The story of Sam Bankman-Fried, the founder of the FTX exchange, who lost all his assets within a few days, was arrested and extradited to the United States for trial.
The Story of Sam Bankman-Fried
Sam Bankman-Fried, the owner and founder of the FTX exchange, which was the second-largest cryptocurrency exchange in the world, lost all his wealth over a single weekend. Imagine a multi-billionaire losing all their wealth over a weekend—wealth equivalent to the value of Iran’s annual oil sales. How can so much money be wiped out in just two days? This exact scenario happened to Sam Bankman-Fried, a thirty-year-old multi-billionaire who was the CEO and majority owner of FTX, in November 2022.
Bankman-Fried, the owner and founder of FTX, the world’s second-largest exchange after Binance, lost all his assets over one weekend. The situation became more dramatic knowing that Bankman-Fried wasn’t just the owner of FTX but also created a token (a cryptocurrency) called FTT through this exchange, with a total market value of $152 billion just a day before the massive collapse. This asset also lost its value. Overall, events unfolded in a way that around $200 billion of wealth was destroyed in just a few days, not accounting for the intangible assets, brand value, and the total worth of the FTX business. Even the lower estimate of $200 billion is equivalent to four years of Iran’s total exports.
The Beginning of the Story
Five years before the great collapse, Bankman was a 25-year-old young man interested in Bitcoin. Millions of young people around the world, like him, are captivated by financial freedom, living simple and carefree lives with minimal assets. They trade or invest in cryptocurrencies with what little they have, hoping to become millionaires one day. Bankman was one of these individuals, deeply interested in trading cryptocurrencies and skilled in technical analysis. With the idea that he could create wealth through trading based on numerical analysis, he came up with a concept. He decided to establish a company focused on capital management and value creation through trading. He named the company Alameda Research, but Alameda had no significant capital on day one. For a young man driving a second-hand Toyota Corolla, lacking even suitable clothes, and with his most valuable asset being the computer he used for trading, starting a trading company in the U.S. and the financial sector was no easy task. So, Bankman turned to family and friends to raise initial capital, and remarkably, he raised several million dollars in a short period. Bankman’s extraordinary skill in attracting investment or convincing others to invest in his ideas made Alameda shine so brightly that, in less than two years, Alameda became a company managing billions of dollars in assets.
Yet, Bankman still drove the same Toyota Corolla and often slept on the couch in his office. His simple lifestyle on Alameda’s journey was ironically emblematic and instructive. Not only was Bankman simple living, but he was also a vegetarian. His Stoic tendencies, his unkempt curly hair as if it hadn’t seen a barber’s scissors for months, his awkward speech and mannerisms, and his sloppy body language in clothes usually consisting of a short-sleeve t-shirt, shorts, and worn-out sneakers were all in stark contrast to the societal image of a financial entrepreneur. These contrasts made him prominent and popular on social media.
Bankman was not the only notable figure in the cryptocurrency and blockchain industry with such a demeanor, appearance, and lifestyle. Vitalik Buterin, the co-founder of the popular Ethereum network and cryptocurrency, also shared a similar style. Buterin, who might be the most influential person in the cryptocurrency ecosystem after the anonymous creator of Bitcoin, Satoshi Nakamoto, had also exhibited such traits in his appearance and behavior since his teenage years. The similarity in lifestyle and appearance between Bankman and Buterin, among others in this space, greatly contributed to his social acceptance and popularity. This acceptance can be traced back to the roots of cryptocurrency, where the emergence and existence of encrypted assets and “distributed ledgers” were essentially a rebellion against the dominant financial systems, with each influential individual in this ecosystem being a rebel, a Stoic, and a disruptor of the established order and its norms and values.
In addition to his business activities, Bankman, like many American investors and billionaires, engaged in philanthropy. He was a supporter of “effective altruism” and had committed to donating a significant portion of his wealth to charitable causes during his lifetime.
Sam Bankman-Fried’s Miracle
Following the success of Alameda Research, Bankman brought his girlfriend, Caroline Ellison, into the company, eventually promoting her to the position of CEO. Caroline, in appearance and behavior, resembled Bankman but had almost no knowledge or experience in finance, company management, blockchain, or analysis. Bankman, buoyed by Alameda’s success in its first two years and having built an extensive network, founded the FTX exchange in 2019 with investments from several venture capitalists and those connected to the cryptocurrency field.
With Bankman’s popularity, hard work, a dedicated and powerful technical team, extensive marketing and promotion by celebrities, and widespread lobbying with government officials and politicians, FTX became the second-largest exchange in the world within two years. It not only surpassed its domestic and well-known competitors but also became the closest rival to the largest exchange, Binance. FTX was now more valuable than Deutsche Bank, but the tides of fortune were turning against it.
Caroline Ellison, who was ordinarily unqualified even for an internship at a cryptocurrency company, had two key attributes that helped her rise in Bankman’s organization. First, she was Bankman’s girlfriend, and second, her father was a prominent MIT professor and the former head of Gary Gensler at the university.
Destruction Timeline
November 2, 2022 – CoinDesk reported that Alameda Research held over $2 billion in FTT tokens out of its total reserve of around $15 billion. This significant amount of FTT in Alameda’s portfolio indicated that Alameda held about half of the total market value of FTT.
FTT, the loyalty token of FTX owned by Sam Bankman-Fried, was a significant concern. The troubling aspect of this report was that holding FTT as an asset backing had no reliable financial justification. FTT was, in reality, an unsupported and valueless token with no specific use. The creation of this token was essentially unregulated, and FTX used a small portion of these tokens as rewards for user activity on the FTX exchange, while Alameda created a false sense of value for FTT by using a large amount of these tokens as collateral for commitments and investments. The revelation of FTT reserves in Alameda sparked a chain of events that sequentially brought down Alameda, the market value of FTT, and the FTX exchange.
