The swift collapse of the cryptocurrency exchange FTX has sent shockwaves through the crypto industry, with investors estimated to be losing a combined $1bn in assets at minimum. Since its establishment in 2019, FTX reportedly placed billions of dollars worth of its own cryptocurrency on the balance sheet of Alameda – a crypto hedge fund owned by FTX’s founder, Sam Bankman-Fried – and used it as collateral against loans. Citing ‘recent revelations’ when considering the purchase of FTX, Binance CEO Changpeng Zhao sold his $500m FTT holding – FTT being the proprietary token of FTX – leading to panicked and rapid selling on the part of retail investors.
Now it seems that the big crypto blowup at FTX is just a fraud from top to bottom. This will not be the last such scandal in this industry… Events at FTX have convinced more folks that this industry – as I have long warned – is full of charlatans and worse. The lack of due diligence at all of the investors in FTX is totally shocking, to say the least. Anyone with any funds held with NEA, IVP, Iconiq Capital, Third Point Ventures, Tiger Global, Altimeter Capital Management, Lux Capital, Mayfield, Insight Partners, Sequoia Capital, SoftBank, Lightspeed Venture Partners, Ribbit Capital, Temasek Holdings, BlackRock, Thoma Bravo or any of the other funds, should all question the leadership capacity and oversight of these firms. What other businesses are included in their portfolios? It seems that basic grade-school level investing skills were not apparent here.
The worst thing seems to be that FTX and a lot of other crypto scams, sorry, “businesses”…basically puffed up their balance sheets by simply inventing tokens and creating an extremely superficial market in them, thus giving these new tokens massive market caps. Et voila, suddenly you have about $10bn in “assets”. Except when they become worth zero overnight.
Crypto, FTX, and Bankman Fried are clogging the news. Reports suggest $8bn was swindled, and the fraud is being compared to Enron. We feel bad for those who were conned and are not here to minimize their losses. Yet this was not an Enron. Many crypto folks didn’t want regulation. We were told that tokens were not securities or even money. People threw their money into an unregulated private exchange with offshore operations to buy unregulated tokens. These things had no operating activities, no cash flow from assets, no property plants or equipment, and generated aggregate total cash flows of zero.
Who was in charge here? Well, SBF of course.
SBF controlled FTX, Alameda and many other entities in the SBF/FTX ecosystem.
He was the “man in charge”
He signed the checks.
What happened?
The really important thing that happened is that:
SBF moved customer funds (deposits) from FTX (and possibly other entities) to Alameda (his personally wholly owned trading firm) and then possibly to himself personally.
Allegedly but SBF has admitted this…
So let’s make it comprehensible to our non-crypto brethren
You deposit money at JP Morgan Chase.
One day your money is gone.
Where did it go?
To Jamie Dimon’s personal trading firm and Jamie Dimon personally…
How much money?
Well nobody knows for sure, but it appears to be in the range of $10 billion which is an awful lot of money anyway you count it.
This is going to be one of the largest (alleged) misappropriations of customer funds in human history.
SBF/FTX also allegedly did a whole of other things that may be inappropriate or illegal (e.g. AML/KYC violations, securities violations, market manipulation, use of company assets for personal use and so on).
Allegedly there are a lot of these too, but don’t get distracted!
Now $10B is a lot of money to be missing.
Why wasn’t there a whistleblower? Why didn’t lawyers, accountants, staff notice?
Well because allegedly SBF built a special custom-made accounting system to hide the missing assets.
So to recap, the CEO and control owner of a firm, allegedly:
✅ Took $10B of customer deposits
✅ Moved them to a company he owns 100%
✅ Further moved them to himself
✅ Made special software to hide the transfers from others
Of course, these are all allegations for now…
But given that:
✅ SBF has sortof agreed this is what happened
✅ And withdrawals are frozen at FTX
I think we (not the court system) can assume for now that the rough outline of the story is correct…
So, ok what is the proper and normal societal response and takeaway to this?
Well, I am pretty sure that the normal response is that it is “really really really bad”
It is allegedly one of the greatest thefts in human history if true…
What are things we should have close to zero interest in right now?
❎ How this affects SBF’s “philanthropic” efforts
❎ What SBF thinks of CeFi or crypto
❎ What SBF thinks of regulation
❎ “what went wrong”
❎ “was SBF about to raise fresh capital”
Let’s take the completely implausible SBF take that “he was about to raise more money”
So what?
SBF was literally days earlier allegedly stealing customer funds.
Why would we have even 1% confidence he wouldn’t steal the new money too?
It is *fantastic* news that SBF did not raise more money.
Very obviously, nobody should trust SBF to be in a custodial position with anyone’s funds ever again.
This is independent of any criminal or civil liability.
This is simply: “not being a complete moron”
here is a whitewashing effort that SBF is attempting now to soften the public perception ahead of possible legal troubles.
The general theme of whitewashing effort is: “we were young and inexperienced and disorganized and bad at risk management and we made mistakes”
This whitewashing is unadulterated bullshit.
