Sam Bankman-Fried was heralded as the savior of crypto. In recent weeks, his empire collapsed. Here’s what you need to know about the unraveling of FTX, including its founder’s rise to fame, how the firm failed and the collateral damage to customers and the crypto industry at large.
Mr. Bankman-Fried, often referred to as SBF, vaulted to celebrity with his attempts to make his crypto exchange into a household name.
The 30-year-old billionaire’s eccentric, unkempt appearance created an aura of genius. Venture capitalists got on board. High-profile athletes and musicians, and a wave of FTX ads, encouraged regular people to use the exchange to tap crypto’s moneymaking potential.
Mr. Bankman-Fried and FTX were among the biggest donors in the recent midterm election cycle, boosting their visibility in Washington. And when other crypto firms started collapsing this year, SBF extended loans to prop up ailing competitors.
Before creating FTX, Mr. Bankman-Fried founded Alameda Research, and it became a major player in crypto market making and institutional trading. Mr. Bankman-Fried recruited Caroline Ellison, whom he met while both were traders at Jane Street Capital, and she later became chief executive. Mr. Bankman-Fried remained CEO of FTX, the crypto exchange.
But even when Mr. Bankman-Fried was no longer at Alameda’s helm, he still owned 90% of it, according to bankruptcy filings. Alameda also traded on FTX.
Mr. Bankman-Fried repeatedly said that Alameda didn’t have any special privileges on FTX. Recent revelations cast doubt on those claims. According to bankruptcy filings, Alameda had a “secret exemption” from the exchange’s process for liquidating bad trades—a loophole that meant Alameda could take on more risk than other customers.
Alameda also doled out billions to buy stakes in startups. It often used FTT, which is FTX’s own cryptocurrency, as collateral for borrowing.
Mr. Bankman-Fried and Ms. Ellison were at times romantically involved.
When crypto prices plunged earlier this year, Alameda’s risky bets soured. Facing potential catastrophe, Mr. Bankman-Fried made a fateful decision: FTX decided to lend billions of dollars worth of customer assets to help Alameda cover its funding gap.
FTX’s problems tumbled into the open on Nov. 2, when CoinDesk published a report questioning the financial health of both FTX and Alameda. It indicated that much of Alameda’s balance sheet was made of FTT.
The report landed with a bang. Changpeng Zhao, the billionaire founder of rival exchange Binance, said he would dump his FTT holdings. Customers panicked and started yanking their money out. Crunched for cash, FTX agreed to sell itself to Binance, but Binance quickly changed its mind. Shortly after, SBF resigned and FTX filed for bankruptcy.
John J. Ray has helped oversee some of the highest-profile bankruptcies ever, including Enron. Mr. Ray, now the new CEO of FTX, says he has never seen anything as bad as FTX. The firm made its first appearance in Delaware bankruptcy court on Nov. 22.
In a court filing, Mr. Ray called the disarray at FTX unprecedented. According to him: Supervisors approved payment requests with emojis. Homes were purchased for employees with corporate funds. Mr. Bankman-Fried communicated with messages set to auto-delete after a short period and encouraged employees to do the same. Bank accounts and company financials weren’t tracked. Software was used to conceal the misuse of customer money.
Many employees have quit recently, saying they were in the dark.
It is hard to say, but people are certainly getting worried.
Court filings from Mr. Ray and those working with him make clear that they don’t know how much cash or crypto they will ultimately find at FTX. The newly appointed chief executive asked for patience.
A court filing late Monday confirmed that the new management has found about $1.2 billion worth of cash. About $740 million worth of cryptocurrency has been recovered—the majority hasn’t been found.
FTX owes its 50 largest creditors a combined $3.1 billion. The firm’s lawyers estimate there may be more than 1 million creditors.
Other financial oddities remain. SBF himself cashed out $300 million of a $420 million funding round. More than $370 million appears to be missing in a possible hack, which occurred after the bankruptcy filing.
The Securities and Exchange Commission and Justice Department are investigating FTX.
With a major exchange and trading firm under its umbrella, many loans to and from other players and various tokens with market values once in the billions of dollars, FTX’s tentacles extended wide across the industry.
Crypto lender BlockFi Inc., which got a line of credit from FTX earlier this year, is preparing a potential bankruptcy filing. Genesis Global Capital—which had loans outstanding to Alameda—is trying to quickly raise a heap of cash. Both have paused withdrawals.
With all that in mind, is crypto doomed? Maybe.
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