Samuel Bankman-Fried poster in downtown San Francisco.
Mackenzie Sigalos | Mackenzie Sigalos CNBC
Two years ago, Sam Bankman-Fried was a 30-year-old billionaire living in a $35 million penthouse in the Bahamas, partying with friends and running One of the most valuable cryptocurrency companies in the world.
Today, he is a 32-year-old inmate at the Metropolitan Detention Center in Brooklyn, waiting for a judge to tell him how long he will serve in prison for masterminding “one of the largest financial frauds in American history.” U.S. Attorney Damian Williams.
Bankman-Fried, the founder and former CEO of failed cryptocurrency exchange FTX, will head to federal court in downtown Manhattan on Thursday, where U.S. District Judge Lewis Kaplan will hand down his sentence. Prosecutors recommended a sentence of 40 to 50 years in prison.
In November, a jury took only about three hours to deliberate before convicting Bankman-Fried of all seven criminal charges against him. For a high-profile month-long trial involving nearly 20 witnesses and hundreds of exhibits, experts said at the time they had never seen such a swift decision. Bankman-Fried plans to appeal his conviction and sentence.
It’s a sharp and swift fall from grace for Bankman-Fried, who was once hailed as an industry titan with a peak net worth of about $26 billion.
Indicted FTX founder Sam Bankman-Fried leaves a US court in New York City on July 26, 2023.
Amr Alfiki | Reuters
Bitcoin Arbitrage
It started with a pickle swap.
In 2017, while working as a quantitative trader at Jane Street, Bankman-Fried noticed something interesting while looking at Bitcoin pricing on CoinMarketCap.com. Bankman-Fried sometimes sees a 60% difference in the value of digital currencies, rather than a uniform price across exchanges. He said his first reaction was to engage in an arbitrage trade—buying Bitcoin on one exchange and selling it back on another, pocketing the difference.
“It’s the lowest hanging fruit,” Bankman-Fried told CNBC in September 2022.
The arbitrage opportunity is particularly striking in South Korea, where Bitcoin exchange listing prices are significantly higher than in other countries. It’s called “premium kimchi,” referring to the traditional Korean side dish of pickled and fermented cabbage.
After a month of personally dipping his toe into the market, Bankman-Fried launched Alameda Research, named after the California county where his first office was located. Bankman-Fried told CNBC that the company sometimes made $1 million a day from Bitcoin transactions.
Alameda’s success spurred the launch of FTX. In April 2019, Bankman-Fried co-founded FTX.com, an international cryptocurrency exchange that provides customers with innovative trading capabilities, a responsive platform and a reliable experience. FTX’s success spawned a $2 billion venture fund and provided the seeds for other cryptocurrency companies.
The FTX logo soon appeared on everything from Formula 1 race cars to Miami basketball courts.Bankman-Fried Speaking of buying Goldman Sachs one dayhe became a fixture in Washington, becoming one of the Democratic Party’s top donors.
Then the market reversed course.
The so-called crypto winter of 2022 devastated hedge funds and lenders across the cryptocurrency space. Bankman-Fried boasted that he and his businesses were not affected. Behind the scenes, Alameda borrowed money to invest in failed digital asset companies to keep the industry afloat.
In May 2022, the collapse of the stablecoin Luna created a domino effect that caused cryptocurrency prices to plummet and dealt a devastating blow to other lenders.
Alameda borrowed money from lenders such as Voyager Digital and BlockFi, both of which eventually went bankrupt. Alameda uses FTT tokens minted by FTX as loan security. Bankman-Fried’s empire controls the vast majority of available currency, with only a small amount of FTT actually in circulation at any one time.
Alameda marks all of its FTT reserves at prevailing market prices, even though it is effectively an illiquid asset. The fund has taken the same approach with other tokens, including Solana and Serum (tokens created and promoted by FTX and Alameda), using them to collateralize billions of dollars in loans. Industry insiders refer to these tokens as “Sam coins”.
Virtual bank run
When faced with margin calls caused by falling prices, Bankman-Fried turned to deposits from FTX clients, amounting to billions of dollars by mid-2022. According to the company’s own bankruptcy filing, it has virtually no record-keeping method.
November 2, 2022, cryptocurrency trading website CoinDesk Public details Alameda’s balance sheet shows assets of $14.6 billion. Over $7 billion of these assets are either FTT tokens or Bankman-Fried-backed tokens such as Solana or Serum. Another $2 billion is locked in equity investments.
Investors began withdrawing funds from FTX, creating the threat of a virtual bank run. Both Alameda and FTX are now facing a liquidity crunch.
On November 6, four days after the CoinDesk article was published, Binance founder Changpeng Zhao dropped the hammer. Binance was the first external investor in FTX in 2019. Two years later, FTX bought back its shares through a combination of FTT and other tokens, Zhao said.
Zhao wrote in an article tweet “Due to the recent revelations (sic), we have decided to liquidate all remaining FTT on our books.” FTX executives scrambled to contain the damage, and Alameda traders managed to stem the flow of funds within a few days.
On November 7, Bankman-Fried tried to project confidence, tweeting: “FTX is good. Asset is good.” The post has since been deleted.
On February 21, 2024, Sam Bankman-Fried, the founder of bankrupt cryptocurrency exchange FTX, was sworn in at a New York court in the United States, the first time since he was convicted of fraud in November Appearing in court for the first time since his conviction.
Jane Rosenberg | Reuters
Internal discussions differ. Bankman-Fried and other executives admitted to each other that “FTX customer funds had been irreparably lost because Alameda had misappropriated those funds.” By November 8, the customer shortfall had grown to $8 billion. Bankman-Fried is seeking a bailout from outside investors but has found no suitors.
FTX suspended all customer withdrawals for the day. The price of FTT plummeted by more than 75%. With no other options, Bankman-Fried turned to Zhao, who announced that he had signed a “non-binding” letter of intent to acquire FTX.com.
But a day later, on November 9, Binance said it would not complete the acquisition, citing “mishandling of customer funds” and reports of a federal investigation.
FTX filed for bankruptcy on November 11, and Bankman-Fried resigned as CEO of FTX and related entities.he Immediately lost 94% of his personal wealth.
FTX’s longtime attorney Sullivan & Cromwell approached John J. Ray, who oversaw Enron’s bankruptcy, to replace Bankman-Fried previous position.
On December 12, Bankman-Fried was arrested by Bahamian authorities and extradited to the United States where he was detained. Federal prosecutors and regulators accuse Bankman-Fried of committing fraud “from the outset,” according to an SEC filing.
Bankman-Fried was released on $250 million bail and was initially placed under house arrest at his parents’ home on the Stanford University campus in Palo Alto, California, with a court-ordered ankle monitor installed. He was soon back in custody on suspicion of witness tampering.
As Bankman-Fried awaits trial, many of his closest friends and confidants have become key witnesses for the prosecution, allowing the former cryptocurrency billionaire to defend himself. Less than a year after Bankman-Fried was arrested, a 12-person jury found Bankman-Fried guilty of all criminal charges against him.
— CNBC’s Rohan Goswami contributed to this report.
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