SBF is a lot of things, but he is not cognitively challenged.
He was raised by top university professors and famously attended the Massachusetts Institute of Technology which is famously not a safety school.
He was running one of the world’s largest exchanges and a prop trading operation, with a vast global presence, while running an extensive lobbying operation, testifying in Congress and so on.
Even doing this “immaturely” is a huge lift, elite tier work, very few could do it.
The issue is here is not that “FTX grew too fast, did not have the proper accounting controls and failed”
The issue is that when SBF had to make a decision about whether he should allegedly take his customers’ funds for himself, he thought:
“Why, yes, I think I will”
An alternative view of the situation is not “there were no accounting controls because SBF is dumb” but “there were no accounting controls to facilitate the alleged misappropriation”
In other words, the lack of accounting controls was a feature for SBF, not a bug.
I remind you when SBF wanted to hide the transfers, he allegedly made a fake accounting system to do so.
So when he needed to build fake accounting controls, he was more than mentally capable of doing so.
Hard to find an innocent explanation for this to be honest.
I am surprised with the relatively mild treatment SBF is getting in the media.
The generous view is that there are so many parts to the SBF story and so many allegedly inappropriate things that happened that people are getting confused.
But that is a generous view
I think the rough outline of the main alleged misappropriation is clear.
And if that is the case, the focus right now should be on preserving evidence and preventing evidence tampering.
We are in the law enforcement, not media tour, phase now.
Evidence preservation is going to be a herculean task.
It is a lot of money, a lot of crypto, a lot of non-existent accounting controls and, in fact, accounting controls used to obfuscate the truth.
I think there should also be an assumption that assets (probably crypto based) may still be under SBF’s or colleagues’ control.
In other words, while the $10B alleged misappropriation is the big deal, it does not mean that there might not be $100M in a side wallet.
The United States government has more capacity on crypto tracing than you may imagine, in different departments and units. This is an excellent time and opportunity to make use of it, for the public good.
The focus right now should be on recovery for the victims. Which means evidence/asset preservation. People deserve the maximum recovery and the real facts on what happened.
In time, we will learn (or I hope we will learn) what things in this episode were:
✅ Massive irresponsibility
✅ Civil violations
✅ Criminal violations
None of this could have without his knowledge and his own *direct action*.
Potential employees were told that Mr. Bankman-Fried established Alameda Research LLC partly so he could give away part of its gains as effective altruism, a movement that declares the aim of directing donations to where they can do the most good. When several crypto exchanges started failing Mr. Bankman-Fried decided to start his own exchange in April 2019 with the idea of building an operation that would serve institutional investors looking for a safe place to do business. Alameda was used to fuel FTX’s growth with the hedge fund serving as FTX’s primary market maker, meaning it was always available to buy and sell if other traders wanted to.
FTX FILLED ITS BANKRUPTCY FILLING RECENTLY IT IS EVEN WORSE THAN ANYONE IMAGINED…
1) FTX LENT SAM BANKMAN OVER $1 BILLION DOLLARS FOR PERSONAL USE
2) FTX USED CUSTOMER FUNDS TO BUY HOUSES FOR EMPLOYEES
3) FTX DIDNT HAVE A LIST OF EMPLOYESS AND WHAT ALL THEY DID
4) FTX DID NOT KEEP ANY BOOKS OR RECORDS OF ITS DIGITAL ASSETS
5) ALAMEDA RESEARCH WAS EXEMPTED FROM AUTO LIQUIDATION ON FTX
6) FTX BUILT A SOFTWARE TO HIDE THE MISUSE OF CUSTOMER FUNDS
7) FTX HAD $400 MILLION IN UNAUTHORIZED TRANSFERS THE DAY THEY FILED FOR BANKRUPTCY
8) FTX HAD BILLIONS IN INVESTMENTS OTHER THAN CRYPTO BUT THERE ARE NO BOOKS OR RECORDS OF ANY OF IT.
9) SAM BANKMAN MADE ALL BUSINESS DECISIONS ON APPS THAT AUTO DELETED EVERYTHING AFTER SOME TIME HE ENCOURAGED ALL EMPLOYEES TO DO THE SAME
Where were the Signs of this Fraud?
This is what renowned short-seller Lucian Miers had to say about this. The signs were everywhere, people just didn’t bother to look and question the business. Lucian highlights this as a study of folly, greed and incompetence. It has everything (certainly sex and drugs and maybe even rock and roll) and gives out a great many examples as to the crazy environment that we have been living in for so long.
Look at me! I am wearing a dirty t-shirt and shorts! Give me your money! And many supposedly sophisticated people did.
It’s easy to blame SBF for all this, and to be sure he should be blamed, but once again we have investors buying into claims that can’t possibly be true. What in SBF’s resume, or for that matter the resumes of any of the principals, indicated any of them had any business even working at a company like this one let alone running it. I am having trouble feeling bad for the investors in either company. If you are careless with your money there will always be an SBF to take it from you.
