In the weeks since Sam Bankman-Fried’s cryptocurrency empire was revealed to be a house of lies, mainstream news organizations and commentators have often failed to give their readers a straightforward assessment of exactly what happened. August institutions including the New York Times and Wall Street Journal have uncovered many key facts about the scandal, but they have also repeatedly seemed to downplay the facts in ways that soft-pedaled Bankman-Fried’s intent and culpability.
It is now clear that what happened at the FTX crypto exchange and the hedge fund Alameda Research involved a variety of conscious and intentional fraud intended to steal money from both users and investors. That’s why a recent New York Times interview was widely derided for seeming to frame FTX’s collapse as the result of mismanagement rather than malfeasance. A Wall Street Journal article bemoaned the loss of charitable donations from FTX, arguably propping up Bankman-Fried’s strategic philanthropic pose. Vox co-founder Matthew Yglesias, court chronicler of the neoliberal status quo, seemed to whitewash his own entanglements by crediting Bankman-Fried’s money with helping Democrats in the 2020 elections – sidestepping the likelihood that the money was effectively embezzled.
Perhaps most perniciously, many outlets have described what happened to FTX as a “bank run” or a “run on deposits,” while Bankman-Fried has repeatedly insisted the company was simply overleveraged and disorganized. Both of these attempts to frame the fallout obfuscate the core issue: the misuse of customer funds.
Banks can be hit by “bank runs” because they are explicitly in the business of lending customer funds out to generate returns. They can experience a short-term cash crunch if everyone withdraws at the same time, without there being any long-term problem.
But FTX and other crypto exchanges are not banks. They do not (or should not) do bank-style lending, so even a very acute surge of withdrawals should not create a liquidity strain. FTX had specifically promised customers it would never lend out or otherwise use the crypto they entrusted to the exchange.
In less than a month, reporting and the bankruptcy process have uncovered a laundry list of further decisions and practices that would constitute financial fraud if FTX had been a U.S. regulated entity – even without any crypto-specific rules at play. Insofar as they enabled the effective theft of the property of American citizens, these ploys may still be litigated in U.S. courts.
The list is very, very long.
The Alameda connection
At the heart of Bankman-Fried’s fraud are the deep and (literally) intimate ties between FTX, the exchange that enticed retail speculators, and Alameda Research, a hedge fund that Bankman-Fried co-founded. While an exchange ultimately makes money from transaction fees on assets that belong to users, a hedge fund like Alameda seeks to profit from actively trading or investing funds it controls.
Bankman-Fried himself described FTX and Alameda as being “wholly separate” entities. To reinforce that impression, Bankman-Fried stepped down as CEO of Alameda in 2019. But it has emerged that the two operations remained deeply tied. Not only did executives at Alameda and FTX often work out of the same Bahamian penthouse, but Bankman-Fried and Alameda CEO Caroline Ellison were romantically linked.
Those circumstances likely enabled Bankman-Fried’s cardinal sin. Within days of FTX’s first signs of weakness, it became clear that the exchange had been funneling customer assets to Alameda for use in trading, lending and investing activities. On Nov. 12, Reuters made the stunning report that as much as $10 billion in user funds had been sent from FTX to Alameda. At the time, it was believed that as little as $2 billion of those funds had disappeared after being sent to Alameda. Now the losses appear to have been much higher.
It remains unclear precisely why those funds were sent to Alameda, or when Bankman-Fried first crossed the proverbial Rubicon to betray his depositors’ trust. On-chain analysis has found the bulk of movements from FTX to Alameda took place in late 2021, and bankruptcy filings have revealed that FTX and Alameda lost $3.7 billion in 2021.
This is maybe the most befuddling part of the Bankman-Fried story: His companies lost massive amounts of money before the 2022 crypto bear market even started. They may have been stealing funds long before the blowups of Terra and Three Arrows Capital that mortally wounded so many other leveraged crypto players.
