The FTX Collapse: How Sam Bankman-Fried’s $32 Billion Crypto Empire Collapsed
In less than a week, the cryptocurrency billionaire Sam Bankman-Fried went from industry leader to industry villain, lost the majority of his fortune, watched his $32 billion company go into bankruptcy, and became the subject of SEC and DOJ investigations. A few weeks ago, it appeared unlikely that any other story would displace Elon Musk from the front pages of business journals.
Despite this, FTX, which was the third-largest crypto exchange in the world, was brought to its knees. The scenario is completely absurd, as it involves drugs, hidden software backdoors, an unexplained tragedy by drowning in Puerto Rico, and the theft of millions or maybe billions of dollars. Let’s take a look at how Sam Bankman-Fried’s $32 billion crypto empire collapsed.
The empire constructed by Mr. Bankman-Fried, who was once compared to financial heavyweights such as John Pierpont Morgan and Warren Buffett, collapsed last month when a run on deposits left his cryptocurrency exchange, FTX, with a $8 billion shortfall, forcing the company to declare bankruptcy. The impact has reverberated throughout the sector, upsetting other cryptocurrency firms and fostering broad mistrust in the technology.
Mr. Bankman-Fried has spoken publicly very little during the past week, excluding a few tweets, notes to staff, and sporadic texts to reporters. In a recent interview, he expressed various regrets over the demise of FTX. However, he would only provide little information regarding the fundamental questions surrounding him: whether FTX inappropriately utilized billions of dollars in customer funds to prop up Alameda Research, a trading firm he had created.
The Justice Department and the SEC are investigating this connection. Mr. Bankman-Fried stated that Alameda had amassed a big "margin position" on FTX, which essentially meant that the company had borrowed funds from the exchange. "It was significantly greater than I had anticipated," he remarked. The magnitude of the stake was in the billions of dollars, he added, but he declined to disclose any information.
However, Mr. Bankman-Fried concurred with opponents in the crypto community who stated that he had grown his commercial activities too rapidly across a vast portion of the market. He stated that his other obligations caused him to overlook warning signs that FTX was in trouble. "Had I paid a little more attention to what I was doing, I could have been more thorough. That would have enabled me to recognize what was occurring on the danger side," he remarked.
FTX exchange has shocked the cryptocurrency community. According to interviews with nine of Mr. Bankman-Fried’s coworkers and business partners, as well as internal messages obtained by The New York Times, warning indications had arisen in recent months that his economic empire was in jeopardy and that his ambitions exceeded his ability. Meanwhile, Mr. Bankman-Fried declined to elaborate on his current whereabouts, citing safety concerns. Mr. Bankman-Fried and FTX's attorneys did not reply to calls for comment.
However, as he began on a buying binge this year, investing in struggling Bitcoin firms, he withheld information from critical personnel. When he was informed that he was overworked and advised to hire extra personnel, he opposed the advice. And in Washington, he advocated for an aggressive regulatory agenda while criticizing Changpeng Zhao, the CEO of the rival exchange Binance, who ultimately rallied his vast Twitter following to trigger the run on FTX.
Despite the billions of dollars that venture capital companies invested in the company, none of these outside investors sat on the board of FTX. According to four people familiar with the situation, Mr. Bankman-Fried maintained a secluded existence in the Bahamas, surrounded by a small group of coworkers, some of whom were in romantic relationships with other FTX employees.
His top lieutenants and he shared a penthouse at Albany, a 600-acre oceanfront resort on the Bahamas' New Providence Island. When asked if he was unduly dependent on this tiny group, Mr. Bankman-Fried stated that he had roughly 15 close colleagues. "I don't believe someone can sustain intimate contact and communication with more than 15 people," he stated.
Mr. Bankman-Fried's fall was precipitated by his association with Alameda and FTX. He established the trading firm in 2017 and rented offices in Berkeley, California, close to where he had grown up as the son of Stanford Law professors. The company quickly amassed millions of dollars by exploiting Bitcoin market inefficiencies.
In 2019, Mr. Bankman-Fried transferred the business to Hong Kong, where the regulatory climate is more favorable. He subsequently founded FTX, a platform for crypto investors to purchase, sell, and hold digital assets, along with a small group of traders, including Caroline Ellison, a former trader at the financial firm Jane Street.
FTX and Alameda were intimately connected. Alameda traded extensively on the FTX platform, which meant that it occasionally gained when FTX's other customers lost money, a situation that critics deemed to be a conflict of interest. In the past, Mr. Bankman-Fried has defended the arrangement by stating that Alameda supplied vital liquidity — financial injections that allowed other clients to execute trades on the crypto exchange.
Ms. Ellison ran Alameda, but Mr. Bankman-Fried was also active, participating in the decision-making process for major trades, according to a source familiar with the company's inner workings. At times, there appeared to be little separation between the firms. Alameda was meant to work out of a separate office, but a guest who visited FTX's building during the past few months said that Ms. Ellison was seated in plain view of computers displaying the exchange's trading data.
In a court filing dated November 19, FTX enumerated the investors to whom it owes the most money. The exchange owes its top 50 creditors a total of about $3.1 billion, with almost $1.45 billion owing to its top 10 debtors alone. CNN claims that the corporation may have over a million individual creditors and that it has been in touch with "large numbers" of international financial regulators.
Sources: NY Times, BlockchainReporter, NerdWallet
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