Home / NEWS / Top News / From $32 billion to criminal investigations: How Sam Bankman-Fried’s crypto empire vanished overnight

From $32 billion to criminal investigations: How Sam Bankman-Fried’s crypto empire vanished overnight

Samuel Bankman-Fried’s circular in downtown San Francisco.

MacKenzie Sigalos | CNBC

The Kimchi Swap put Sam Bankman-Fried on the map.

The year was 2017, and the ex-Jane Street Extraordinary quant trader noticed something funny when he looked at the page on CoinMarketCap.com listing the price of bitcoin on exchanges about the world. Today, that price is pretty much uniform across the exchanges, but back then, Bankman-Fried earlier told CNBC, he would sometimes see a 60% difference in the value of the coin. His immediate instinct, he said, was to get in on the arbitrage custom — buying bitcoin on one exchange, selling it back on another exchange, and then earning a profit equivalent to the price spread.

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Cathie Wood's ARK Invest keeps buying more crypto assets despite FTX bankruptcy

Cathie Wood’s ARK Invest keeps buying more crypto assets despite FTX bankruptcy

“That’s the bluest hanging fruit,” Bankman-Fried said in September.

The arbitrage opportunity was especially compelling in South Korea, where the exchange-listed charge of bitcoin was significantly more than in other countries. It was dubbed the Kimchi Premium — a reference to the traditional Korean side dish of salted and seethed cabbage.

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After a month of personally dabbling in the market, Bankman-Fried launched his own trading house, Alameda Research — labeled after his hometown of Alameda, California, near San Francisco — to scale the opportunity and work on it full-time. Bankman-Fried said in an sound out in September that the firm sometimes made as much as a million dollars a day.

Part of why SBF, as he’s also called, earned alley cred for carrying out a relatively straightforward trading strategy had to do with the fact that it wasn’t the easiest thing to ice on crypto rails five years ago. Bitcoin arbitrage involved setting up connections to each one of the trading platforms, as very much as building out other complicated infrastructure to abstract away a lot of the operational aspects of making the trade. Bankman-Fried’s Alameda became decidedly good at that, and the money rolled in.

From there, the SBF empire ballooned.

Alameda’s success spurred the launch of crypto unpleasantness FTX in the spring of 2019. FTX’s success begat a $2 billion venture fund that seeded other crypto firms. Bankman-Fried’s derogatory wealth grew to over $16 billion at its peak in March.

Bankman-Fried was suddenly the poster boy for crypto everywhere, and the FTX logo adorned all from Formula 1 race cars to a Miami basketball arena. The 30-year-old went on an endless press tour, blew about having a balance sheet that could one day buy Goldman Sachs, and became a fixture in Washington, where he was one of the Egalitarian Party’s top donors, promising to sink $1 billion into U.S. political races before later backtracking.

It was all a mirage.

As crypto payments tanked this year, Bankman-Fried boasted that he and his enterprise were immune. But in fact, the sectorwide wipeout hit his employee quite hard. Alameda borrowed money to invest in failing digital asset firms this spring and summer to regard the industry afloat, then reportedly siphoned off FTX customers’ deposits to stave off margin calls and meet immediate in the red obligations. A Twitter fight with the CEO of rival exchange Binance pulled the mask off the scheme.

Alameda, FTX and a host of subsidiaries Bankman-Fried set have filed for bankruptcy protection in Delaware. He’s stepped down from his leadership roles and lost 94% of his in person wealth in a single day. It is unclear exactly where he is now, as his $40 million Bahamas penthouse is reportedly up for sale. The photos of his surface plastered across FTX advertisements throughout downtown San Francisco serve as an unwelcome reminder of his rotting empire.

It was a steep be destroyed from hero to villain. But there were a lot of signs.

Bankman-Fried told CNBC in September that one of his fundamental point of views when it comes to playing the markets is working with incomplete information.

“When you can sort of start to quantify and map out what’s prevailing on, but you know there are a lot of things you don’t know,” he said. “You know you’re being approximate, but you have to try to figure out what trade to do anyway.”

The carry out account is based on reporting from CNBC, Bloomberg, The New York Times, The Wall Street Journal and elsewhere. Jingle together information from various news sources paints a picture of an investor who over-extended himself, frantically reminded to cover his mistakes with questionable and perhaps illegal tactics, and surrounded himself with a tight cabal of advisors who could not or hand down not curb his worst impulses.