It seems like the whole industry is one big scam involving companies propping up the value of each other’s assets, which were created out of nothing and are worth whatever the traders and exchanges say they are. Then they use the artificial value as collateral for real assets, like real estate in the Bahamas. Asking no questions is necessary for the scam and undoubtedly reciprocated.
- “In late 2018, he promised potential lenders of cash or crypto annual returns of up to 20%” – This reads like every other con and should be repeated often while this circus plays out. The idea that there was anything sophisticated about this guy’s hustle is naïve. It’s surprising so many with large sums bought into his hype. He is nothing more than a digital version of Charles Ponzi. Don’t people do their homework when someone dangles those high rates of returns?
- Jim Cramer of the influential financial TV channel CNBC (fresh from calling disgraced Elizabeth Holmes of Theranos “the new Steve Jobs”) gushingly referred to Sam Bankman Fried as the JP Morgan of Crypto.
- The New York Times wrote many uncritical puff pieces and naturally he was on the front cover of several glossy financial magazines.
- Sam Bankman Fried was the second largest donor to the Democratic party after George Soros. ‘I’m a liberal giving money to good social causes that you want to support (but not with your own money). Nope, not a greedy capitalist, just a swindler.’
- Gary Gensler’s boss at MIT (Massachusetts Institute of Technology) is the father of Caroline, Co-Ceo of Alameda Research. SBF, the founder of FTX also went to MIT and helped create Alameda Research.
- There are the less culpable useful idiots such as Tom Brady (the Lionel Messi of American Football) who were paid to promote FTX and the more culpable investment names like Softbank (as usual) and
- Sequoia Capital who invested other people’ money into this obvious fraud with zero due diligence affording comfort to the retail investors and depositors, the real victims of this crime.
Caroline Ellison Apologizes for Misconduct in FTX Collapse
“Ms. Ellison also said she and Mr. Bankman-Fried worked with others to conceal the arrangement from lenders, including by hiding on quarterly balance sheets the extent of Alameda’s borrowing and the billions of dollars in loans that the firm had made to FTX executives and associates. Mr. Bankman-Fried was among the executives who received loans from Alameda, she said.”
Potential employees were told that Mr. Bankman-Fried established Alameda Research LLC partly so he could give away part of its gains as effective altruism, a movement that declares the aim of directing donations to where they can do the most good. When several crypto exchanges started failing Mr. Bankman-Fried decided to start his own exchange in April 2019 with the idea of building an operation that would serve institutional investors looking for a safe place to do business. Alameda was used to fuel FTX’s growth with the hedge fund serving as FTX’s primary market maker, meaning it was always available to buy and sell if other traders wanted to.
FTX and Alameda Research shared technology and offices, documents from the SEC and CFTC show. Mr. Bankman-Fried instructed Ms. Ellison, with whom he had been in a relationship at the time, to utilise Alameda’s buying power to push up the value of a cryptocurrency the trading firm was borrowing against, the SEC said. While competitors such as Wintermute Trading Ltd and Jump Trading Group made markets in bitcoin and ether, which were popular and relatively liquid, Alameda specialized in trading so-called alt-coins, including two that pay homage to the Shiba Inu dog breed, as well as coins introduced by FTX itself, such as FTT. Alameda made over $1 billion in profits in 2021, according to people familiar with the results. That year, cryptocurrencies of all kinds soared, even ones created as a joke.
December 2021 was close to the peak for cryptocurrencies. Bitcoin had touched its record high a month earlier. Although by then Mr. Bankman-Fried had stepped down as CEO of Alameda, he continued to be deeply involved in its decision-making, according to the SEC.
This is a story about Caroline and Sammy too
Bitcoin lovers with nothin’ better to do
Then hang in the Bahamas, snort meth and eye the loot
And here ‘s what happened when they decided to cut loose
They moved the money and hid billions in assets
For a million customers ’twas a great big hassle
FTX is now bankrupt and broken
What happened to the FTT tokens?
Woo woo woo
Go on take the money and run
Go on take the money and run
Woo woo woo woo
John J. Ray III is looking at the mess
How many billions gone is anyone’s guess?
He can’t let them escape with the assets
cuz millions of investors are blowing their gaskets
Subterfuge and hiding in Bahamas
Welcome to his guarded island compound
Where the world’s elite are at his beck and call
And the best crystal meth is snorted by ALL
Singin’ go on take the money and run
Go on take the money and run
Woo Woo woo
Go on take the money and run
Ooh Lord
Go on take the money and run
Woo woo woo
Breaking news y’all, he was locked up in jail
But poor little SBF was released on bail
FTX clan moved the money and got away
But SBF will be serving time one day
Singin’ go on take the money and run
—————————————————————–
Who’s sorry now?
Who’s embezzled and how?
Lending out digital asset holdings
What could go wrong?
Wang’s singing his song
FBI is all over you
Right to the end
Caroline’s your friend
She’s tried to warn you somehow
You had your way
Now you must pay
Sammy’s gonna’ serve time one day.
This graphic from Visual Capitalist is wild – it is helpful to highlight the depth of the fraud at crypto company FTX.
