The most notorious scandal of the blockchain world, giving birth to the most successful scammer of all time. Welcome to Station 101! This time, we’ll take a deep dive into FTX Exchange and its CEO, Sam Bankman-Fried, a fraud that was believed to be “the next Warren Buffett” by the Fortune.
Note: This article is mainly based on my own observation and research, information from various sources will be used for reference but it might contain holes and shortcomings. Read at your own discretion.
1. What Is FTX Exchange?
FTX Trading Ltd., or FTX (short for “Futures Exchange”) [1] was a leading centralized cryptocurrency exchange with its popularity rose significantly in 2019, right after when it was founded by Sam Bankman-Fried.
Having built such an empire that even Forbes put him on their cover, Sam Bankman-Fried, aka SBF, was indeed a brilliant brain. Sam was born on March 6th 1992 in California whose parents were professors from Stanford Law School. Brought up in such a highly educated family, Sam soon showed his brilliance in mathematics as he partook in a summer academic program for gifted high school students.
In 2014, he graduated from MIT (Massachusetts Institute of Technology) with a degree in physics and a minor in mathematics [2]. After his graduation, he applied for a full-time job in New York–based Jane Street Capital [3]. But in 2017, he decided to part ways with the firm and founded his own, named Alameda Research, a quantitative trading firm that employed cutting-edge technology and machine learning to formulate and implement trading tactics across diverse financial markets [4].
Until April 2019, Alameda Research’s sister cryptocurrency exchange, FTX Exchange was born under the hands of Sam and a co-founder named Gary Wang. Together, Alameda Research and FTX Exchange had formed a cryptocurrency empire, from which SBF earned $23 billion when he was only 29 [5].
And the downfall of this empire was as colossal as its rise.
2. The Ticking Bomb, “Alameda’s Backdoor”
Every magician needs a sidekick/assistant, who knows how to pull off the trick they’re about to perform without the audience realizing they’re being fooled. So does Sam.
Another brilliant mind join the empire. Caroline Ellison is the daughter of Glenn Ellison, head of the economics department at the Massachusetts Institute of Technology, and her mother is Sara Fischer Ellison, an economics lecturer at the same school. Before reaching second grade, while other kids played with Lego, Ellison studied Bayesian statistics. Instead of writing a birthday card for her father, she gave him a research paper on the prices of stuffed animals at Toys 'R' Us. At the end of second grade, she won a top prize in the linguistics olympiad. She also maintained her interest in reading Harry Potter from the age of three until adulthood [6].
Before becoming the CEO of Alameda Research and the core of SBF’s fall, Ellison graduated from Stanford and worked at Jane Street Capital. In March 2018, she received a call from SBF persuading that she should join him in this journey, which could earn her million of dollars. And so, she agreed to quit her job and became the CEO of Alameda Research while SBF was focusing on growing FTX.
Soon enough, customers began rushing to FTX to open their crypto trading accounts, along with top venture capital investors started pouring in. The company was worth $32 billion as of January 2022 [7]. What is the relationship between Alameda Research and FTX Exchange? Simply put, FTX would provide financial support to Alameda Research as it needed funds to run its trading activities, and vice versa. And this created something called the “backdoor”, which enabled Alameda Research to withdraw billions of funds from users on FTX. And finally, their little “magic trick” got exposed.
“What first appeared to be an accounting oversight turned out to be major fraud, and billions of dollars were lost by customers and investors. It was discovered that customer funds went to accounts controlled by Alameda Research -- a cryptocurrency trading firm headquartered in Hong Kong -- instead of FTX.” [7]
According to Gary Wang’s testimony in court, when a programming flaw caused FTX to lose hundreds of millions of USD, SBF requested to transfer that loss to Alameda's balance sheet. SBF evaluates the financial situation of Alameda received less public scrutiny compared to the FTX exchange. As a result, Alameda's liabilities amounted to $14 billion just before going bankrupt [8].
So SBF and Caroline Ellison (and previously Sam Trabucco - the resigned CEO of Alameda Research) decided to bail out Alameda Research by using that “backdoor” and managed to “evaporate over $20 billion dollars of profits and deposits in less than a week.” [9]
“Customers trading on FTX’s main exchange, which was based in the Bahamas, had to send cash or cryptocurrency to the platform before they could trade. Cryptocurrency deposits were sent from a customer’s personal wallet to the customer’s FTX account. If a customer sent funds in cash, the money was converted into “e-money,” according to FTX’s terms of service, which was then used to buy cryptocurrency.” [10]
People were not supposed to know about this “backdoor”, even the staff of FTX. In May 2022, a staff named Outen reported that he found something rather strange in FTX’s code, which granted Alameda “gets special treatment in one way or another.” He was fired when someone from SBF’s inner circle was alerted [11].
It was reported that Bankman-Fried used FTX funds to buy personal luxury items, finance elaborate advertising campaigns and make political donations. However, the revelation of this “backdoor” was only one of the main factors that contributed to SBF’s downfall.
