Before his shock Monday evening arrest, Sam Bankman-Fried had apologized for every part he may consider, to everybody who would pay attention. In a leaked draft of his aborted House testimony, he wrote that he was actually, for his complete grownup life, “sad.” He “f—– up,” he tweeted, and wrote, and mentioned.
He advised Bahamas regulators he was “deeply sorry for ending up in this position.” But when Bankman-Fried was escorted out of his penthouse condominium in Nassau in handcuffs, it nonetheless wasn’t clear what he was apologizing for, having stridently denied committing fraud to CNBC’s Andrew Ross Sorkin, ABC News’ George Stephanopoulos, and throughout Twitter for weeks.
But the day after his arrest, federal prosecutors and regulators unsealed dozens of pages of filings and prices that accused Bankman-Fried of not simply having perpetrated a fraud, however having carried out so “from the start,” in keeping with a submitting from the Securities Exchange Commission
Far from having “f—– up,” SEC and Commodity Futures Trading Commission regulators, alongside federal prosecutors from the United States Attorney’s Office for the Southern District of New York, allege that Bankman-Fried was on the coronary heart — certainly, the driving force — of “one of the biggest financial frauds in American history,” within the phrases of U.S. Attorney Damian Williams. The allegations in opposition to Bankman-Fried had been assembled with beautiful velocity, however supply perception into one of many highest-profile fraud prosecutions since Enron.
Bankman-Fried based his crypto hedge fund Alameda Research in November 2017, renting workplace area in Berkeley, California. The scion of two Stanford legislation professors, Bankman-Fried had graduated from MIT, labored on the prestigious quantitative buying and selling agency Jane Street Capital, and had damaged into cryptocurrencies with a MIT classmate, Gary Wang.
Alameda Research was basically an arbitrage store, buying bitcoin at a lower cost from one alternate and promoting it for the next worth at one other. Price variations in South Korea versus the remainder of the world allowed Bankman-Fried and Wang to revenue tremendously from what was nicknamed “the kimchi swap.”
In April 2019, Bankman-Fried and Wang — together with U.C. Berkeley graduate Nishad Singh — based FTX.com, a world cryptocurrency alternate that supplied clients progressive buying and selling options, a responsive platform, and a dependable expertise.
Federal regulators on the CFTC say that only a month after founding FTX.com, Bankman-Fried, “unbeknownst to all but a small circle of insiders,” was leveraging buyer belongings — particularly, clients’ private cryptocurrency deposits — for Alameda’s personal bets.
Rehypothecation is the time period for when companies legally use buyer belongings to take a position and make investments. But Bankman-Fried did not have permission from clients to gamble with their funds. FTX’s personal phrases of use particularly forbade him, or Alameda, from utilizing buyer cash for something — except the shopper allowed it.
And from FTX’s inception, there was a number of buyer cash. The CFTC cited 2019 stories from FTX which pegged the futures quantity alone as usually exceeding $100 million every single day.
Using buyer cash for Alameda’s bets constituted fraud, the CFTC alleges. In the Southern District of New York, the place Bankman-Fried was indicted by a grand jury, Bankman-Fried faces prison fraud prices as nicely. From the very genesis of FTX, regulators allege, Bankman-Fried was utilizing buyer funds to bankroll his speculative investments.
It is a swift fall from grace for the one-time king of crypto, who as just lately as two months in the past was hailed because the savior of the trade. Now, Bankman-Fried heads to a Bahamian court docket on Monday to give up himself to the U.S. extradition course of, in keeping with an individual acquainted with the matter. A prison trial awaits him as soon as he’s again on U.S. soil.
Attorneys for Bankman-Fried, and attorneys for his former corporations, didn’t instantly return requests for remark. A consultant for Bankman-Fried declined to remark.
The rise of the Alameda-FTX empire
FTX rapidly rose, launching its personal token, FTT, in July 2019 and snagging an fairness funding from Binance in November of that yr.
By 2021, in keeping with the CFTC submitting, FTX and its subsidiaries held roughly $15 billion price of belongings, and accounted for 10% of worldwide digital transaction quantity, clearing $16 billion price of buyer trades every single day.
The agency’s “years-long” fraud did not simply lengthen to taking part in with buyer cash, in keeping with the SEC.
FTX was capable of function so successfully, clear such huge quantity, and generate such curiosity as a result of it had a chosen market maker (DMM) of its personal. In conventional finance, a DMM is a agency that may purchase and promote securities to and from clients, hoping to clear a revenue in any distinction in worth, known as the unfold.
From FTX’s 2019 founding, Alameda was that market maker, snapping up and releasing cryptocurrencies on the alternate. Alameda and FTX’s symbiotic relationship proved advantageous for each ends of Bankman-Fried’s rising empire.
As FTX matured, different market makers got here on-line to supply liquidity. But Alameda was, and remained, FTX’s largest liquidity supplier, easing platform perform at “Bankman-Fried’s direction,” the SEC alleges.
Unlike these different market makers or energy customers, Alameda had a set of highly effective instruments at its disposal.