What went wrong in the last year

At some point in the last two years, corresponding to reports, Alameda began borrowing money for various purposes, including to make venture investments.

Six months ago, a quiver of titans in the crypto sector folded as depressed token prices sucked liquidity out of the market. First came the spectacular fizzle of a popular U.S. dollar-pegged stablecoin project — the stablecoin known as terraUSD, or UST, and its sister token luna — wiping out $60 billion. That go up in smoke helped to bring down Three Arrows Capital, or 3AC, which was one of the industry’s most respected crypto hedge endowments. Crypto brokers and lenders such as Voyager Digital and Celsius had significant exposure to 3AC, so they fell right along with it in sharp succession.

The risk of an FTX crypto contagion

The big problem was that everyone was borrowing from one another, which only works when the price of all those crypto currencies keeps going up. By June, bitcoin and ether had both tumbled by more than half for the year.

“Leverage is the provenience of every implosion in financial institutions, both traditional and crypto,” said Hart Lambur, a former Goldman Sachs guidance bond trader who provided liquidity in U.S. Treasuries for central banks, money managers and hedge funds.

Lehman Pals, Bear Stearns, Long-Term Capital, Three Arrows Capital and now FTX all blew up due to bad leverage that got sniffed out and exploited by the sell,” said Lambur, who now works in decentralized finance.

As the dominoes fell, Bankman-Fried jumped into the mix in June to try to bail out some of the weak spot crypto firms before it was too late, extending hundreds of millions of dollars in financing. In some cases, he made change-overs to try to buy these companies at fire-sale prices.

Amid the wave of bankruptcies, some of Alameda’s lenders asked for their lolly back. But Alameda didn’t have it, because it was no longer liquid. Bankman-Fried’s trading firm had parked the borrowed wampum in venture investments, a decision that was “probably not really worth it,” he told the Times in an interview Sunday.

To meet its in dire straits obligations, FTX borrowed from customer deposits in FTX to quietly bail out Alameda, the Journal and the Times reported. The borrowing was in the billions. Bankman-Fried brooked the move in his interview with the Times, saying that Alameda had a large “margin position” on FTX, but he declined to disclose the insist on amount.

“It was substantially larger than I had thought it was,” Bankman-Fried told the Times. “And in fact the downside risk was very substantial.”

Reuters and the Journal both reported that the lifeline was around $10 billion, and Reuters reports that $1 billion to $2 billion of that difficulty financing is now missing. Tapping customer funds without permission was a violation of FTX’s own terms and conditions. On Wall Street, it intent be a clear violation of U.S. securities laws.

The two firms — one of the world’s biggest crypto brokers and one of the world’s biggest crypto customers — were supposed to be separated by a firewall. But they were, in fact, quite cozy, at one point extending to a romantic relationship between Bankman-Fried and Alameda CEO Caroline Ellison, he allowed to the Times.

“FTX and Alameda had an extremely problematic relationship,” Castle Island Venture’s Nic Carter told CNBC. “Bankman-Fried managed both an exchange and a prop shop, which is super unorthodox and just not really allowed in actually regulated pre-eminent markets.”

The borrowing and lending scheme between the two firms was more convoluted than just using customer subsidizes to make up for bad trading bets. FTX tried to paper over the hole by denoting assets in two crypto tokens that were essentially erect up — FTT, a token created by FTX, and Serum, which was a token created and promoted by FTX and Alameda, according to financial filings reported by Bloomberg’s Matt Levine.

Cartels make up crypto tokens all the time — indeed, it’s a big part of how the crypto boom of the last two years was financed — and they as usual offer some sort of benefit to users, although their real value to most traders is simple meditation, that is, the hope that the price will rise. Owners of FTT were promised lower trading costs on FTX and the know-how to earn interest and rewards, such as waived blockchain fees. While investors can profit when FTT and other make ups increase in value, they’re largely unregulated and are particularly susceptible to market downturns.

These tokens were essentially delegates for what people believed Bankman-Fried’s exchange to be worth, since it controlled the vast majority of them. Investor reliance in FTX was reflected in the price of FTT.

