• Tuesday, May 21, 2024
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The rise and fall of Sam Bankman-Fried

The rise and fall of Sam Bankman-Fried

Sam Bankman-Fried was once the wonder boy of the cryptocurrency ecosystem.

He was the chief executive officer of FTX, the second-most valuable crypto exchange globally. As of January 2022, the exchange was valued at $32 billion before it crashed after it could not plug an $8 billion hole caused by mass withdrawals.

“In Africa, the crypto exchange grew in leaps and bounds.”

Early Days:

While in college, Bankman-Fried was reportedly considering a career in animal welfare. In his first year, he organised a protest against factory farming. But after meeting with Will MacAskill, one of the movement’s leaders, he shifted perspective.

After school, he worked at the quantitative trading firm Jane Street. He reportedly donated about half of his salary to charities, including animal welfare organisations.

In 2017, Bankman-Fried quit his job and turned to crypto. He co-founded the cryptocurrency trading firm Alameda Research. At its peak, the company had a BTC transaction value of $25 million.

“I got involved in crypto without any idea what crypto was,” he told Forbes. “It just seemed like there was a lot of good trading to do.”

In 2019, along with former Google employee Gary Wang, he founded FTX, a platform for trading crypto tokens and derivatives. The company soon moved its operations to the tax haven of the Bahamas, where the new CEO bought a waterfront penthouse.

He is also reported to have relocated FTX to the Caribbean nation because the platform employed a trading mechanism that was barred in the US.

This luxury property became a home office for Bankman-Fried and about nine others. In 2021, the company raised $420 million in venture funding, increasing its valuation to $25 billion. Also that year, Forbes described him as the richest twenty-something in the world with a net worth of $22.5 billion, putting him at 32 on the Forbes 400 rich list.

“I got involved in crypto without any idea what crypto was,” he told Forbes. “It just seemed like there was a lot of good trading to do.”

Bankman-Fried typified the tech billionaire persona wearing T-shirts and shorts and making high-minded philosophical pronouncements. He is said to have been influenced by his Stanford law professor parents, who studied utilitarianism, and he proclaimed that his business transactions were carried out in this context.

While at the top, he mingled with high-profile figures such as Bill Clinton and Tony Blair and donated to campaigns. According to reports, he was the second-largest individual donor to Joe Biden in the 2020 election cycle and was among the largest donors to Democratic candidates ahead of the November 2022 midterm elections.

He is said to have used $100 million in stolen FTX deposits to fund those donations, which he thought would influence the passage of crypto-friendly legislation.

The rise and eventual fall of FTX

After it was launched in 2019, the crypto exchange rose tremendously. In 2020, it acquired the mobile portfolio tracking application Blockfolio for $150 million. By 2021, it already had a valuation of $25 billion after closing a round with investors including Singapore’s Temasek and Tiger Global.

In Africa, the crypto exchange grew by leaps and bounds. A tweet by former staff member Juwon Adebayo revealed that the FTX monthly volume in Nigeria increased from $5 million to $500 million within a year. South Africa grew from $50 million to over $2 billion, and Ghana went from $0 to $100 million at its peak.

In 2022, FTX raised $400 million from investors, including SoftBank, at a valuation of $32 billion. That year, it signed a deal with an option to buy crypto lender BlockFi for up to $240 million, then offered a partial bailout of bankrupt crypto lender Voyager Digital.

In July, it got approval to operate its exchange and clearing house in Dubai. On November 2, crypto news website CoinDesk reported a leaked balance sheet showing Alameda Research, Bankman-Fried’s first firm, heavily depended on FTX’s native token, FTT.

The CEO had used FTT as collateral for sizable loans. Four days later, Changpeng Zhao, Binance CEO, disclosed that his firm would liquidate its FTT holdings ($500 million). By November 8, FTT had collapsed by 72 percent as clients swamped the exchange with withdrawal requests. A day later, Binance decided against pursuing a non-binding agreement to bail out FTX.