In August 2019, the SEC alleges, Bankman-Fried directed his workforce at FTX to program an exception into the alternate’s code, permitting Alameda to “maintain a negative balance in its account, untethered from any collateral requirements.”
“No other customer account at FTX was permitted to maintain a negative balance,” the SEC submitting continues. The adverse steadiness meant that Alameda was allegedly successfully backstopped by buyer belongings whereas making trades.
Former Alameda CEO Caroline Ellison as soon as alluded to this in a broadly disseminated interview.
“We tend not to have things like stop losses,” Ellison mentioned.
In conventional finance, a stop-loss order helps merchants restrict publicity to a doubtlessly shedding commerce. When an asset (a inventory, for instance) reaches a pre-determined decrease restrict, the stop-loss order will routinely dump the asset to stop losses from spiraling uncontrolled.
Not content material with what would ultimately turn out to be a “virtually unlimited” line of credit score from buyers — his personal clients — Bankman-Fried conspired to stack the deck in Alameda’s favor, regulators say.
FTX supplied energy customers entry to an API — an interface that allowed the person to bypass FTX’s front-end platform and talk straight with FTX’s back-end techniques. Normal customers had been nonetheless subjected to commonsense checks: verifying that that they had sufficient cash of their account, for instance.
Alameda merchants may entry a fast-lane which allow them to shunt previous different customers and shave “several milliseconds” off their commerce execution occasions, in keeping with the CFTC. The sort of high-frequency buying and selling that FTX customers engaged in made that invaluable.
A awful crypto hedge fund
Despite the deck being stacked in Alameda’s favor, the hedge fund supplied horrible returns. A court docket submitting indicated that Alameda misplaced over $3.7 billion over its lifetime, regardless of public statements by FTX leaders touting how worthwhile the buying and selling arm was.
Alameda’s losses and lending construction had been a vital element of FTX’s eventual collapse.
Alameda did not simply play quick and free with buyer cash. The hedge fund borrowed aggressively from a number of lenders, together with Voyager Digital and BlockFi Lending. Both these corporations entered Chapter 11 chapter proceedings this yr, and FTX focused each for acquisition.
Alameda secured its loans from Voyager and BlockFi with FTT tokens, which FTX minted itself. Bankman-Fried’s empire managed the overwhelming majority of the obtainable forex, with solely a small quantity of FTT really circulating at any time.
Alameda ought to have acknowledged the truth that its tokens could not be bought on the worth that they claimed they had been price, the CFTC alleges in its grievance.
This was as a result of any try by Alameda to dump their FTT tokens would crater FTT’s worth, given how a lot of the obtainable provide Alameda managed.
Instead of accurately marking its tokens to market, although, Alameda recorded their complete hoard of FTT as being well worth the prevailing market worth.
Alameda used this system with different cash as nicely, together with Solana and Serum (a token created and promoted by FTX and Alameda), utilizing them to collateralize billions in loans to different crypto gamers. Industry insiders even had a nickname for these tokens — “Sam coins.”
The tables turned after the collapse of Luna, a stablecoin whose implosion and subsequent crash devastated different lenders and crypto companies and despatched crypto costs plunging. Major Alameda lenders, like Voyager, declared chapter. Remaining lenders started to execute margin calls or liquidate open positions with clients, together with Alameda.
The CFTC alleges that between May and June 2022, Alameda was subjected to “a large number of margin calls and loan recalls.”
Unbeknownst to buyers, lenders, or regulators, Alameda lacked sufficient liquid belongings to service its mortgage obligations.
But whereas Alameda was illiquid, FTX’s clients — who had been consistently reassured that the alternate, and Bankman-Fried, had been decided to guard their pursuits — weren’t.
The fraud — uncovered
Bankman-Fried stepped down from his management place at Alameda Research in Oct. 2021 in what CFTC regulators declare was a calculated bid to domesticate a false sense of separation between FTX and the hedge fund. But he continued to train management, regulators declare.
Bankman-Fried allegedly ordered Alameda to extend its use of buyer belongings, drawing down massively on its “unlimited” credit score line at FTX.
“Alameda was able to rely on its undisclosed ordinary-course access to FTX credit and customer funds to facilitate these large withdrawals, which were several billion dollars in notional value,” the CFTC submitting reads.
By the center of 2022, Alameda owed FTX’s unwitting clients roughly $8 billion. Bankman-Fried had testified earlier than the House that FTX boasted world-class threat administration and compliance techniques, however in actuality, in keeping with the agency’s personal chapter filings, it possessed nearly nothing in the way in which of record-keeping.
Then, on Nov. 2, the primary domino fell. Crypto commerce publication CoinDesk publicized particulars on Alameda’s steadiness sheet which confirmed $14.6 billion in belongings. Over $7 billion of these belongings had been both FTT tokens or Bankman-Fried-backed cash like Solana or Serum. Another $2 billion had been locked away in fairness investments.