The FTT print and 'collateralized' loans
The initial spark that set FTX and Alameda Research on fire was CoinDesk reporting on the portion of Alameda’s balance sheet made up of the FTX exchange token, FTT. This instrument was created by FTX, but only a tiny portion of it was traded in public markets, with FTX and Alameda holding the vast majority. This meant those holdings were effectively illiquid – impossible to sell at the open market price. Nonetheless, Bankman-Fried accounted for its value at that fictitious market price.
More dangerously still, FTT tokens are widely believed to have been used as collateral for loans, including loans of customer funds from FTX to Alameda. This is where the close ties between FTX and Alameda became truly toxic: Had they been genuinely independent firms, the FTT token might have been much more difficult or expensive to use as collateral, reducing the risk to customer funds.
This use of an in-house asset as collateral for loans between clandestinely related entities can be best compared to the accounting fraud committed by executives at Enron in the 1990s. Those executives served as much as 12 years in prison for their crimes.
Alameda’s margin liquidation exemption
In legal filings by the new CEO handling FTX’s bankruptcy and liquidation, it was reported that Alameda Research had special status as a user on FTX: a “secret exemption” from the platform’s liquidation and margin trading rules.
FTX, like other crypto platforms and some conventional equity or commodity services, offered users “margin,” or loans, that they could use to make trades. However, these loans are generally collateralized – that is, users put up other funds or assets to back their borrowing. If the value of that collateral drops, or a margin trade loses enough money, the user’s collateral will be sold and the exchange will use that money to pay off the initial loan.
Liquidating bad margin positions is fundamental to keeping asset markets solvent. Exempting Alameda from these standards would give it huge advantages, while exposing other FTX users to immense hidden risks. Alameda could have kept losing positions open until they turned around, while competing users were closed out. Alameda was also in theory free to lose more money on FTX than it was able to pay back, leaving a hole where customer funds had been.
The exemption could be considered criminal from a number of angles. Above all, it means that FTX as a whole was fraudulently marketed. Rather than the even playing field an exchange is meant to be, it was a barrel full of customers.
Above them all, with shotgun poised, was Alameda Research.
Alameda front-running FTX listings
According to the crypto analytics firm Argus, there is strong circumstantial evidence that Alameda Research had insider access to information about FTX’s plans to list particular tokens. Because an exchange listing usually has a positive impact on the price of a token, Alameda was able to buy large amounts of these tokens before the listing, then sell them after the listing bump.
If these claims prove out, they would be perhaps the most obviously and brazenly criminal of the reported hanky-panky between Alameda and FTX. Setting jurisdictional questions to one side, the actions could be pursued under insider trading laws, even if the tokens concerned aren’t formally classed as securities.
In a similar situation earlier this year, an OpenSea employee was charged with wire fraud for allegedly buying assets based on early listing information … or insider trading. For the crime of merely front-running monkey JPEGs, that employee faces up to 20 years in prison.
Immense personal loans to executives
Executives at FTX reportedly received a total of $4.1 billion in loans from Alameda Research, including massive personal loans that were likely unsecured. As revealed by bankruptcy proceedings, Bankman-Fried received an incredible $1 billion in personal loans, as well as a $2.3 billion loan to an entity called Paper Bird in which he had 75% control. Director of Engineering Nishad Singh was given a loan of $543 million, while FTX Digital Markets co-CEO Ryan Salame received a $55 million personal loan.
The FTX situation has more smoking guns than a shooting range in Texas, but you might call this one the smoking bazooka – a glaringly obvious sign of criminal intent. It’s still unclear how the bulk of those personal loans were used, but clawing the expenditures back will likely be a major task for liquidators.
The loans to Paper Bird were arguably even more worrying because they appear to have fueled more structural fraud by creating yet another related third party to shuffle assets between. Forbes has posited that some of the Paper Bird funds may have gone to buy part of Binance’s stake in FTX, and Paper Bird also committed hundreds of millions of dollars to various outside investments.
