Almost after a month of high-power drama, the founder of the collapsed FTX cryptocurrency exchange, Sam Bankman-Fried aka SBF was arrested in the Bahamas and charged with eight criminal counts in the US. The complaint alleges that SBF orchestrated a fraud, misusing FTX’s investor’s money. The federal prosecutors are referring to it as one of the “biggest financial frauds in US history.” The US Security and Exchange Commission (SEC) Chair Gary Gensler says SBF built a ‘house of cards on a foundation of deception.’
A few months ago, the company owned by the 30-year-old crypto kid was worth around $32 billion. However, on November 11, the crypto exchange filed for Chapter 11 bankruptcy protection in the US. SBF is accused of squandering billions on a crypto hedge fund, Alameda Research crypto fund that was also founded by Bankman-Fried. It is alleged that Bankman-Fried diverted FTX customer funds to Alameda, thus, making undisclosed venture investments, luxury real estate purchases, and political donations.
FTX was one of the world’s largest cryptocurrency exchanges, enabling customers to trade digital currencies for other digital currencies or traditional money, and vice versa. It was based in the Bahamas. The company’s collapse has sent shockwaves to the already frail crypto world.
Here’s a chronology of what led to the collapse of FTX:
Just after a few years of graduating from MIT in 2017, SBF founded the crypto trading firm Alameda Research. In 2019, Bankman-Fried founded FTX along with ex-Google employee Gary Wang. By 2021, FTX reached to an $18 billion valuation after a $900 million funding round that included SoftBank Group, venture capital firm Sequoia Capital and over 50 other investors.
During the same period, the two-year-old company said it has more than 1 million users and averages about $10 billion in trading volume per day. In the following months, FTX raised capital at a valuation of $25bn from investors, including Singapore’s Temasek and Tiger Global.
Things started turning against FTX in the first half of this year when the world saw a series of crypto collapses, led by the Luna / Terra, and wiped out billions in value overnight. The company decided to rescue New Jersey-based crypto lender BlockFi with an option to buy it for as much as $240m and also extended an offer to acquire the assets of bankrupt Voyager Digital. This move, however, established FTX as one of the strongest players in the crypto universe.
On November 2, CoinDesk published a report based on a private financial document reviewed by the publication, stating that SBF’s trading firm Alameda Research was heavily dependent on FTT, an exchange token of the FTX ecosystem which was often touted as the backbone of the exchange. The report said that FTX and Alameda Research are unusually close. The hedge fund rested on a foundation made up of a coin that its sister company invented, not an independent asset like a fiat currency or another crypto.
Soon after the report, on November 6, the world’s largest crypto exchange and also FTX’s rival, Binance announced it will sell off its FTT holdings. Company CEO, Changpeng Zhao often referred to as CZ, in a tweet said that the decision wasn’t a “move against a competitor.” Notably, last year, CZ sold the stake he held in FTX back to its CEO, receiving a number of FTT tokens in exchange. The holdings were worth $580 million worth of the token. This major exit triggered a wider selloff, putting sudden pressure on FTX to meet the escalated demand for customer withdrawals. Due to a lack of funds, FTX halted customer withdrawals altogether.
Amid all this chaos, Bankman-Fried said “FTX is fine. Assets are fine”. At the same time, a deal was finalized that Binance will acquire the firm. However, Binance later pulled out due to the reports about mishandled customer funds and US agency investigations, making the situation grimmer for FTX.
Moving forward, the company suspended the onboarding of new clients and pauses withdrawals until further notice. On the other day, SBF announced that Alameda Research is shutting down. Authorities in the Bahamas also froze FTX assets. On November 11, FTX filed for bankruptcy under Chapter 11 proceedings in the US, along with its US unit, crypto trading firm Alameda Research and nearly 130 other affiliates.
FTX was hacked and over $300 million were stolen from the exchange. Sequoia Capital wrote down its roughly $210 million stake in FTX to $0. Bankman-Fried also resigned as CEO. Soon after John J. Ray III, was appointed as the new CEO of failed crypto exchange FTX which filed for bankruptcy in Delaware. Millions of customers and several investors lost billions of dollars in losses.
On November 13, it was revealed that at least $1 billion of customer funds vanished from collapsed crypto exchange FTX. Reports suggested the exchange’s founder discreetly transferred $10 billion of customer funds from FTX to Alameda Research, out of which, $1 billion of these funds were not accounted for among Alameda’s assets.
As the investigation geared up, a Reuter report explained that Bankman-Fried implemented something that it called a “backdoor” in FTX’s bookkeeping system. FTX’s legal and finance team said that it allowed SBF to execute commands that could alter the company’s financial records without alerting other people, including external auditors. Thus, the movement of the $10 billion in funds to Alameda did not trigger internal compliance or accounting red flags at FTX, they said.
With Bankruptcy proceedings moving forward, SBF’s empire turned into ruins. Tax filings revealed that long before the current debacle, between 2019 and 2021, FTX and Alameda Research collectively lost $3.7 billion suggesting things were never going as well in the SBF empire as they were being projected.
On December 12, Police arrested Bankman-Fried. The charges include wire fraud, wire fraud conspiracy, securities fraud, securities fraud conspiracy, and money laundering. Celebrities, including Naomi Osaka, Shaquille O’Neal, and Kevin O’Leary, who earlier promoted FTX were sued in federal court in a class-action lawsuit alleging that false representations of a deceptive product were used to dupe vulnerable investors.
On December 13, SEC in its press release accused Bankman-Fried of promoting FTX as a safe, responsible crypto asset trading platform, specifically touting FTX’s sophisticated, automated risk measures to protect customer assets. It further alleges that he misled investors by using the FTX platform, to provide Alameda with a virtually unlimited “line of credit”. SBF is also alleged to be illegally donating millions of dollars to candidates and political action groups ahead of the 2022 midterm elections. In 18 months, the total funneled amount to election campaigns is estimated to be over $70 million.
