The highly anticipated criminal trial of Sam Bankman-Fried, the former CEO of bankrupt cryptocurrency exchange FTX, begins Tuesday to determine whether he is guilty of seven counts of fraud and conspiracy.
The 31-year-old co-founded FTX in 2019; Within a few years, the valuation of the third-largest cryptocurrency exchange reached $32 billion at its peak. It is now trying to recover any money to distribute to creditors.
But how did the third largest cryptocurrency exchange get here?
Before FTX, Bankman-Fried co-founded cryptocurrency trading firm Alameda Research in 2017. He co-founded FTX in 2019 as a complement to Alameda, to help bring revenue and liquidity to the trading arm.
Within two years, more than 80 investors provided nearly $2 billion in capital to FTX, helping Bankman-Fried turn his vision into reality. In January 2022, the company raised $400 million in a Series C round, boosting its valuation to $32 billion. This was the last round of public funding.
The company has gained somewhat mainstream recognition through brand deals and partnerships. For example, in 2021, it purchased the naming rights to the Miami Heat’s home arena. FTX has also gotten its name on the polo shirts of Major League Baseball umpires, and has partnered with celebrities like Tom Brady and his ex-wife, Gisele Bündchen, as well as Steph Curry, Shaquille O’Neal, and Naomi Osaka, among others. He also had close relationships with US regulators and government officials, many of whom he donated to.
Bankman-Fried has been compared to Warren Buffet and called by many a white horse of crypto (TechCrunch has never done that, for what it’s worth).
But in early November 2022, everything changed.
FTX breakdown
Concerns surrounding FTX’s liquidity increased after CoinDesk published a copy of Alameda Corporation Balance Sheetwhich shows that the company has assets worth $14.6 billion and liabilities worth $8 billion as of June 30, 2022.
But there was a problem: The report showed that Alameda’s largest assets were $3.66 billion in “unblocked money transaction transfers” and $2.16 billion in “transaction money transfer guarantees.” FTT was the token behind FTX.
The balance sheet showed that the $5.82 billion worth of FTT tokens held by Alameda was 193% higher than FTT’s total market capitalization, which was about $3 billion at the time. This means that it claims to have more FTT tokens on its balance sheet than there are in the world.
Around the same time as the disclosure, the world’s largest cryptocurrency exchange, Binance, began withdrawing the equivalent of $2.1 billion in cash remaining in BUSD and FTT. (It had an equity position in FTX from 2019 to 2021.) This has essentially led to a bank flight from FTX.
FTX and Alameda filed for Chapter 11 bankruptcy in the United States in mid-November 2022. Bankman-Fried resigned, and John J. Ray III, an Enron turnaround veteran, was named its new CEO.
But Bankman-Fried maintained his innocence. At the New York Times’ DealBook Summit, he appeared virtually from the Bahamas, saying, “I’ve never tried to commit fraud on anyone; I’ve never done anything at all.” “I was shocked by what happened this month.” In a published live exchange with a Vox reporter, he said he regretted filing for bankruptcy and believed “regulators are making everything worse.”
SBF is arrested
Bankman-Fried was arrested in December 2022 in the Bahamas, where FTX is based. He was then extradited to the United States to face a number of criminal charges. He was released on $250 million bail and remains under house arrest at his parents’ home in Palo Alto. This was overturned in August after he was accused of intimidating former Alameda CEO Caroline Ellison by leaking her private memoirs.
Ray represented the company during a House Financial Services Committee hearing regarding FTX. When asked if the company had significant risk management systems in place, Ray said at the time that “there were virtually no internal controls and no separation at all,” and added that he “didn’t trust a single piece of paper” in regulating the stock exchange. US Attorney Damien Williams called Bankman-Fried’s alleged crimes “one of the largest financial frauds in American history.” Press Conference.
Aftermath
FTX co-founder and former CTO Gary Wang and former Alameda Research CEO Carolyn Ellison both pleaded guilty in December 2022 to federal criminal charges in connection with FTX’s collapse. They also face civil penalties from the SEC and CFTC along with criminal charges. Wang and Ellison plan to cooperate with prosecutors and will be key witnesses at trial, given their close ties to Bankman-Fried, FTX and Alameda.
In January, Bankman-Fried pleaded not guilty to all charges against him, which include wire fraud, conspiracy to commit money laundering, and conspiracy to misuse client funds. He could face up to 115 years in prison if convicted of all charges.
The cryptocurrency industry as a whole suffered from the FTX collapse, which was the first of many. BlockFi filed for Chapter 11 in November 2022, as did Genesis Global Trading in January.
Where are we today?
Bankman-Fried will be represented by Cohen & Greiser, and Mark Cohen, a prominent defense attorney and former federal prosecutor, will be lead counsel. If that name sounds familiar, it might be because he also represented Ghislaine Maxwell in her sex trafficking trial involving Jeffrey Epstein. And he asked for a Early release For Bankman Fried but it was rejected.
On Tuesday, we will start to see how the FTX story ends. But what is on our minds is what happens to investors and creditors affected by the collapse? And what happens to the billions of crypto assets associated with legal proceedings?