For the primary time ever, the secretive internal workings of Alameda Research had been revealed to be a modern-day Potemkin village. Investors started to liquidate their FTT tokens and withdraw their holdings from FTX, a doubtlessly calamitous scenario for Bankman-Fried.
Alameda nonetheless had billions of collateralized loans excellent — but when the worth of their collateral, FTT, fell too far, their lenders would execute additional margin calls, demanding full compensation of loans.
Allegedly, Alameda had already been unable to meet mortgage obligations over the summer season with out accessing buyer funds. Now, with cash flowing out of the alternate and FTT’s worth slipping, Alameda and FTX confronted a liquidity crunch.
In a now-deleted tweet, Bankman-Fried continued to say FTX was totally funded and that buyer belongings had been protected. But on Nov. 6, 4 days after the CoinDesk article, the crack widened right into a chasm, because of an previous investor-turned-rival, Changpeng “CZ” Zhao.
Zhao based Binance in 2017, and it was the primary outdoors investor in FTX, funding a Series A spherical in 2019. It had exited the funding by July 2021, the identical yr that FTX raised $1 billion from massive names like Sequoia Capital and Thoma Bravo.
FTX purchased out Binance with a mixture of BUSD, BNB, and FTT, in keeping with Zhao.
BUSD is Binance’s exchange-issued stablecoin, pegged to the worth of the U.S. greenback. BNB is their alternate token, much like FTX’s FTT, issued by Binance and used to pay transaction and buying and selling charges on the alternate.
Zhao dropped the hammer with a tweet saying that due to “recent revelations that have came [sic] to light, we have decided to liquidate any remaining FTT on our books.”
FTX executives scrambled to include potential injury. Ellison responded to Zhao providing to buy Binance’s remaining FTT place for $22 per token.
Privately, Bankman-Fried ordered Alameda merchants to liquidate Alameda’s investments and positions “to rapidly free up capital for FTT buybacks,” the CFTC submitting states. Bankman-Fried was getting ready to guess the home in an effort to keep up Ellison’s public assist degree of $22.
Alameda merchants managed to fend off outflows for 2 days, holding the worth of FTT at round $22.
Publicly, Bankman-Fried continued to function as if all was nicely. “FTX is fine. Assets are fine,” he wrote in a tweet on Nov. 7 that has since been deleted. Bankman-Fried asserted that FTX didn’t make investments consumer belongings and that each one redemptions could be processed.
But on the identical time Bankman-Fried was tweeting reassurances, internally, executives had been rising an increasing number of alarmed on the growing shortfall, in keeping with prosecutors. It was “not merely a matter of having sufficient liquid funds on hand to cover customer withdrawals,” the CFTC alleges.
Rather, Bankman-Fried and different executives admitted to one another that “FTX customer funds were irrevocably lost because Alameda had appropriated them.”
It was an admission that flew within the face of every part Bankman-Fried would declare publicly up by means of the day of his arrest, a month later.
By Nov. 8, the shortfall had grown from $1 billion to $8 billion. Bankman-Fried had been courting outdoors buyers for a rescue bundle. “Numerous parties declined […] regardless of the favorable terms being offered,” the CFTC submitting alleges.
FTX issued a pause on all buyer withdrawals that day. FTT’s worth plummeted by over 75%. Bankman-Fried was within the midst of a high-tech, decentralized run on the financial institution. Out of choices, he turned to Zhao, who introduced that he’d signed a “non-binding” letter of intent to accumulate FTX.com.
But only a day later, on Nov. 9, Binance mentioned it could not undergo with the acquisition, citing stories of “mishandled customer funds” and federal investigations.
Two days later, Bankman-Fried resigned as CEO of FTX and related entities. FTX’s longtime attorneys at Sullivan & Cromwell approached John J. Ray, who oversaw Enron by means of its chapter, to imagine Bankman-Fried’s former place.
FTX filed for chapter that very same day, on Nov. 11. A month later, Bankman-Fried was arrested by Bahamian authorities, pending extradition on prices of fraud, conspiracy, and cash laundering.
Bankman-Fried, a devotee of a philosophy generally known as “efficient altruism,” was apparently pushed by an obsessive have to quantify the influence he had on this world, measured in {dollars} and tokens. He drafted a spreadsheet which measured the affect that Alameda had on the planet (and decided it was almost a web wash).
Billions of {dollars} of buyer cash at the moment are floating in enterprise funds, political battle chests and charitable coffers — cash now prone to being clawed again, because of Bankman-Fried’s alleged crimes.
Almost a decade in the past, Bankman-Fried posed a hypothetical query to his family and friends on his private weblog: Waxing poetic on efficient altruism, he requested rhetorically, “Just how much impact can a dollar have?”
“Well, if you want a one-sentence answer, here it is: one two thousandth of a life,” he mentioned.
The CFTC alleges that over $8 billion {dollars} of buyer funds are lacking. Some clients have probably misplaced their life financial savings, their child’s school funds, their future down funds. By Bankman-Fried’s personal math, his alleged misdeeds had been price 4 million lives.