Two years ago, Sam Bankman-Fried was a 30-year-old multibillionaire living in a $35 million Bahamas apartment, partying with friends while running one of the world’s most valuable cryptocurrency companies.
Today, he is a 32-year-old inmate at the Metropolitan Detention Center in Brooklyn, awaiting a judge’s decision on how long he will be imprisoned for masterminding “one of the biggest financial frauds in American history,” according to U.S. Attorney Damian Williams.
Bankman-Fried, the founder and former CEO of the collapsed cryptocurrency exchange FTX, will be sentenced on Thursday in federal court in downtown Manhattan by U.S. District Judge Lewis Kaplan. Prosecutors have proposed a prison term of 40 to 50 years.
After only about three hours of deliberation in November, jurors found Bankman-Fried guilty of all seven felony charges against him. Experts noted at the time that they had never seen such a quick decision in a high-profile month-long trial with over 20 witnesses and hundreds of exhibits. Bankman-Fried intends to appeal his conviction and punishment.
It was a steep and rapid fall from grace for Bankman-Fried, who was once regarded as an industry powerhouse with a peak net worth of over $26 billion.
Bitcoin Arbitrage
It began with the Kimchi Swap.
Bankman-Fried, a quant trader at Jane Street, observed something unusual when he looked at bitcoin pricing on CoinMarketCap.com in 2017. Instead of a consistent price across exchanges, Bankman-Fried saw a 60 percent variance in the value of the digital money. His first reaction, he said, was to participate in the arbitrage trade — purchasing bitcoin on one exchange and selling it on another, pocketing the difference.
“That’s the lowest hanging fruit,” Bankman-Fried told CNBC in September 2022.
The arbitrage potential was particularly appealing in South Korea, where the exchange-traded price of bitcoin was substantially higher than in other nations. It was dubbed the Kimchi Premium, after the traditional Korean side dish of salted and fermented cabbage.
After a month of personal experimentation in the market, Bankman-Fried founded Alameda Research, named after the California county where he initially established an office. Bankman-Fried told CNBC that the firm might make up to a million dollars every day trading bitcoin.
Alameda’s success prompted the establishment of FTX. In April 2019, Bankman-Fried co-founded FTX.com, an international cryptocurrency exchange that provided users with new trading capabilities, a responsive platform, and a dependable experience. FTX’s success resulted in a $2 billion venture fund that sponsored additional cryptocurrencies.
firms.
The FTX insignia soon appeared on everything from Formula One racecars to a Miami basketball building. Bankman-Fried discussed one day purchasing Goldman Sachs, and he became a fixture in Washington as a big Democratic Party fundraiser.
Then the market turned.
The so-called crypto winter of 2022 decimated hedge funds and lenders across the cryptocurrency sector. Bankman-Fried claimed that he and his business were immune. Behind the scenes, Alameda borrowed money to invest in failing digital asset startups in order to keep the industry viable.
In May 2022, stablecoin Luna crashed, causing a domino effect that drove crypto prices plummeting and devastated other lenders.
Alameda borrowed from lenders such as Voyager Digital and BlockFi, both of which went bankrupt. Alameda backed their loans with FTT tokens issued by FTX. Bankman-Fried’s empire held the great majority of the available cash, with only a little quantity of FTT in circulation at any given moment.
Despite the fact that FTT is a practically illiquid asset, Alameda priced its entire stash at the current market price. The fund used the similar process with other tokens, like Solana and Serum (a token produced and promoted by FTX and Alameda), to collateralize billions of dollars in loans. Industry insiders referred to the tokens as “Sam coins.”
Virtual Bank Run
When faced with margin calls owing to declining prices, Bankman-Fried turned to FTX customers’ deposits, which totaled billions of dollars by mid-2022. According to the firm’s bankruptcy filings, it had virtually no record keeping.
On November 2, 2022, the cryptocurrency trade portal CoinDesk published information of Alameda’s balance sheet, which indicated $14.6 billion in assets. Over $7 billion of the assets were either FTT tokens or Bankman-Fried-backed currencies, such as Solana or Serum. Another $2 billion was locked up in equity investments.
Investors began withdrawing their shares from FTX, raising the possibility of a virtual bank run. Alameda and FTX were now both facing liquidity issues.
On November 6, four days following the CoinDesk piece, Binance founder Changpeng Zhao released the bombshell. Binance became the first outside investment in FTX in 2019. According to Zhao, two years later, FTX repurchased its stake using FTT and other coins.
Zhao stated in a tweet that, due to “recent revelations that have come [sic] to light, we have decided to liquidate any remaining FTT on our books.” FTX executives rushed to mitigate the damage, and Alameda traders were able to hold off outflows for a few days.
On November 7, Bankman-Fried tried to convey confidence by tweeting, “FTX is good. Assets are ok. The post was deleted.
Internal discussions differed. Bankman-Fried and other officials confirmed to one another that “FTX customer funds were irrevocably lost because Alameda had appropriated them.” By November 8, the client gap had reached $8 billion. Bankman-Fried sought outside investors for a rescue package but found no takers.
FTX halted all customer withdrawals that day. FTT’s price dropped by more than 75%. Out of choices, Bankman-Fried went to Zhao, who stated that he had signed a “non-binding” letter of intent to buy FTX.com.
But a day later, on November 9, Binance said that it will not proceed with the acquisition, citing reports of “mishandled customer funds” and federal inquiries.
On November 11, FTX filed for bankruptcy, and Bankman-Fried resigned as CEO of FTX and related firms. He immediately lost 94% of his personal wealth.
FTX’s longtime solicitors, Sullivan & Cromwell, sought John J. Ray, who managed Enron’s bankruptcy, to take over Bankman-Fried’s prior post.
On December 12, Bahamian officials apprehended Bankman-Fried and extradited him to the United States, where he was detained. According to a Securities and Exchange Commission filing, federal prosecutors and authorities accused Bankman-Fried of engaging in fraudulent behavior “from the start.”
Bankman-Fried was released on a $250 million bond and was first placed under house arrest with a court-ordered ankle monitor at his parents’ home in Palo Alto, California, near the Stanford University campus. He was quickly put back into custody for accused witness tampering.
While Bankman-Fried awaited trial, several of his closest friends and confidants served as key witnesses for the prosecution, leaving the erstwhile crypto billionaire to defend himself. Less than a year after his arrest, a 12-person jury convicted Bankman-Fried of all felony charges.
— CNBC’s Rohan Goswami contributed to this story.
Penthouse to prison: Sam Bankman-Fried’s journey from crypto king to convicted conman
