How FTX’s Sam Bankman-Fried went from cryptocurrency king to convicted fraudster

Two years ago, Sam Bankman-Fried was a 30-year-old multi-billionaire living in a $35 million apartment within the Bahamas, partying with friends while running one of the invaluable crypto corporations on this planet.

Today, he’s a 32-year-old inmate on the Metropolitan Detention Center in Brooklyn, waiting for a judge to tell him how long he’ll spend behind bars for organizing “one of the largest financial frauds in American history,” as U.S. Attorney Damian Williams says.

Bankman-Fried, the founder and former CEO of failed cryptocurrency exchange FTX, will appear in federal court in downtown Manhattan on Thursday, where U.S. District Judge Lewis Kaplan will sentence. The prosecutor’s office recommends a sentence of 40 to 50 years in prison.

In November, jurors needed just three hours of deliberation to find Bankman-Fried guilty on all seven criminal charges against him. Due to the high-profile, month-long trial, which involved nearly 20 witnesses and a whole lot of exhibits, experts said on the time that they’d never seen such a fast decision. Bankman-Fried plans to appeal his conviction.

Once hailed as an industry titan whose peak net value – on paper – was around $26 billion, Bankman-Fried’s rise was fierce and fast.

It began with a kimchi swap.

In 2017, Bankman-Fried, a quantitative trader on Jane Street, noticed something funny while bitcoin prices on CoinMarketCap.com. Instead of a uniform price across all exchanges, Bankman-Fried sometimes saw a 60% difference in the worth of the digital currency. He said his immediate instinct was to engage in arbitrage trading – buying bitcoins on one exchange and selling them on one other, pocketing the difference.

“It’s the lowest hanging fruit,” Bankman-Fried told CNBC in September 2022.

The arbitrage opportunity was particularly attractive in South Korea, where the listed price of bitcoin was much higher than in other countries. It was named Kimchi Premium, which refers to the standard Korean side dish of salted and pickled cabbage.

After a month of non-public involvement out there, Bankman-Fried founded Alameda Research, named after the California county where his first office was positioned. Bankman-Fried told CNBC that the corporate sometimes made as much as $1 million a day trading bitcoin.

Alameda’s success spurred the launch of FTX. In April 2019, Bankman-Fried co-founded FTX.com, a world cryptocurrency exchange that offered clients modern trading features, a responsive platform, and a reliable experience. FTX’s success led to a $2 billion enterprise fund that spawned other crypto corporations.

The FTX logo soon adorned every thing from Formula 1 race cars to a Miami basketball arena. Bankman-fried I used to be talking about how I’d buy Goldman Sachs in the futureand established himself in Washington as one in every of the Democratic Party’s major donors.

Then the market turned around.

The so-called crypto winter of 2022 has devastated hedge funds and lenders across the cryptocurrency universe. Bankman-Fried boasted that he and his company were resilient. Behind the scenes, Alameda borrowed money to put money into failing digital asset corporations to keep the industry afloat.

May 2022 saw the crash of the Luna stablecoin, causing a domino effect that sent cryptocurrency prices crashing, devastating other lenders.

Alameda borrowed from lenders including Voyager Digital and BlockFi, which ultimately went bankrupt. Alameda collateralized its loans with FTT tokens, minted by FTX. The Bankman-Fried Empire controlled the overwhelming majority of the available currency, with only a small amount of FTT actually in circulation at any time.

Alameda valued its entire PTF treasury on the prevailing market price, although it’s a virtually illiquid asset. The fund has applied the identical methodology to other coins, including Solana and Serum (a token created and promoted by FTX and Alameda), using them to secure billions of dollars in loans. Industry insiders called the tokens “Sam’s coins.”

Facing margin calls amid falling prices, Bankman-Fried turned to billions of dollars in FTX customer deposits through mid-2022. According to the corporate’s bankruptcy filings, it had almost no technique of keeping records.

November 2, 2022 cryptocurrency trading site CoinDesk details made public Alameda’s balance sheet showed assets value $14.6 billion. More than $7 billion of those assets were FTT tokens or Bankman-Fried-backed coins akin to Solana or Serum. Another $2 billion was invested in capital investments.

Investors began to withdraw their shares from FTX, creating the specter of a virtual bank run. Both Alameda and FTX now face a liquidity crunch.

On November 6, 4 days after the CoinDesk article, Binance founder Changpeng Zhao dropped the hammer. According to Zhao, Binance was the primary outside investor in FTX in 2019. Two years later, FTX repurchased its shares using a mixture of FTT and other coins.

Zhao wrote in tweet that due to “the last revelations that have come [sic] to light, we have decided to eliminate any remaining financial transaction tax on our books.” FTX management scrambled to address the damage, and Alameda investors were able to stem the outflows for several days.

On November 7, Bankman-Fried tried to show confidence by tweeting: “FTX is doing well. The assets are fine.” The entry has been deleted.

Internal discussions took a unique course. Bankman-Fried and other executives admitted amongst themselves that “FTX client funds were irretrievably lost because Alameda misappropriated them.” By November 8, the shopper shortfall had grown to $8 billion. Bankman-Fried sought a rescue package for external investors, but found no takers.

On that day, FTX suspended all customer withdrawals. The price of FTT dropped by over 75%. Out of options, Bankman-Fried turned to Zhao, who announced he had signed a “non-binding” letter of intent to acquire FTX.com.

However, a day later, on November 9, Binance stated that the acquisition wouldn’t go ahead, citing reports of “mismanagement of customer funds” and federal investigations.

On November 11, FTX filed for bankruptcy and Bankman-Fried resigned as CEO of FTX and its affiliates. He he immediately lost 94% of his personal wealth.

Sullivan & Cromwell, FTX’s longtime lawyers, asked John J. Ray, who oversaw Enron until its bankruptcy, to take over Bankman-Fried’s former position.

On December 12, Bankman-Fried was arrested by Bahamian authorities and extradited to the United States, where he was arrested. Federal prosecutors and regulators accused Bankman-Fried of committing fraud “from the very beginning,” according to Securities and Exchange Commission filings.

Bankman-Fried was released on $250 million bail and initially remained under house arrest with a court-ordered ankle monitor at his parents’ home in Palo Alto, California, on the campus of Stanford University. He was soon imprisoned again for alleged witness tampering.

While Bankman-Fried awaited trial, a lot of his closest friends and confidants became key prosecution witnesses, leaving the previous crypto billionaire alone within the defense. Less than a 12 months after his arrest, a 12-person jury found Bankman-Fried guilty of all criminal charges against him.

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