTX Group that they hope to recover.”

The regulators need to be dragged into court to explain yet another abject failure whereby the greedy have been exploited, ripped off and dumped, and assorted investment institutions have been hit. For example, the Ontario Teachers Pension Fund lost nearly $75m and the Tennessee Consolidated Retirement System; City & County of San Francisco Employees’ Retirement System; Maryland State Retirement & Pension System; and Alaska Permanent Fund Corp all went down for billions. LESSONS TO BE LEARNED

Digital currency will now face much tighter regulation. “The implosion of FTX shows the need to bring the crypto world within the regulatory framework,” Bank of England Deputy Governor Jon Cunliffe commented.

“While the crypto world – as was demonstrated during last year’s crypto winter and November’s FTX implosion – is not at present large enough or interconnected enough with mainstream finance to threaten the stability of the financial system, its links with mainstream finance have been developing rapidly,” he continued.

He added that FTX’s woes highlighted the need for regulators to put in place tighter controls as quickly as possible. It did not have a licence to operate in Britain, yet had caused waves.

“We should not wait until it is large and connected to develop the regulatory frameworks necessary to prevent a crypto shock that could have a much greater destabilising impact,” Cunliffe told a Warwick Business School event. “Our aim is to ensure that innovation can take place but within a framework in which risks are properly managed,” Cunliffe said. “The events of recent weeks provide a compelling demonstration of why that matters.”