Despite the global downturn in crypto, Sam Bankman-Fried still began his week as a billionaire. By the end, both he and his empire have fallen from grace to the depths of bankruptcy. How did this seemingly untouchable king of crypto fall from his throne?
While the crypto markets as a whole have been stalling, it was initially unclear exactly where FTX’s bankruptcy stemmed from according to its Chapter XI filing. Multiple developments have contributed, however, with the first being that sister company and affiliated trading firm, Alameda, owes FTX $10 Billion. These loans from FTX—which represent over 60 percent of FTX’s $16 Billion in customer assets—were used to fund what are being dubbed “risky bets.”
As the days progressed, however, it is speculated that FTX’s currency, FTT, is partially responsible for the demise. The coins were issued to users as incentives to use the platform – eventually being bought by Alameda and subsequently being pledged as collateral on the aforementioned loans. This in and of itself would be a problem, as collateral is ideally meant to be either stable or separated from the entity at hand (e.g. another company’s stock), but circumstances magnified these missteps. Rival and potential acquirer, Binance, had sold $500 million worth of FTT earlier this month.
The situation escalates from there, with sources estimating that between $1 and $2 billion are missing from transferred funds. In an exchange with Reuters, Bankman-Fried stated that the funds “were not secretly transferred” and instead “had confusing internal labeling” causing them to be misread.
Earlier this week, Binance was engaged in a deal to acquire FTX but backed out during the due diligence stage while inspecting FTX’s internal books. The move has carried sweeping consequences from the U.S. Securities and Exchange Commission (SEC) and U.S. Department of Justice (DOJ) investigating FTX for potential securities violations all to the sports and celebrity sphere, with the Miami Heat ending their naming partnership with FTX.
The biggest question here: is Bankman-Fried a fraud? A man who claims to pledge his wealth to philanthropy becomes immersed in a scandal of historical proportions. For reference, the infamous Jordan Belfort defrauded about 1,500 investors out of an estimated $200 million. For Bankman-Fried, that figure could range anywhere from 5 to 10 times that. It seems highly unlikely that there is any scenario that Bankman-Fried avoids prison times. In one of the most historical events of the decade, it appears that the crypto wave is suffering from dying tides.
The US House of Representative Financial Services Committee is planning on holding a hearing in December to further discuss the collapse of FTX.
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