Sam Bankman-Fried's Empire Crumbles

Sam Bankman-Fried's Empire Crumbles

By Kathy Chu, TruthDAO

Four months ago, Sam Bankman-Fried was touting the health of his own mega-businesses -- crypto exchange FTX and hedge fund Alameda Research -- as he gamely stepped up to bail out others that were teetering on the edge of collapse.

FTX is now dealing with its own financial implosion. On Friday, FTX revealed that it had filed for bankruptcy. Bankman-Fried, who held the title of CEO, has now resigned. How could one of the industry's most successful and stable players spin out so fast? Before the meltdown, the 30-year-old crypto entrepreneur -- known universally as "SBF" -- had a personal fortune of more than $24 billion. As for FTX, it was one of the largest and most respected crypto exchanges in existence.

Earlier in the week, FTX, trying to extricate itself, asked rival Binance to help with its “significant liquidity crunch,” Binance Chief Executive Changpeng “CZ” Zhao tweeted on Tuesday. Binance initially agreed, and signed a non-binding letter of intent. On Wednesday, however, Binance said it was scrapping the deal due to issues around "corporate due diligence" and reports of mishandled customer funds and regulatory investigations.

FTX has been mum on Binance's decision, but CZ made the case that an FTX collapse will hurt the industry, including rivals like Binance: “FTX going down is not good for anyone," because it will erode investor confidence and draw more regulatory scrutiny to exchanges, CZ wrote in a note to employees that he posted to Twitter Wednesday.

The timing of SBF's financial woes could not be worse. The crypto industry has shed a third of its value over the past year --  owing in part to high risk lending practices that are a hallmark of many crypto firms. As losses continue to mount, so has the level of scrutiny by regulators, including the U.S. Securities and Exchange Commission.

Crypto investors, meanwhile, are running for the exits. In the 72 hours before Binance offered to buy FTX, users withdrew some $6 billion from FTX alone, according to an internal document viewed by Reuters.

Wilfred Daye, chief executive of Securitize Capital, a digital asset-management firm, says the failure to find financing will further weaken the already-compromised crypto world: "The market will continue to be volatile and contagion risk will be meaningful, leading to an even more extended crypto winter." Daye previously served as head of financial markets for global crypto exchange OKCoin.

Brian Armstrong, chief executive of Coinbase, a regulated exchange based in the U.S., is distancing himself from what he calls FTX’s “risky business practices, including conflicts of interest between deeply intertwined entities, and misuse of customer funds (lending user assets).” Tweeting from his verified account, Armstrong contrasted the approach of Coinbase vs FTX, noting that Coinbase -- unlike FTX and other exchanges -- holds all customers’ assets dollar for dollar, instead of lending them out. As a result, Amstrong tweeted, Coinbase "can satisfy customer withdrawals (at) any time."

FTX didn’t immediately respond to a request for comment.

In October 2021, SBF handed control of Alameda -- based in Delaware and the British Virgin Islands -- to two deputies, Caroline Ellison, his former colleague at quant trading firm Jane Street, and Sam Trabucco, a friend from the Massachusetts Institute of Technology (MIT). At the time, SBF indicated that he intended to focus on FTX, which largely operates offshore and is incorporated in Antigua and Barbuda. FTX also has a U.S. arm that it operates separately.

The relationship between FTX and Alameda is unclear. A CoinDesk report on Nov. 2 noted that $6 billion of Alameda’s $14.6 billion in assets (as of June 30) was related to FTT, the native token that FTX describes as a “backbone” and that gives holders trading discounts on its platform. Ellison, the Alameda CEO, took to Twitter on Nov. 6 to say the internal document reviewed by CoinDesk only represented a portion of the firm's assets.

But by then, the exodus of investors was well under way. Nansen, a chain analytics firm, showed that (as of Nov. 6),  stablecoin outflow of $292 million from FTX over a 7-day period was the largest of any crypto exchange in the world. Depending on the volume and velocity of the exodus in the coming days and weeks, analysts say Alameda and FTX could face a liquidity crunch.

And FTX's woes continue. The SEC and Department of Justice have begun investigating FTX, the Wall Street Journal reports. The Texas State Securities Board is now investigating whether FTX offered unregistered securities in the U.S. through its yield-bearing accounts. In August, the Federal Deposit Insurance Corp. (FDIC) ordered FTX to stop making “false and misleading” claims about deposit insurance.

The FDIC took action a week after TruthDAO posted a story that explored claims by FTX and other exchanges of FDIC-style investor protections on their platforms. SBF later apologized for the lack of clarity as it concerned FTX.