The fall of FTX’s Sam Bankman-Fried puts the crypto industry on edge

The denunciation of crypto-billionaire Sam Bankman-Fried happened on Twitter.

Over the past two years, the 30-year-old entrepreneur has earned a reputation as one of the smartest and most trusted figures in crypto. He built his cryptocurrency exchange FTX into a $32 billion company. He spent hundreds of millions of dollars to prop up other struggling crypto companies. And he became a major political donor to Joseph R. Biden Jr.’s presidential campaign as well as a frequent, welcome presence in the halls of Congress.

Then, within days, his fledgling empire collapsed, and it was Mr. Bankman-Fried who needed saving.

In a shocking implosion that was a hammer blow to the crypto market’s credibility, Mr. Bankman-Fried said on Tuesday that he planned to sell his suddenly struggling company to an arch-rival.

Mr. Bankman-Fried fell into the hands of Changpeng Zhao, CEO of Binance, the only crypto exchange larger than FTX. After reports circulated that one of Mr. Bankman-Fried’s other businesses was on shaky financial footing, a Twitter post by Mr. Zhao, who is known online as CZ, essentially started a bank run that crippled FTX. On Tuesday, Binance announced that it had agreed in principle to buy its biggest competitor, although it remains unclear whether the deal will go through.

“CZ performed a pincer movement,” said Lee Reiners, a crypto expert who teaches at Duke University Law School. – He surprised us all.

Many of crypto’s fundamental myths have already been punctured this year, and Mr. Bankman-Fried’s rapid fall suggests that no company in this freewheeling, loosely regulated industry is safe from extreme volatility. As news of FTX’s collapse spread, crypto markets took a hit, with Bitcoin and Ether both down more than 15 percent since Tuesday.

On Tuesday, Mr. Bankman-Fried framed the Binance takeover as a measure to ensure FTX customers did not lose their money. But the deal has not been finalized and its exact terms remain unclear, opening the possibility that FTX’s hundreds of thousands of customers could lose their money and set off another crash in crypto prices.

“This episode highlights the vulnerability of the entire crypto edifice,” said Eswar Prasad, an economics professor at Cornell University. “Even large and seemingly financially sound institutions turn out to have fragile and unstable foundations that crumble at the slightest hint of trouble.”

A spokesman for FTX declined to comment. A spokeswoman for Binance did not respond to a request for comment.

Unlike some other crypto companies that have imploded this year, FTX was almost mainstream. Mr. Bankman-Fried ran a commercial during the Super Bowl and bought the naming rights to the Miami Heat’s basketball arena. He was profiled in virtually every major news outlet, including The New York Times, and had nearly a million followers on Twitter.

“It’s like the person you thought was Hermione turned out to be Voldemort,” crypto journalist Laura Shin tweeted on Wednesday.

When the company collapsed, FTX’s venture investors were in the dark about Mr. Bankman-Fried’s plans, and employees had little guidance. Other companies tried to distance themselves. “There cannot be a ‘run on the bank’ at Coinbase,” Alesia Haas, the US crypto exchange’s chief financial officer, wrote in a blog post. “We hold our customers’ assets 1:1.”

In a memo to Binance employees posted on Twitter, Mr. Zhao so that FTX’s demise “is not good for anyone in the industry.”

“Regulators will scrutinize the exchanges even more,” he wrote. “Worldwide licenses will be harder to get.”

Until this week, Mr. Bankman-Fried, known by his initials SBF, was considered one of the industry’s shrewdest and most formidable executives.

In 2017, he founded Alameda Research, a crypto trading firm, which made a fortune by exploiting arbitrage opportunities in the Bitcoin market. He parlayed this success into the establishment of FTX, which was based in Hong Kong before moving to the Bahamas last year.

FTX’s business was built on a type of risky trading – where investors borrow money to make large bets on the future value of cryptocurrencies – that is still illegal in the United States. But Mr. Bankman-Fried started a smaller U.S. branch that offered more conservative trading options, while lobbying U.S. regulators to approve the riskier model. As the company grew, he became a prolific political donor, contributing more than $5 million to Mr. Biden’s 2020 campaign.

He also embarked on a marketing blitz. In April, Mr. Bankman-Fried hosted a dazzling conference in the Bahamas, where he appeared on stage with former President Bill Clinton and former British Prime Minister Tony Blair. At one point, he was worth an estimated $24 billion, according to Forbes, making him the second-richest crypto businessman behind Mr. Zhao. Mr. Bankman-Fried vowed to one day give away his entire fortune.

When the crypto market crashed in May, Mr. Bankman-Fried was hailed as a savior. He loaned troubled crypto company Voyager Digital $485 million and bailed out BlockFi, a crypto lending firm, with a $400 million line of credit.

But in recent weeks, he began to face setbacks in the industry. He was criticized by crypto enthusiasts for supporting regulatory proposals that they saw as a violation of the technology’s philosophical principles.

Last week, crypto publication CoinDesk reported on a leaked balance sheet that showed a large portion of Alameda’s assets consisted of FTT, a token that FTX had invented to facilitate trading on the platform. The news raised fears that a fall in FTT’s value could cripple both FTX and Alameda, which are closely intertwined.

A former FTX investor, Mr. Zhao still held a large amount of FTT, which Mr. Bankman-Fried had given him to buy back equity in FTX. Zhao also seemed to be getting displeased with his colleague. In October, Mr. Bankman-Fried had made a joke on Twitter suggesting that Zhao was not allowed to enter Washington, an apparent reference to the scrutiny Binance has faced from US regulators.

Over the weekend, Zhao announced on Twitter that Binance would be selling its holdings of FTT. He insisted he was not engaging in a “move against a competitor.” But he later compared the FTT token to Luna, a cryptocurrency that crashed in May, sparking a wider crisis.

“We will not support people who lobby against other industry players behind their backs,” he added on Twitter.

The impact was immediate. Over the course of three days, customers withdrew more than $6 billion from FTX. Mr. Bankman-Fried said on Twitter that “a competitor is going after us with false rumors.”

Around the same time, Mr. Bankman-Fried called potential investors while trying to raise money, according to two people familiar with the conversations. But it was not clear how much he would need, one person said. But the stakes were clearly high: Mr. Bankman-Fried explained that FTX was in an emergency, according to the second person.

On Tuesday, Mr. Bankman-Fried entered into the agreement with Mr. Zhao. “Binance has shown time and time again that it is committed to a more decentralized global economy,” he wrote. – We are in the best hands.

In his memo to employees, Zhao said he was as shocked as anyone. “I had very little knowledge of the internal state of things at FTX,” he wrote. “I was surprised when he wanted to talk.”

But the takeover is far from a done deal. In a series of tweets, Zhao emphasized that “Binance has the discretion to withdraw from the agreement at any time,” he said.

The companies must still go through a due diligence process. Both FTX and Binance are based outside the US, but regulators in other countries may try to intervene. “Every regulator is going to be looking for a way to exercise jurisdiction over this deal,” said Joseph Castelluccio, a lawyer who specializes in digital assets.

Confusion reigns among FTX employees. Mr. Bankman-Fried announced the deal to employees around the same time the news was posted on Twitter. Employees in the US and abroad were blindsided, according to two people familiar with the matter.

“I owe you all a great debt for following me, and I will do what I can to make it right,” Mr. Bankman-Fried wrote Tuesday in a memo to employees, which was obtained by The Times. “Sorry.”

The fall from grace is also reflected in the size of his fortune. According to a Bloomberg wealth index, Mr. Bankman-Fried, now worth $991.5 million, is no longer a billionaire.