Everyone is talking about Sam Bankman-Fried, the founder of cryptocurrency exchange FTX, who is accused of orchestrating one of the largest financial frauds in history.
In November, the celebrity-backed FTX had a spectacular and sudden collapse. 30-year-old Bankman-Fried is now facing fraud charges and the former billionaire faces up to 115 years in prison if convicted.
Bankman-Fried stands accused of misusing billions of dollars in FTX customers’ funds for his own personal uses, including buying real estate and financing a Super Bowl ad.
Bankman-Fried’s ex-girlfriend, Caroline Ellison who ran his trading firm Alameda Research, and his FTX co-founder Gary Wang are also facing fraud charges.
Why should I care?
- The fall of FTX has been compared to the collapse of Enron and the fall of the Lehman Brothers which sparked the 2008 financial crisis. The alleged fraud has also been called worse than Theranos and the Bernie Madoff scandal.
- If the accusations are true, Bankman-Fried and the personal lives of the shadowy characters involved in the FTX saga will undoubtedly be the subject of podcasts, television shows, and movies. (Actor Mark Walberg is already making a documentary about Bankman-Fried.)
Context
In a matter of months, Bankman-Fried went from being celebrated as a financial genius and the poster child of crypto to a disgraced fraudster.
The Rise
- The son of Stanford University professors, Bankman-Fried founded crypto trading firm Alameda in 2017 at the age of 25. He first became a millionaire by buying bitcoin in the U.S. and selling it in Japan for a higher price.
- Two years later, Bankman-Fried and Gary Wang founded FTX — an exchange where people could buy and sell cryptocurrency.
- As the industry boomed, FTX quickly grew into one of the largest crypto exchanges in the world. Bankman-Fried joined Forbes’ list of billionaires in 2021 and was worth as much as $24 billion in January 2022.
- As his star rose, Bankman-Fried persuaded his on-off girlfriend Caroline Ellison to become CEO of Alameda so he could run FTX.
- In 2021, Bankman-Fried moved his companies to the Bahamas. Bankman-Fried and the other nine employees who ran FTX and Alameda lived together in a Caribbean penthouse and shared the same therapist. They were reportedly all paired up in romantic relationships with each other and there have been rumors of polyamorous relationships between the ten staff including with Bankman-Fried.
- FTX was the first company that bought crypto to the masses. FTX was also able to secure the endorsement of high-profile celebrities like NFL superstar Tom Brady and supermodel wife Gisele Bundchen, who both invested in it.
- Bankman-Fried marketed FTX hard to the U.S. public — with a Super Bowl ad starring comedian Larry David, sports sponsorships, and even NFT crypto condoms.
- Bankman-Fried also spent over $70 million on candidates for the U.S. midterms. This made him one of the biggest political donors in the country and granted him powerful access to congress. In April 2022, he threw a party in the Bahamas with people like Bill Clinton, Tony Blair, Katy Perry, and Orland Bloom in attendance.
- Bankman-Fried had a good guy reputation. His relaxed persona, disheveled look, (he was usually pictured wearing a t-shirt, shorts, and flip-flops), and purported belief in effective altruism made him likable to the public. Bankman-Fried would often be sleeping on a bean bag or playing video games when investors showed up at the office.
The Fall
- In November 2022, Coindesk published an article about the murky reality of Bankman-Fried’s trading firm Alameda. Soon after, the CEO of rival cryptocurrency exchange Binance, Changpeng Zhao, sent a series of tweets that led to the credibility of FTX being undermined.
- In a nutshell, this started a chain of events that led to Bankman-Fried’s alleged misuse of customer funds being revealed and customers withdrawing money from FTX en masse. Soon after, Bankman-Fried filed for bankruptcy.
- In December, Bankman-Fried was arrested on fraud charges and was extradited from the Bahamas to the U.S. He is said to have secretly transferred up to $8 billion of FTX customer funds to Alameda and improperly used it for his own purposes.
- Bankman-Fried allegedly used FTX customer funds to finance a billion-dollar loan for himself, buy millions of dollars worth of property for himself and his staff, and make political donations. He may have even financed FTX’s Super Bowl commercial with customer money. In short, FTX appears to have been Bankman-Fried’s own personal piggy bank.
- Ellinson and Wang were also arrested for federal fraud charges.
What is Bankman-Fried up to now?
- Bankman-Fried has pled not guilty to all eight counts of fraud and conspiracy.
- In late December, Bankman-Fried was released from prison on a $250 million bail bond — the largest pre-trial bail amount in U.S. history — 25 times the $10 million posted by notorious Ponzi schemer Bernie Madoff.
- A judge has ruled that the identity of the two mystery donors behind Bankman-Fried’s record-breaking bond must be revealed.
- Bankman-Fried has sworn that he never defrauded customers in multiple interviews, tweets, and his own recently-launched Substack newsletter.
- This week, Bankman-Fried was barred from contacting current or former FTX employees after he was accused of using a messaging app to influence a witness in the U.S. government’s fraud case against him.
- Meanwhile, Ellinson and Wang have both pleaded guilty and are cooperating with the U.S. government as part of a deal for leniency. Wang has claimed that Bankman-fried ordered him to create a secret line of credit so he could use FTX customer funds. Ellinson has confessed to engaging in “illegal” activities with Bankman-Fried.
What’s next?: Bankman-Fried’s trial will begin on October 2, 2023.
The big picture:
- The fall of FTX has revealed the lack of mainstream financial regulation in cryptocurrency. Thousands of normal people have lost an estimated $8 billion in the FTX collapse and the future of cryptocurrency in general seems even shakier now.
- Bankman-Fried is looking like the “next Elizabeth Holmes.” Holmes was the founder of Theranos, the blood testing firm that collapsed after its technology was revealed to be largely fraudulent.
Holmes and Bankman-Fried were both hyped in the media, beloved by celebrities, and considered to be eccentric geniuses. But ultimately, they were both running multi-billion dollar deceptions. Bankman-Fried’s case feels like history repeating itself and poses the question of whether Silicon Valley will ever learn from its mistakes .
