Crypto Giant FTX Crumbles As Sam Bankman-Fried Loses Billions
Cryptocurrency has a serious problem: The party is over. New dollars from naïve retail shoppers are no longer coming in after the crashes in May and June, despite an advertising run during the Super Bowl in February reaching all US consumers. Without these fresh dollars, the holders cannot withdraw money.
Crypto trading firms have large piles of assets whose “market cap” – their purported market capitalization – reportedly amounts to a trillion dollars. But this number is unrealizable nonsense because the actual dollars just aren’t there. Everyone in the system knows it. What to do?
The regulated US-based exchanges are just the cashier’s desk for the wider cryptocasino. The real trading action, as well as the price discovery, is on the unregulated offshore exchanges. These include Binance, OKX and Huobi. Until Tuesday 8 November, they also included Sam Bankman-Fried’s FTX, which suspended client withdrawals around 11:37 UTC on 8 November and then revealed around 16 UTC that it was suffering from a “liquidity crisis”. FTX is just the latest casualty in a series of collapses that began with Terraform Labs’ UST stablecoin; which took out Celsius Network, Voyager Digital and many other crypto trading firms; and it is now gradually driving the price and trading volume of cryptocurrencies to what they should be: zero.
Cryptocurrency has a serious problem: The party is over. New dollars from naïve retail shoppers are no longer coming in after the crashes in May and June, despite an advertising run during the Super Bowl in February reaching all US consumers. Without these fresh dollars, the holders cannot withdraw money.
Crypto trading firms have large piles of assets whose “market cap” – their purported market capitalization – reportedly amounts to a trillion dollars. But this number is unrealizable nonsense because the actual dollars just aren’t there. Everyone in the system knows it. What to do?
The regulated US-based exchanges are just the cashier’s desk for the wider cryptocasino. The real trading action, as well as the price discovery, is on the unregulated offshore exchanges. These include Binance, OKX and Huobi. Until Tuesday 8 November, they also included Sam Bankman-Fried’s FTX, which suspended client withdrawals around 11:37 UTC on 8 November and then revealed around 16 UTC that it was suffering from a “liquidity crisis”. FTX is just the latest casualty in a series of collapses that began with Terraform Labs’ UST stablecoin; which took out Celsius Network, Voyager Digital and many other crypto trading firms; and it is now gradually driving the price and trading volume of cryptocurrencies to what they should be: zero.
FTX desperately sought more funding, but to no avail; at press time, FTX had been shut down by its Bahamian regulator and placed into liquidation, as well as filed for bankruptcy in the US and Bankman-Fried has resigned as CEO. But the fall of FTX has been particularly notable in part because its founder became unusually fetid.
Sam Bankman-Fried, often referred to as SBF, was born in 1992 to parents who were both academics at Stanford University. After earning a physics degree at the Massachusetts Institute of Technology, he was introduced to the “effective altruism” quantified charity movement by “long-term researcher” William MacAskill, and he took a job at quantitative trading firm Jane Street in 2014 with the goal of “earning to give ,” a buzzword among effective altruists who believe that the most effective way to do good is to make a lot of money first—even in ethically dubious ways—in order to give it away.
After three years at Jane Street, Bankman-Fried started his own cryptocurrency hedge fund, Alameda Research, during the bitcoin bubble in 2017. He has said he made money to start FTX from an arbitrage opportunity. In 2018, bitcoin cost more in Japan than it did in the US; everyone could see this, but for reasons unclear, only Alameda was in a position to exploit it.
FTX was founded in May 2019. Alameda could trade there and acted as the exchange’s market maker. In most regulated markets this would not be allowed due to obvious conflicts of interest and incentives to trade against your own clients – but offshore crypto is unregulated. FTX quickly became very popular, offering complex products such as option trading, perpetual futures and tokenized stock market shares, and it was perfectly positioned for the 2021 crypto bubble, when bitcoin rose to $69,000, trading volume increased, and ordinary people worldwide were hard-sold on coming into just a little crypto. FTX did not allow US clients, but started a separate exchange, FTX US, in May 2020.
During the 2021 crypto bubble, Bankman-Fried began marketing himself as a billionaire public thinker with big ideas and a deliberate mystique. He posed for the cover of Fortune and Forbes. He was always photographed in shorts, a t-shirt and untied shoes. He reportedly said: “I think it’s important for people to think I look crazy.” This worked on the venture capitalists, such as Sequoia Capital, who bought his pitch – hook, line and sinker – with one writer on the site saying: “And since SBF is obviously a genius, I should simply assume that compared to me, SBF will always play at level N+1.”
High-profile visitors were scheduled to arrive when Bankman-Fried was asleep in his briefcase. He spoke to the media about his charity’s mission – even if the charity’s goals sometimes seemed odd, such as combating risks from hypothetical future artificial intelligence.
FTX marketed itself heavily. It prompted Larry David to create a Super Bowl ad this year in which the skepticism of his character proved to be entirely correct. Bankman-Fried bought a 7.6 percent stake in the popular day-trading brokerage Robinhood. FTX sports sponsors included the Miami Heat’s FTX Arena, MLB referee pads, the Mercedes-AMG Petronas Formula One racing team and athletes such as quarterback Tom Brady. FTX even advertised in fortune cookies. FTX worked hard to paint itself as a reliable, fully capitalized institution run by smart and sensible people – even though it operated almost entirely outside of any regulation and was a hollow shell.
