On Nov. 2, 2022, the heavy weight of America’s justice fell in a matter of hours over crypto’s kingpin, Sam-Bankman Fried (SBF)
. Bankman-Fried was found guilty of “wire fraud, conspiracy, and money laundering” after being unable to return $8 billion of customer money according to the New York Times
. He would be sentenced on March 28 and face a maximum sentence of 110 years.
The downfall of Bankman-Fried is intriguing both because of its scale and because of the tentacular pervasiveness of his firm in broader American society. FTX, the firm he co-founded, was one of the darlings of the finance world. Valued $32 billion
at its peak in 2021, the firm handled $719 billion in trade for 1.2 million users and was the second largest player in the crypto futures exchange market as well as a fierce competitor to market leader Binance
The firm was backed by the most powerful and sophisticated investors in high finance
such as acclaimed venture capital Sequoia Capital, private equity powerhouse Thoma Bravo, conglomerate mammoth Softbank, asset management mastodont Blackrock, hedge fund giant Tiger Global, sovereign wealth fund titan Temasek, and pension fund juggernaut Ontario Teachers. In addition to its importance within the finance industry, FTX became more entrenched in mainstream culture. Its ads were featured on the Super Bowl
, the most popular sporting event in the United States. FTX had celebrity endorsements from "supermodel Gisele Bündchen, NBA star Stephen Curry, tennis phenom Naomi Osaka, former baseball superstar David “Big Papi” Ortiz, and Shark Tank's Kevin O'Leary
". It even bought the naming rights
for the NBA Miami Heat Arena for $135 million.
The MIT graduate and son to two Stanford professors, Bankman was as infamous as his firm. He was worth $24 billion, earning him 41st place
in the Forbes 400 list of the wealthiest Americans. He was a frequent invitee to Congress and a sought-after speaker for many international forums. His unusual background and style made him a charismatic and persuasive advocate for the crypto industry, which led him to testify thrice in Congress in support of new regulations for crypto
Bankman-Fried’s participation in the Giving Pledge
, a commitment by billionaires to donate at least 50% of their wealth to philanthropic causes, along with his involvement with the Center of Effective Altruism portrayed him as an altruistic mission-driven innovator.
He was often compared to John Pierpont Morgan
, the founder of the eponymous bank and creator of the Federal Reserve. He had also earned himself a sweet spot on the Time’s 100
list of the most influential people among the Forbes 30 under 30
Yet in Nov. 2022, Bankman-Fried’s business and future took an abrupt turn. The torpedo came from an unexpected and low-profile part of his business empire: Alameda Research
. It was a trading firm that started before FTX to take advantage of crypto market mispricing across geographies. A report by CoinDesk reported that Alameda had $14.6 billion worth of assets which were mainly held in FTT
) for $5.82 billion. FTT is “an exchange token issued by FTX which allows users to receive a discount on the trading fees they pay and can earn additional commissions on referrals.”
Strangely, the market cap of FTT was reported at the time at $3.32 billion, far less than the value of Alameda holdings, suggesting a significant asset write-down for the trading shop. The heavy exposure raised fears that any potential massive selloff by Alameda to cover its positions would depress FTT prices and strain an already illiquid market from its main liquidity provider, Alameda. Sensing the opportunity, Changpeng Zhao
, the founder of Binance, the world’s largest crypto trading venue, decided to tackle the firm he backed in its infancy with $100 million of seed financing.
In a Twitter
post, CZ announced the divestment of his investment by closing its $2.1 billion position in FTT. This shook markets and was a substantial vote of no-confidence in FTX leading to a massive sell-off of FTT tokens by spooked investors, creating an 80% decline
in their value. A domino effect ensued and panicked customers withdrew $6 billion
in 72 hours.
Despite multiple reassurances from Bankman-Fried on the solvency of the business through Twitter
, it was a poor deterrent to customers and the decline continued, resulting in another $8 billion
worth of unmet withdrawal requests.
In the face of FTX's inability to service customers’ demands, CZ
took the matter into his own hands and offered to rescue FTX to starve off the liquidity crunch, effectively becoming crypto’s latest lender of last resort. This role was previously held by FTX
which rescued BlockFi and Voyager Digital by respectively taking ownership of the companies through a $240 million capital injection, $400 million credit facility, and a $1.42 billion equity cheque. The non-binding offers to bail out FTX collapsed less than 24 hours later, following heavy scrutiny by Binance
of FTX's books under these terms: “As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of FTX․com.”
Furthermore, the $8 billion of liabilities of Alameda, created from $7.4 billion worth of customer money, was improperly channeled
by FTX through a backdoor in its system. Reports
suggested that under such stratagems, FTX reallocated more than $10 billion of customer funds.
The money was used by Bankman-Fried and other FTX employees to finance a lavish lifestyle: multi-million dollar homes, investments in Sequoia Capital, Reddit, and Anthropic, as well as heavy political donations. Indeed, Mr. Bankman was found to be “the second largest donor to Biden
behind Bloomberg in the 2020 election with $5.2 million” and the “second largest donator to the democratic party
, just behind Sorors with around $40 million” in 2022. Bankman-Fried and his employees allegedly explored the idea of “paying Trump
$5 billion not to run for the 2024 elections” or paying down the “$11.6 billion national debt of the Bahamas
Bankman-Fried also built his case on “overwhelming evidence including millions of pages of internal messages, spreadsheets, and memos” and live testimonies from “three of his top deputies [who] pleaded guilty to fraud.” Among these testimonies were Bankman-Fried’s former girlfriend, Ellison, and Alameda’s CEO, claiming that “Mr. Bankman-Fried had repeatedly directed them to lie to the public and route billions of dollars in customer money from FTX to its sister trading firm, Alameda Research” according to the New York Times
. After his victory, the prosecutor
described the scheme as “one of the biggest financial frauds in American history.” For him, “the crypto industry might be new … but this kind of fraud, this kind of corruption, is as old as time.”.
This concludes the story of a man once seen as “a force for good who accumulated wealth in the hopes of eventually giving it all away,” who, instead of joining the ranks of JP Morgan and Steve Jobs, will be recalled alongside Bernie Madoff, Elizabeth Holmes, and Jeffrey Skilling.
Bankman-Fried will remain in prison long after all of his clients and customers have been repaid. According to a recent report, the recovery team
has successfully repossessed $7.3 billion out of the $8 billion required to reimburse customers. FTX Ventures' $500 million investment in Anthropic
, a leading player in the AI industry founded by former Open AI employees, has garnered substantial value in the private market—recently estimated at approximately $20-30 billion. This valuation is supported by investments from major entities like Google and Amazon, the latter contributing $1.25 billion with an option to increase its stake to $4 billion. Consequently, FTX's equity holding in Anthropic is valued at $3-4.5 billion, exceeding the amount needed to cover its creditors' claims.
The demise of FTX and its founder has also been directly felt by the NYU Abu Dhabi community. Bankman-Fried was one of the leading faces of the Effective Altruism movement. He has stated to Forbes
: “I’m part of the Effective Altruism community. In the end, my goal is to do as much good as I can for the world.” He reportedly followed his predictions prophecies by donating half of his income during his time at Jane Street
. Beyond words, he has financially backed
the EA movement with $36.5 million. Such allocations have allowed countless NYUAD students to engage in trips and experiences around the world under the EA
banner. The full extent of the effects of Bankman-Fried’s conviction on EA chapters worldwide remains to be seen.