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Sam Bankman-Fried: From crypto king to handcuffs

Published 14/12/2022, 02:15 am
Sam Bankman-Fried: From crypto king to handcuffs

A responsible leader of the crypto community. A genius who understood the importance of regulation and transparency. The next John Pierpont Morgan. Crypto’s white knight. The next Warren Buffet. A charming nerd in an ill-fitting t-shirt and goofy hair.

Sam Bankman-Fried was called it all, until, in the span of a few days in November 2022, his globe-spanning crypto empire came crashing down, taking his personal fortune and reputation with it.

No longer the next Buffet, the man known as SBF is now more likely to draw comparisons to Bernie Madoff, Elizabeth Holmes, Charles Ponzi… A wolf in sheep’s clothing who took investors, customers and the press for a pack of fools, all the while potentially committing one of the greatest acts of fraud in the 21st century.

Quite a stunning innings for a man in his early 30s, but how did he get here in the first place?

The early years

SBF was born in Stanford University, California to a wealthy family of professors before attending the Massachusetts Institute of Technology (MIT) at aged 18, where he studied physics and mathematics.

After working for a while at New York trading firm Jane Street Capital in his early 20s, SBF co-founded quant trading firm Alameda Research.

It was here that SBF made his first major success by arbitrage trading the price of bitcoin after noticing that the benchmark cryptocurrency was trading for 10% more on the Japanese exchanges compared to the US exchanges.

Exactly how much Alameda made is unclear, but in a piece for New York magazine, SBF said he was moving up to US$25mln per day in 2018 by cobbling together “a chain of intermediaries, including obscure banks in rural Japan, to take advantage of the month long price discrepancy”.

But it was not until Sam met fellow crypto entrepreneur Changpeng ‘CZ’ Zhao in 2019 that his status as the king of crypto would start to form.

Head of major cryptocurrency exchange Binance, CZ would later be the architect of SBF’s demise, but in 2019, he was something of a mentor to this shaggy-haired upstart.

CZ saw potential in his protege, so much so that spearheaded the initial investment into FTX, Bankman-Fried’s nascent cryptocurrency exchange, that would go on to become Binance’s biggest rival.

Political influencer

With Alameda Research and FTX in full swing, Sam soon become among the richest men on the planet, with his face splashed across Time and Forbes, espousing his brand of “effective altruism”.

SBF, he would have you know, was one of the good ones. A billionaire who planned to give away his fortune and save the world. Who was more than willing to bail out struggling cryptocurrency firms if they needed it.

The first stage of Sam’s plan was to spend millions in political donations. His Democratic Party donations were well known: He was the second-largest donor to Democratic politicians in the last election cycle.

But as data from non-profit platform OpenSecrets shows, he was almost as likely to give to Republicans as he was to Democrats.

His status and clout went stratospheric in 2021, when in the record crypto bull run, FTX signed huge sponsorship deals with McLaren F1, bought Super Bowl ads starring Tom Brady and Larry David, bought the naming rights to NBA team Miami Heat’s home stadium, and inked sponsorship deals with high-profile businesspeople including Shark Tank’s Kevin O’Leary.

More than any other cryptocurrency firm, including Binance, FTX had gone mainstream.

Yet as we now know, his empire was built on sand.

The collapse

The intricacies of FTX and Alameda Research’s demise will be mulled over for years to come, but it started with a CoinDesk article and humble Twitter spat with former mentor CZ, who had accused SBF of lobbying “against other industry players behind their backs”.

A few barbs later and CZ pulled out his trump card: As a majority holder of FTX’s FTT token, CZ had a huge amount of influence over its price. If he threatened to dump his bag on the market, it could be a death blow for the token.

On November 6, CZ did just that. Citing that fateful CoinDesk article that raised suspicions that FTX and Alameda Research were illegally comingling funds, CZ announced that Binance was about to liquidate its entire FTT holdings.

A run on FTT ensued and, inevitably, the token crashed. But there was a bigger issue brewing: FTT, now essentially worthless, was carrying the majority of Alameda’s US$8bn liabilities on its shoulders.

Worse still, as customers rushed to withdraw their funds from FTX following a collapse in trust, they soon discovered that their collateral wasn’t there.

Vindicating CoinDesk’s article, solid proof has come to light that Alameda Research was funnelling user funds out of FTX in order to place risky, high-leverage trades. SBF has admitted to it but, has denied criminal wrongdoing.

The weeks since have been a non-stop barrage of shocking revelations about severe professional misconduct, potential Madoff-level fraud, and salacious personal stories about Sam's personal life.

Now, as of December 13, Sam Bankman-Fried is under arrest on criminal charges in Nassau, The Bahamas, at the behest of the US government.

His arrest brings to an end a bizarre post-collapse media tour that saw SBF agree on interviews with everyone from Good Morning America and the BBC to citizen journalists Tiffany Fong and Stephen ‘Coffeezilla’ Findeisen.

What next for SBF?

Bankman-Fried’s arrest put to bed plans to appear before a December 13 US House Committee on Financial Services hearing titled ‘Investigating the Collapse of FTX, Part I’ at the request of house representative Maxine Waters.

For his part, SBF’s intended speech before the committee, a draft of which was obtained by Forbes, went to great lengths to describe his own failings.

His speech would have talked at great lengths about overleveraged positions, margin calls, declining asset values, illiquid positions, bank runs, a failure of hedges and the rest of the apparent failures he has not shied away from.

SBF would have also repeated his regret of “giving in to pressure to sign forms that precipitated the Chapter 11 filing”, while also accusing FTX’s new management team under restructuring expert John J. Ray III of ghosting him.

“I have sent five emails to Mr Ray. Mr Ray has never responded, nor has he reached out to me to communicate in any other ways,” Sam was going to tell the committee.

But those statements have since faded into irrelevance, for no matter how hard he tried to pivot the blame to his poor judgement and innocent mismanagement, the court of public opinion looks like it got its wish.

Sam was taken in by Bahamian authorities at the behest of the US government, not on civil charges, but on criminal offences that could carry a life sentence.

The US Securities and Exchange Commission (SEC) suggested further charges of fraud and securities law violations.

“We allege that Sam Bankman-Fried built a house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto,” said the SEC chair Gary Gensler, before throwing in a nod to the inevitable regulatory groundswell underway: “The alleged fraud committed by Mr Bankman-Fried is a clarion call to crypto platforms that they need to come into compliance with our laws.”

But despite there being an extradition treaty between The Bahamas and the US, extradition is a drawn-out process. Instead, deportation is a possibility, reckons tax and immigration lawyer David Lesperance of Lesperance & Associates.

Per US laws, passports remain the property of the US government at all times, and “given the now-disclosed charges, it is reasonable to assume that the Department of Justice (DoJ) has already placed a call to the State Department to cancel his passport,” said Lesperance.

Without a valid passport, SBF would no longer fulfil The Bahamas’ residency requirements.

“This is such a tried and true method to end around extradition that it is actually described in the State Department’s Foreign Affairs Manual,” noted Lesperance.

Lesperance surmised that a similar strategy could be used “against other FTX employees who only have US citizenship to whom the SEC and DoJ were interested in interviewing, all without the need for indictments”.

Could further prosecutions be on the way? We'll soon find out.

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