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The Untold Story of the Fall of the Sam Bankman-Fried’s FTX Empire

Roughly three weeks after the biggest fiasco in cryptocurrency history, it’s an understatement to say that Sam Bankman-Fried is now laying low. Here’s a standout line from his speech at a conference hosted by the New York Times on Thursday, December 1, 2022: “I’ve made a lot of mistakes but I’ve never tried to defraud.”

SBF then tried to justify himself and explain the unthinkable: the collapse in twenty minutes of a $20 billion cryptocurrency empire (stock exchange, trading firm, investment fund) that was supposed to be one of the industry’s benchmarks.

Silicon Valley, the crypto world, and Wall Street were looking for a hero. They thought they had found the new Steve Jobs, but they ended up with a crypto-prestidigitator already compared to Bernard Madoff.

Sam Bankman-Fried ticked all the boxes of the success story that Americans love. With his scruffy nerd look, his chubby face, and his ideal CV, he had managed to seduce prestigious investors.

The son of Stanford University law professors, this graduate of the Massachusetts Institute of Technology (MIT) had his fingers in the pie in Washington. Ironically, he had been one of the few crypto entrepreneurs to be heard in Congress or to meet Jerome Powell, the powerful chairman of the Federal Reserve.

Sam Bankman-Fried reached the peak of his wealth ($26.5 billion) at just 30 years old. He had amassed in five years a fortune that George Soros, the king of hedge funds, took more than thirty years to acquire. His fall was as meteoric as his rise. FTX’s hedge fund, Alameda Research, lost stratospheric amounts of money with money that was not its own.

Changpeng Zhao delivers the coup de grace to his best enemy

Investigators suspect that some of the deposits of customers of the FTX Group’s crypto exchange landed in the trader’s coffers to mop up his losses. “A simple temporary intra-group loan,” according to the interested party.

At the beginning of November 2022, the first doubts appeared about the strength of the building after an article by the specialized media Coindesk. FTX’s rival and Binance’s boss, Changpeng Zhao, dealt the final blow to a competitor who had not spared him. CZ got rid of the $530 million of FTT (the cryptocurrency created by FTX) that he had received in part when he sold his 20% stake in FTX. CZ paid $100 million for it in 2019 and sold it for $2.1 billion two years later.

It was FTX that bought it back at full price but paid Binance for part of it with its cryptocurrency, the FTT.

As the relationship between the two heavyweights deteriorated, the separation was inevitable. When Changpeng Zhao realized that FTX was sinking, he sold his FTTs en masse, causing its share price to collapse. However, it was the FTT that was used as collateral by Alameda and FTX to obtain loans. This guarantee being now worthless, the group could no longer obtain liquidity and its creditors immediately demanded their money.

The boss of Binance had certainly eliminated a competitor but he was perfectly aware that this bankruptcy would penalize the whole sector (fall of the prices, loss of confidence of the investors, tightening of the regulation…) and thus his company.

In the days preceding the bankruptcy, Sam Bankman-Fried had been working to save his empire. His father, a Stanford law professor, even came to his rescue. To obtain liquidity, his son contacted the largest investment funds, including the Saudi sovereign wealth fund, according to Reuters.

In the middle of the night, SBF swallowed his pride and called his rival, Changpeng Zhao, the boss of Binance, whom he had been criticizing bluntly on Twitter a few days before. The abracadabra financial documents that FTX’s boss presented to all potential investors were deemed not very credible and therefore even more worrying about the real health of the group.

FTX customers tried to withdraw their money en masse when the rumor of bankruptcy became more pressing. But the coffers were more than empty: there would be a shortfall of 8 billion dollars that customers and creditors of the platform hope to recover at the end of the bankruptcy announced on November 11, 2022.

The customers of the FTX platform, which is based in the Bahamas, could recover only a quarter of their money estimated Sam Bankman-Fried. FTX US, its American cousin, regulated in the United States, offers much more guarantees to its customers. To show its goodwill with Washington and the establishment, the group created this platform in the United States, but it is its offshore version that generated the most money for the group.

The collapse of Sam Bankman-Fried’s empire could claim a million victims from all countries and all walks of life, from hedge funds to individuals. Some will not recover financially. Institutional investors were aware of the risks inherent in investing in this sector. They were supposed to have done all the necessary due diligence. Several weeks after its fall, aftershocks from the earthquake caused by FTX’s sudden collapse are still shaking the cryptocurrency world. Cascading failures remain possible. The latest victim, lending platform BlockFi, has filed for bankruptcy.

Accounting has been relegated to a menial task

The New York prosecutor opened an investigation into FTX a few days after its bankruptcy. Being registered in the Bahamas will not prevent the American authorities from prosecuting the MIT prodigy if he has committed fraud. It can earn him twenty years in prison. Justice will have to determine whether SBF was dishonest or just incompetent in managing a group that grew too fast.

The company did not know the exact number of its employees (520) nor the number of its assets and debts in the tangle of its 130 subsidiaries.