3. The Downfall Of The Genius
November 2nd 2022 marked the end of SBF and his empire as CoinDesk published a leaked balance sheet, stating that Alameda Research heavily depended on funding from FTX with its digital tokens, FTT, quote:
“That balance sheet is full of FTX – specifically, the FTT token issued by the exchange that grants holders a discount on trading fees on its marketplace. While there is nothing per se untoward or wrong about that, it shows Bankman-Fried’s trading giant Alameda rests on a foundation largely made up of a coin that a sister company invented, not an independent asset like a fiat currency or another crypto. The situation adds to evidence that the ties between FTX and Alameda are unusually close.” [12]
Furthermore, CoinDesk also noted the substantial liabilities of Alameda Research, which appeared on the balance sheet, totaling roughly $8 billion. Specificially, the balance sheet reported $8 billion in liabilities, with only $900 million “liquid” assets (meaning they could easily be sold), and $5.5 billion of “less liquid” assets from crypto tokens, and $3.2 billion of illiquid private equity investments. Basically, FTX was holding less than $1 billion against their $8 billion liabilities.
There are more FTX tokens among its $8 billion of liabilities: $292 million of “locked FTT.” (The liabilities are dominated by $7.4 billion of loans.) [12]
As FTX was in absolute crisis mode by November 8th, Binance, a cryptocurrency exchange and FTX direct rival, stepped in with a deal to acquire FTX. This deal was made aware of by a tweet from Cheng Zhao, also known as CZ - Founder and CEO of Binance, stating that Binance intended to “fully acquire FTX”. This merger would solidify strengthen Binance's standing as the world’s top cryptocurrency exchange and market-making platform.
The thing is, CZ announced this acquisition just days after Binance informed the public that it was selling all its roughly $529 million worth of FTT, fearing that the FTT price would plummet due to the recent scandals [13]. Some suggested that CZ master planned FTX’s collapse, which he denied [14].
It only took two days for Binace to say “Oh hell naw” and walk away from the deal. Binance soon posted a tweet regarding the decision, saying:
And so, the rescue deal fell through, leaving FTX on the brink of collapse. A death blow to FTX. Former FTX CEO sought last-minute financing from Apollo, as indicated by testimonies from former FTX attorney Can Sun and SBF himself [15]. Additionally, Ellison claimed that SBF reportedly attempted, but ultimately failed, to secure additional capital from Saudi Crown Prince Mohammed Bin Salman [16]. All to no avail, and then came the inevitable end of FTX, Alameda Research and Sam Bankman-Fried.
Almost instantly, between November 8th and November 9th, SBF's net worth plummeted 94%, marking the most significant single fall in recorded history. His wealth dropped from approximately $15 billion to $900 million. So did his token, FTT, which had “already plunged in recent days, was down another 32% to about $2.41” [17].
And so, Sam Bankman-Fried had to resign and filed for bankruptcy. His first trial took place, the 32-year-old “Crypto King” was found guilty of wire fraud, conspiracy and money laundering. The FTX bankruptcy proceedings are still underway and his sentence seems to be the most discussed topic in the crypto space. According to an article of The New York Times issued on March 15th 2024, prosecutors believe Sam “should receive a prison sentence of 40 to 50 years,” adding:
“Mr. Bankman-Fried’s sentencing hearing is scheduled for March 28, when Judge Lewis A. Kaplan will decide his fate. He faces a maximum possible penalty of 110 years.” [18]
Though his sentence has not been decided yet, it appears that Sam Bankman-Fried may not get a taste of his freedom in the next few decades.
⭐Station Shout-Out⭐
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Reference:
[1] https://en.wikipedia.org/wiki/FTX
[2] https://www.investopedia.com/who-is-sam-bankman-fried-6830274#toc-early-life-education-and-career
[3] https://en.wikipedia.org/wiki/Sam_Bankman-Fried
[4] https://www.quora.com/What-is-the-difference-between-Alameda-Research-and-FTX
[5] https://www.forbes.com/sites/chasewithorn/2021/10/21/the-worlds-richest-29-year-old-just-got-a-lot-richer-thanks-to-new-ftx-funding-round/?sh=3e3e29ba715d
[6] https://vnexpress.net/bong-hong-dung-sau-tham-hoa-ftx-4539695.html
[7] https://www.techtarget.com/whatis/feature/FTX-scam-explained-Everything-you-need-to-know
[8] https://vnexpress.net/ong-chu-ftx-bon-rut-tien-nguoi-dung-tu-khi-moi-mo-san-4662268.html
[9] https://www.pymnts.com/news/2022/how-the-entangled-ceos-of-ftx-and-alameda-took-the-public-for-a-ride/
[10] https://www.nytimes.com/2022/12/16/business/ftx-exchange.html
[11] https://nypost.com/2023/10/05/ftx-staff-found-alamedas-backdoor-months-before-collapse/
[12] https://www.coindesk.com/business/2022/11/02/divisions-in-sam-bankman-frieds-crypto-empire-blur-on-his-trading-titan-alamedas-balance-sheet/
[13] https://blockworks.co/news/ftx-meltdown-timeline
[14] https://www.theblock.co/post/184789/binance-ceo-says-he-didnt-master-plan-ftxs-collapse
[15] https://blockworks.co/news/sam-bankman-fried-trial-week-three
[16] https://blockworks.co/news/sam-bankman-fried-trial-day-6
[17] https://www.coindesk.com/business/2022/11/09/binance-walks-away-from-ftx-deal-wsj/
[18] https://www.nytimes.com/2024/03/15/technology/sam-bankman-fried-sentencing.html
Thanks so much for the shout-out!!