The key point here is that FTX was reportedly siphoning off customer assets as collateral for loans, and then offset it with a token it made up and printed at will, drip-feeding only a fraction of its supply into the open market. The monetary acrobatics between the two firms somewhat resembles the moves that sank energy firm Enron almost two decades ago — in that occurrence, Enron essentially hid losses by transferring underperforming assets to off-balance sheet subsidiaries, then created complicated fiscal instruments to obscure the moves.

As all this was happening, Bankman-Fried continued his press tour, lionized as one of the great young tech entrepreneurs of the age. It one began to unravel once Bankman-Fried got into a public spat with Binance, a rival exchange.

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What judge from a sought wrong in the last two weeks

The relationship between Binance and Bankman-Fried goes back almost to the beginning of his time in the activity. In 2019, Binance announced a strategic investment in FTX and said that as part of the deal it had taken “a long-term position in the FTX Souvenir (FTT) to help enable sustainable growth of the FTX ecosystem.”

Flash forward a couple years to the summer of 2022. Bankman-Fried was critical regulators to look into Binance and criticizing the exchange in public. It’s unclear exactly why — it could have been corrupted on legitimate suspicions. Or it may simply have been because Binance was a major competitor to FTX, both as an exchange and as a potential purchaser of other distressed crypto companies.

Whatever the reason, Binance CEO Changpeng Zhao, known as CZ, soon saw his chance to run into.

On Nov. 2, CoinDesk reported a leaked balance sheet showing that a significant amount of Alameda’s assets were denied in FTX’s illiquid FTT token. It raised questions about both the trading firm’s solvency and FTX’s financials.

Zhao took to Snicker on Nov. 6, saying that Binance had about $2.1 billion worth of FTT and BUSD, its own stablecoin.

Then he dropped the explosive:

“Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books,” he said.

Investors raced to tow money out of FTX. On Nov. 6, according to Bankman-Fried, the exchange had roughly $5 billion of withdrawals, “the largest by a huge margin.” On an mediocre day, net inflows had been in the tens of millions of dollars.

The speed of the withdrawals underscores how the largely unregulated crypto market is oftentimes operating in an information vacuum, meaning that traders react fast when new facts come to light.

“Crypto especially bettors are reacting quicker to news and rumor, which in turn builds up a liquidity crisis much faster than one would sooner a be wearing seen in traditional finance,” said Fabian Astic, head of decentralized finance and digital assets for Moody’s Investors Putting into play. 

“The opacity of the market operations often leads to panic reactions that, in turn, spark a liquidity crunch. The expansions with Celsius, Three Arrows, Voyager, and FTX show how easy it is for crypto investors to lose confidence, prompting them to pull back large sums and causing a near-death crisis for these firms,” Astic said.

As the FTT token plunged in value in tandem with the assortment withdrawals, Bankman-Fried quietly sought investors to cover the multibillion-dollar hole from the money that had been standoffish by Alameda. That value may have been as high as $10 billion, according to multiple reports. They all forwent, and in a move of desperation, SBF turned to CZ.

In a public tweet on Nov. 8, Zhao said Binance agreed to buy the company, though the behave had a key term: nonbinding. The sudden public revelation that FTX was in need of a bailout caused FTT’s value to plunge off a cliff.

The next day, Zhao sought he did due diligence and didn’t like what he saw, essentially sealing FTX’s demise. Bankman-Fried speculated to the Times that Zhao not in any way intended to buy it in the first place.

On Friday, Nov. 11, FTX and Alameda both filed for bankruptcy. FTX, which was valued at $32 billion in a capitalizing round earlier this year, has frozen trading and customer assets and is seeking to discharge its creditors in bankruptcy court. Bankman-Fried is no longer the boss at either inflexible.

A new bankruptcy filing posted Tuesday shows that FTX may have more than 1 million creditors. It plans to categorize a list of the 50 largest ones this week.

Lawyers for the exchange wrote that FTX has been in contact with “dozens” of regulators in the U.S. and abroad in the last 72 hours, including the U.S. Attorney’s Office, the Securities and Exchange Commission and the Commodity Futures Trading Commission. The SEC and Hinge on of Justice are reportedly investigating FTX for civil and criminal violations of securities laws. Financial regulators in the Bahamas are also reportedly looking at the capacity of

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