That included many of the same venture capital funds that backed FTX. It will take time to sort out whether this financial incest constituted criminal fraud. But it certainly matches the broader pattern by which Bankman-Fried used secretive flows, leverage and funny money to deceptively prop up the value of various assets.
'Bailouts' of entities holding FTT or loans
Speaking of which. In the summer of 2022, as the crypto bear market continued, Bankman-Fried emerged as a white knight, proposing bailouts of entities including bankrupt crypto lenders BlockFi and Voyager Digital. This was a moment when we at CoinDesk were among the deceived, welcoming SBF as a J.P. Morgan-style backstopper of the entire sector.
In a now infamous interview with CNBC’s “Squawk Box,” Bankman-Fried danced around the issue of where FTX got the cash for these backstops, and referred to these decisions as bets that may or may not pay off.
But that may not have been what was going on at all. In a recent column, Bloomberg’s Matt Levine hypothesized that FTX backstopped BlockFi using its FTT funny money. This Monopoly bailout may, in turn, have been intended to conceal FTX and Alameda liabilities that would have been exposed earlier if BlockFi had gone bankrupt sooner. There’s not even really a name for this ploy, but it echoes the end stages of many other corporate frauds.
Secretive purchase of a US bank
Examiners have discovered that Alameda Research invested $11.5 million into the miniscule Farmington State Bank community bank, an amount more than double the bank’s prior net worth. This may be illegal even in a vacuum: As both a non-U.S. entity and an investing firm, Alameda should have cleared a number of regulatory hurdles before it could acquire a controlling interest in a U.S. bank.
In the broader context of the FTX story, the bank stake goes from “questionably legal” to “incredibly ominous.” Controlling a U.S. bank could have allowed Alameda and FTX to engage in any number of further shenanigans. Compare this, for instance, to attempts to buy U.S. banks by the Pakistan-founded Bank for Credit and Commerce International, which U.S. regulators repeatedly blocked. BCCI turned out to be an even more nefarious entity than FTX, and wanted to buy U.S. banks to bolster its global criminal money laundering empire.
Why the mainstream gets it wrong
These are complex and in many cases nuanced forms of fraud – largely echoing, it must be said, well-established models in the traditional finance world. That obscurity is one reason Bankman-Fried was able to masquerade as an honest player, and has likely helped keep coverage softer even after the collapse.
Bankman-Fried had also crafted a scruffy, nerdy image hard to square with malevolent thievery – not unlike other 21st century luminaries like Mark Zuckerberg and Adam Neumann. In interviews, he talked a stream of nonsense tailored to snowjob outsiders about an industry that’s already full of jargon and complicated tech. He cultivated political and social influence through a web of strategic donations and insincere ideological statements.
See also: How Sam Bankman-Fried's 'Effective' Altruism Blew Up FTX | Opinion
Since his con collapsed, Bankman-Fried has continued to muddy the waters with carefully disingenuous letters, statements, interviews and tweets. He has attempted to portray himself as a well-intentioned but naïve kid who got in over his head and made a few miscalculations. This is a softer but more pernicious version of the crisis management approach Donald Trump learned from the black-hat mob lawyer Roy Cohn: Instead of “deny, deny, deny,” Bankman-Fried has decided to “confuse, evade, distort.”
O’Leary’s status as an investor in, and formerly paid spokesperson for, FTX (we sure hope those checks clear, Kevin!) explain his continued affection for Bankman-Fried in the face of mounting contradictory evidence. But he is far from alone in burnishing Bankman-Fried’s image. The disgraced failed son of two Stanford University law professors will be handed the opportunity to defend himself onstage at the New York Times’ DealBook Summit Wednesday.
The scale and complexity of Bankman-Fried’s fraud and theft appear to rival those of Ponzi schemer Bernie Madoff and Malaysian embezzler Jho Low. Whether consciously or through malign ineptitude, the fraud also echoes much larger corporate scandals such as Worldcom and, particularly, Enron.