Compliance and accounting had been relegated to menial tasks that no one wanted to deal with. The “paperwork was boring everyone,” according to SBF. In Seattle, the risk controller would respond in emojis to employees asking for millions of dollars to launch an ad campaign (at the Super Bowl) or a new project. A thumbs-up was the green light to spend like crazy.

Money flowed freely to FTX employees. For example, the company chartered a private plane to make Amazon deliveries for employees from Miami, as the group does not operate in the Bahamas. Approximately $300 million belonging to the platform was also allegedly used to purchase villas in the Bahamas for group executives, including Sam Bankman-Fried and his parents.

FTX has loaned more than $1 billion to its top executives.

The group was a reflection of its founder, a hyperactive man known for multitasking. The FTX platform itself was created in the wake of Alameda. Subsidiaries were created around the globe, mostly as local marketing operations for the international platform. In Europe, FTX set up shop in Cyprus, a member state regularly criticized for its lax supervision. The group even financed the acquisition of a stake in the neo-broker Robinhood, a herald of finance for all, and had entered the capital of the American stock exchange IEX.

None of this would have been possible without the financial support of major investors.

SBF has been a big hit in this regard. The list of FTX investors reads like a Who’s Who of Wall Street. It includes the largest manager on the planet, the American BlackRock, with $8 trillion in assets, as well as the Singapore investment company Temasek. The largest tech hedge fund, Tiger, was also present, as was private equity specialist Sequoia Partners. In a goodwill gesture, FTX had invested $300 million in Sequoia’s funds.

These prestigious investors served as moral guarantors for SBF and FTX.

After all, how could such financial professionals, who know the markets inside out, be fooled by an unshaven geek? The FTX debacle certainly caused a lot of soul-searching among these investors. SEC investigators are also looking into the matter.

While we await the conclusions of these investigations, a laudatory portrait of SBF posted online by Sequoia a few weeks before the FTX bankruptcy filing — now deleted — is indicative of the willful blindness of these professionals. In hindsight, this portrait is damning. Speaking of a fundraiser, it says FTX “needed the money to come from credible sources so it could continue to distinguish itself from the parasites who came to cryptos to scam the suckers.”

Without having to make the slightest effort, SBF was contacted directly by Sequoia, which was concerned that the startup would fall into the nets of its competitors. All he had to do was mention an embryonic “super app” project during a video conference to convince them. “I’m sitting ten feet away from him, and I walk up and say, ‘Oh, shit, that was good,’“ recalls one of Sequoia’s investors. “And it turns out this little fucker was playing League of Legends the whole meeting.”

Neither SBF’s obvious disinterest in his backers nor his open disdain for books — he doesn’t read any (“If you wrote a book, you screwed up, it should have been a six-paragraph blog post,” he muses) held Sequoia back. Like many high-profile investors, the fund ultimately wrote off its $213 million investment in the Sam Bankman-Fried-founded group.

Far from The Wolf of Wall Street

Those who remained lived in isolation in their golden prison in the Bahamas, like millionaire crypto lofts. FTX moved its headquarters there from Hong Kong in September 2021. During the COVID-19 crisis, the firm had moved to an island where the containment rules were much less strict. Less than thirty minutes from Miami, the tax haven had become the nerve center of the cryptocurrency empire.

FTX employees stayed in the luxury Albany residential complex in which stars like Tiger Woods and Justin Timberlake had invested.

George Lerner, FTX’s “wellness coach,” told the New York Times about the hobbies of the close-knit group, some of whom shared the same apartments. “They played chess and games most of the time, there were rarely parties. It was a far cry from The Wolf of Wall Street.”

Employee romances, which often result in dismissal in corporate America, were quite accepted and normalized at the highest levels. Sam Bankman-Fried himself was having an affair with Alameda’s boss, Caroline Ellison, which lasted six months, he said.

Five identical pavilions shared the different activities of the group. At the headquarters, there was no receptionist and it was an “open house” all year long without any control.

Traders from Alameda, who were supposed to be separated by a “Chinese wall” from FTX’s operations, were able to roam the premises at will and observe theoretically confidential data on the platform’s clients’ activities. In the offices, the traders, and Sam Bankman-Fried himself, were all wearing shorts, socks, or bare feet. Footstools were set up in the trading room for the short restorative naps the boss was used to. SBF believed that sleeping in the office was restorative and essential when one only slept two to three hours like him.

Today, investors are calling them to account.

This crisis of confidence is reminiscent of the Madoff affair in 2008. Unlike the author of the largest Ponzi scheme in history, who had shut himself up in eternal silence, Sam Bankman-Fried is running around on television, making a lot of shattering statements, to the despair of his lawyers. His ambition knew no bounds. Not content with wanting to revolutionize the world of cryptocurrency, he wanted to disrupt traditional markets, transform social networks and artificial intelligence, and influence American elections.

Ironically, the sensationalist FTX debacle may have provided the impetus for real oversight of the sector.

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