November 6, 2022 – Changpeng Zhao (CZ), the influential CEO of the largest exchange, Binance, tweeted an indirect reference to the CoinDesk report from four days earlier, announcing that Binance would sell all its FTT tokens.
A few hours after CZ’s tweet, Caroline Ellison announced that they would buy all the FTT tokens from Binance. Her goal was to preserve the value of FTT and, consequently, the value of Alameda and FTX.
November 7, 2022 – Sam Bankman-Fried tweeted several times claiming that a competitor—referring to Binance—was trying to harm them with false rumors, stating: “FTX is fine. The situation of user assets is good.”
November 8, 2022 – In a surprising move, CZ proposed buying FTX, a proposal that revived hope among investors whose money was trapped in FTX. The truth is that cryptocurrency companies have a history of supporting each other despite fierce competition. Blockchain industry players understand that they are alone against the traditional financial world and must support each other. Sam Bankman-Fried himself had been a pioneer in supporting blockchain businesses. Just a few months before the collapse of FTX, after the collapse of the Luna cryptocurrency, some DeFi businesses were on the brink of destruction. Bankman-Fried had rushed to their aid with $750 million to Blockfi and Voyager. Bankman-Fried justified this generous support by saying: “Sometimes we need to spend a bit of money to keep crypto infrastructure active.”
But was CZ’s proposal to buy FTX a generous attempt to strengthen the crypto ecosystem?
Within a day or two of the buyout proposal, CZ withdrew his offer, claiming that the situation was worse than expected to save FTX. While CZ’s assessment was correct—FTX had misused user assets with the issuance of unsupported FTT and used it in the Alameda Research fund, placing investors in a dangerous position and squandering the proceeds from these fraudulent actions—one might argue that CZ, who was an early investor in FTX and had access to on-chain data and FTX’s asset status, should have known the situation was irreparable. Therefore, his proposal might have been seen as a public relations maneuver and a blow to Bankman-Fried’s reputation.
It is worth noting that at the beginning of FTX’s establishment, CZ invested $100 million in the company and about a year before FTX’s collapse, withdrew from partnership with Sam Bankman-Fried, receiving $2.1 billion, part of which was FTT tokens. CZ’s announcement to sell this FTT inventory at the worst possible time contributed to the collapse of FTX.
Immediately after CZ withdrew his buyout proposal, the market value of FTT nearly evaporated, and FTX came to an end.
December 12, 2022 – One month after the great collapse, Sam Bankman-Fried was arrested in the Bahamas and extradited to the United States for trial. The Bahamas was the official headquarters of Bankman’s company, where he had purchased luxury properties, and there had been much talk about his and his associates’ extravagant spending in the Bahamas.
Regulatory Conspiracy
What happened after the fall and arrest of Sam Bankman-Fried was nothing short of a tsunami of various attacks against him and FTX. However, these attacks were not limited to accusations of fraud in public opinion. Another layer of the Bankman-Fried saga is that in the last year, he traveled repeatedly to Washington and New York to lobby with U.S. government and congressional officials for cryptocurrency exchange regulations. Many crypto industry insiders believe that these lobbying efforts were not just to aid the crypto ecosystem but more to create rent-seeking opportunities and immunity for FTX, and were also considered a form of betrayal to his peers in a risky path.
It is worth noting that Sam Bankman-Fried did not come from an ordinary family; his parents were legal professionals with connections to influential people in the United States. His father was a tax lawyer for Senator Elizabeth Warren, the largest opponent of cryptocurrencies in the U.S. Senate. Senator Warren has not spared any effort in the Senate to restrict and destroy the crypto ecosystem. Sam Bankman-Fried’s mother was also a prominent figure in Hillary Clinton’s campaign and leads an active liberal democratic lobby.
Sam Bankman-Fried was also one of the largest donors to the election campaigns of U.S. Congress representatives and politicians, second only to George Soros.
The story does not end here; Sam Bankman-Fried had at least two face-to-face meetings with Gary Gensler. Gensler, who has been the chairman of the U.S. Securities and Exchange Commission (SEC) for most of the FTX’s operation, should have been the person to prevent Bankman-Fried’s fraudulent actions through regulation. Instead, during this period, he was engaged in lobbying with Bankman-Fried for crypto regulation. Meanwhile, Gensler has caused significant trouble for cryptocurrency exchanges and token creators and projects in the U.S.
The situation becomes more intriguing when we recall that Gensler taught cryptocurrency at MIT, where Caroline Ellison’s father was the head of the economics department.
The FTX debacle was not solely the result of Sam Bankman-Fried’s efforts; there was also extensive lobbying by politicians and professors from MIT and Stanford involved.
The case of Sam Bankman-Fried is a world of intricate details, with a mix of correct and incorrect information. Numerous conspiracy theories have also emerged on the sidelines, which are not acceptable due to their lack of documentation.
I conclude this article by pointing out that when we review the list of various allegations and potential crimes committed by Sam Bankman-Fried—from misusing customer assets, lobbying with politicians, issuing unsupported currency, and causing harm to people—he has committed no crimes that do not happen repeatedly and continuously every day by many banks and central banks around the world.
“Sam Bankman-Fried initially drove a used Toyota Corolla, had no decent clothes, and his most valuable asset was the computer he used for trading. After three years, the same person, who had billions of dollars of user assets in his two companies without even basic accounting, was still just as disheveled and extravagant in the Bahamas.” -Pooria Asteraky