Binance tweeted on X, “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. In the beginning, our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help.”

By November 10, FTX had stopped onboarding new clients and making withdrawals, and Bankman-Fried told staff in a memo that he was seeking capital.

In a series of tweets, the CEO outlined his attempt to get FTX out of the hole he had sunk it into. “First, one way or another, Alameda Research is winding down trading.

One of his tweets read, “They aren’t doing any of the weird things that I see on Twitter—and nothing large at all. And one way or another, soon they won’t be trading on FTX anymore.”

Another read: “The full story here is one I’m still fleshing out every detail of, but at a very high level, I fucked up twice. The first time, poor internal labelling of bank-related accounts meant that I was substantially off on my sense of users’ margin. I thought it was way lower.”

The company didn’t turn the corner, and by December 2022, the Manhattan US attorney’s office had charged Bankman-Fried with financial crimes.

According to a Guardian report, prosecutors allege that the FTX CEO engaged in fraud from 2019 until November 2022. They argued that Bankman-Fried misappropriated and embezzled FTX customers’ deposits and funnelled billions in stolen funds to his wallet and bankroll high-risk investments.

Prosecutors stated that Bankman-Fried shuffled funds to cover his lifestyle, and spending unrelated to FTX paid for Bankman-Fried’s expenses, such as more than $200 million in Bahamas real estate, speculative investments, and repayment to those who had loaned money to Alameda.

The report disclosed that throughout Bankman-Fried’s month-long trial, members of his inner circle took the stand against him, and some of the most damning testimony was from Alameda Research’s CEO, Caroline Ellison., who served as the prosecution’s star witness.

“While you were working at Alameda, did you commit any crimes?” Ellison was asked. She answered, “Yes, we did… [Bankman-Fried] directed me to commit these crimes.”

Despite these revelations, the FTX CEO continued to defend his actions. “I made a number of small mistakes and a number of large mistakes,” Bankman-Fried told jurors. “There were significant oversights.”

While agreeing to managerial errors, including failing to institute a dedicated risk-management team, Bankman-Fried maintained that he did not defraud clients or steal their money.

On March 28, the once-poster boy of the crypto industry was sentenced to 25 years in prison by a judge for stealing $8 billion from customers.

U.S. District Judge Lewis Kaplan handed down the sentence at a Manhattan court hearing after rejecting Bankman-Fried’s claim that FTX customers did not lose money and discovering that he lied during his trial testimony.

Earlier in November 2023, a jury found Bankman-Fried guilty of seven fraud and conspiracy counts stemming from FTX’s 2022 collapse.

“He knew it was wrong,” Kaplan said. “He knew it was criminal. He regrets that he made a very bad bet about the likelihood of getting caught. But he is not going to admit a thing, as is his right.”

U.S. Attorney General Merrick Garland said in a statement, “There are serious consequences for defrauding customers and investors.

“Anyone who believes they can hide their financial crimes behind wealth and power, or behind a shiny new thing they claim no one else is smart enough to understand, should think twice.”

Bankman-Fried’s 25-year sentence is below the maximum statutory sentence of 115 years and the 40–50 years sought by prosecutors but is significantly higher than the 6.5 years requested by his attorneys.

FTX to pay back customers

In December 2023, FTX filed a reorganisation plan to end bankruptcy and repay creditors. According to CoinDesk, in FTX’s new proposal, creditor and customer claims are classified according to priority. Earlier in October 2023, the company explained that customers with a preference settlement amount of less than $250,000 will get settled without any reduction of claim or payment.

The CoinDesk report said, “Preference settlement is 15 percent of customer withdrawals on the exchange, nine days before it went under. Creditors would further receive a shortfall claim against the general pool corresponding to the estimated value of assets missing at their exchange—estimated to be nearly $9 billion for FTX.com and $166 million for FTX.US, the exchange’s U.S. arm.”

The company, however, stated that various factors, such as taxes, government claims, token price fluctuations, etc., could impact recoveries.