But Bankman-Fried was also keen to sell himself as a philanthropist. Bankman-Fried formed a super PAC, Protect Our Future, to lobby political candidates in the 2022 US midterm elections, spending over $39 million. Several million dollars went to sponsor his fellow effective altruist Carrick Flynn in a Democratic primary for the House of Representatives, but Flynn lost the primary to Andrea Salinas.
Bankman-Fried aggressively lobbied in Washington, DC, for the Commodity Futures Trading Commission to regulate crypto in the United States. He was photographed with the commissioner, Caroline Pham. Bankman-Fried’s policy proposals upset many of his fellow crypto institutions, particularly offshore crypto exchange Binance and its CEO, Changpeng Zhaowho felt that Bankman-Fried was setting the rest of the industry up for failure.
Bankman-Fried’s media campaign served to distract attention from what was going on inside FTX. Sometimes leaked warning signs: Hans Forbes The billionaires list entry included a warning that most of his alleged wealth “was tied up in ownership of approximately half of FTX and a share of its FTT tokens.”
FTT was the internal trading symbol of FTX – as supermarket loyalty points for frequent traders, who could get discounted trading fees and free withdrawals. The token was also traded in the broader crypto market. On November 2, a balance sheet was leaked showing that a third of Alameda’s alleged assets were a large volume of FTT. It was as if supermarket chain Tesco was solvent only if you counted its own pooled Clubcard points as assets. Alameda had also used this pile of FTT as collateral for loans from external companies.
Binance had been an early investor in FTX. It was sold in July 2021; FTX paid Binance for its share of $2.1 billion of FTT and stablecoins. On November 6, when FTT was at $25, Zhao began dumping Binance’s FTT holdings on the open market. Alameda offered to buy Binance’s FTT at $22but Binance continued dumping.
Bankman-Fried had always maintained that Alameda and FTX were separate entities, but the market viewed them as closely intertwined. The possibility of problems at Alameda led FTX users to cash out as quickly as possible – a bank run. FTX stopped all withdrawals on November 8.
A few hours later, Binance and FTX announced it Binance would buy FTX to solve its “liquidity problems” – pending due diligence. Zhao announced the day after FTX’s books showed that, rather than just a lack of liquidity, the exchange was insolvent by at least $6 billion. The Bahamas, where FTX is incorporated, has frozen all assets and appointed a provisional liquidator.
Alameda’s liabilities included substantial loans from FTX. It later emerged that FTX had lent over $10 billion in customer assets to Alameda and had accepted FTTs – its own internal loyalty points – as collateral. Alameda had been in a hole months before, when the May crash of Terraform’s UST was quickly followed by the June collapse of Celsius Network and Three Arrows Capital. Bankman-Fried had bailed out Alameda with client funds, secured by Alameda’s FTT holdings. FTX and Alameda worked together as a risky shadow bank using customer funds.
Bankman-Fried was quick to reassure customers that FTX US was not affected and that it was “fully supported 1:1.” FTX US also sought to buy the remains of bankrupt Voyager Digital – another victim of Three Arrows Capital – although the deal is on hold until the status of FTX US is sufficiently clear; withdrawals are in progress, but deposits are blocked. The Texas State Securities Board had previously wanted to stop FTX US’s purchase of Voyager due to problematic activity by the international branch of FTX.
It is clear now that FTX and Alameda had been hollow shells for many months, even as Bankman-Fried presented himself to lawmakers as a serious regulatory-minded crypto owner. But there is no reason to assume that any other crypto institution is healthier while the fresh dollars are not coming in. In May 2021, FTX’s former savior Binance appeared to be acting against its own customers. Binance was also used by Iran to avoid sanctions with bitcoin. After all, there was no regulator to stop the central from doing something it felt like.
Lawmakers have occasionally proposed rules for sensible crypto trading in the United States. The problem with regulation is that the cryptocurrency industry itself is anything but unregulated as long as the trading volume and price discovery happens in the unregulated offshore casinos and the US entities within the reach of the law are just the cashier’s desks for the casinos. This is how the crypto world likes it: a trash-fire trading environment, but being able to cash out with real dollars. This is why it bitterly fights the weakest regulation, every time.
This is not just a concern for consumers, but a concern for wider financial stability. Financial Stability Oversight Councils 2022 Report on Digital Asset Financial Stability Risks and Regulation covers in detail the collapses of UST-Luna and Three Arrows Capital, as well as the cascade of failures that followed.
The upside for regulators is that the cryptocurrency collapse did not affect the broader economy. The consequences for retail investors in Celsius Network and Voyager Digital were dire, but the wider economy has not been put at systemic risk – yet.
The cryptocurrency collapse will be easy to relax: the crypto traders will go broke and everyone in crypto will finally admit their losses. Sequoia Capital has marked its FTX investment down to $0— and deleted from the website its previously amusing tribute to Bankman-Fried’s mysterious genius. The crash victims that FTX was supposed to rescue, such as e.g BlockFihave realized that their savior is not coming.
All crypto wallet holders actually lost their money long before, when they bought bitcoins. In the time since, they had told themselves and everyone else that their magic beans were worth the money and didn’t care about the lack of buyers. But this was not the case. The beans were always worthless, and the only way to make money from them was to sell them before others caught on.
