"I don't think it's a fad or going away but I can't put an intrinsic value on it," Morgan Stanley CEO
Fri, December 2, 2022
(Reuters) - Regulators must step in to protect crypto investors after the collapse of FTX, financial industry executives and lawmakers said at the Reuters NEXT conference this week, the latest call for tougher oversight of a sector prone to meltdowns.
Policymakers have for years highlighted the need for effective rules on the crypto industry, pointing to risks to consumers after a string of big market crashes and corporate failures.
But cryptocurrencies and related businesses remain mostly unregulated.
The European Union regulations designed to bring crypto to heel are expected to take effect in 2024, but the United States in particular still lacks overarching rules.
The collapse of Sam Bankman-Fried's FTX was the biggest in string of big crypto-related failures this year. It sparked a cryptocurrency rout and has left an estimated 1 million creditors facing losses of billions of dollars.
"The collapse of something as major as FTX just illustrates the importance of transparency, importance of appropriate regulatory protection, regulatory requirements for all financial activities," Laura Cha, chairman of Hong Kong Exchanges and Clearing said.
New York Stock Exchange President Lynn Martin said institutional investors will be unlikely embrace crypto without clearer rules.
"There was no regulatory framework, and an institutional investor is not going to really dip their toe in a meaningful way in a market unless they understand what the regulatory framework is," Martin said.
Some crypto investors share these concerns.
"Regulators could have posted a lot more guidance for crypto," said Brian Fakhoury at crypto venture capital fund Mechanism Capital.
Graphic: Pain in crypto land
REGULATORY CATCH-UP?
The crypto sector hit a record value of almost $3 trillion late last year, before market turmoil prompted by rising interest rates and a string of industry blow-ups wiped more than $2 trillion from its valuation. Bitcoin, the biggest token, is down by three-quarters from its record high of $69,000.
This extreme volatility has not done the crypto sphere any favours in terms of winning broader support in the financial services industry.
"I don't think it's a fad or going away but I can't put an intrinsic value on it," Morgan Stanley CEO James Gorman said at Reuters NEXT. "I don't like investing in things that have a range of outcomes or putting clients in it."
After FTX's collapse, regulators in the United States as well as finance industry executives and crypto entrepreneurs are focused on the need for a workable set of rules and greater transparency.
Nasdaq CEO Adena Friedman called for a balance in regulation between protection and innovation - a common refrain among mainstream businesses involved in crypto.
Nasdaq, whose crypto custody arm is expected to launch in the first half of 2023, pending regulatory approval, has provided trading and surveillance tech to crypto exchanges for several years.
"Now is the time for regulation to catch up and make sure that as we go forward, to have safety and soundness, but we also allow for innovation and a nimble ecosystem," Friedman said.
India's Finance Minister Nirmala Sitharaman said the collapse of FTX underscored the need for greater visibility on often-anonymous crypto transactions.
The FTX collapse "shows the importance of a well-framed regulation," Sitharaman said, "so that countries can be clearly aware of by whom, for what for these transactions are happening. Who's the end beneficiary?"
Crypto entrepreneur Justin Sun said investors seldom have clarity on how funds at crypto companies are used.
"For a lot of exchanges and lending providers and institutions in the space, (there's) a lack of transparency. The customers basically have no idea where the funds are allocated," said Sun, founder of Tron cryptocurrency.
Investors "can lose their life savings in seconds, but they have no idea where their money goes." he said.
(Reporting by Sumeet Chatterjee, Megan Davies, Aftab Ahmed, John McCrank, Lananh Nguyen, Elizabeth Howcroft, Saeed Azhar and John Sinclair Foley. Writing by Tom Wilson. Editing by Jane Merriman)
Dietrich Knauth
Thu, December 1, 2022
Illustration shows FTX logo and representation of cryptocurrencies
By Dietrich Knauth
(Reuters) - 2022 has been a rough year for the crypto industry. The price of bitcoin has dropped 65% since the start of the year, the cryptocurrency Luna suffered a total collapse in value, and crypto exchange FTX went from buying Super Bowl ads to crash landing into bankruptcy.
Here are the major crypto companies that have gone bankrupt in 2022.
FTX
FTX's implosion was the biggest and most spectacular crypto downfall in 2022 thus far. The Bahamas-based exchange started the year with a $32 billion valuation, hired celebrities including Larry David and Tom Brady for flashy Super Bowl ads, and put its name on the home arena of the NBA's Miami Heat. FTX, which said it had more than a million users, positioned itself as a "white knight" that could rescue other crypto firms amid market turbulence earlier this year.
But by November, FTX went bankrupt after a week in which a possible merger with rival crypto exchange Binance failed, FTX founder Sam Bankman-Fried dealt with allegations that he had funneled customer deposits to FTX's affiliated trading firm Alameda Research, and the exchange suffered withdrawals of about $6 billion in just 72 hours. Bankman-Fried has said he is "deeply sorry about what happened" and acknowledged a "massive failure of oversight of risk management," but said he did not intentionally commingle FTX's user deposits with Alameda's trading activity.
John Ray, the new CEO brought in to oversee FTX's bankruptcy, said he had never before seen "such a complete failure of corporate controls" - and Ray was the executive tasked with cleaning up Enron's debts in the wake of its early-2000s accounting fraud scandal.
BLOCKFI
Crypto lender BlockFi was the first crypto company to follow FTX into bankruptcy, filing for Chapter 11 about two weeks after FTX's collapse.
BlockFi had several ties to FTX, and it had relied on a $400 million FTX credit facility to stay afloat after competing crypto lenders Voyager Digital Ltd and Celsius Network went bankrupt as a result of market turbulence earlier in 2022.
BlockFi has previously said it had 450,000 users and intends to ask a bankruptcy judge to allow some of them to withdraw funds. The users that would be able to withdraw funds have non-interest-bearing BlockFi Wallet accounts, which BlockFi created earlier this year as part of a $100 million settlement with the U.S. Securities and Exchange Commission.
THREE ARROWS CAPITAL
The crypto hedge fund Three Arrows Capital (3AC) was the first major crypto firm to go bankrupt in 2022, brought down by the collapse of cryptocurrencies Luna and TerraUSD in May. Those meltdowns roiled crypto markets around the world, wiped out $42 billion in investor value, and led to an arrest warrant in South Korea for the cryptocurrencies' developers.
Singapore-based 3AC, which was reported to have $10 billion in cryptocurrency earlier in 2022, began bankruptcy proceedings in the British Virgin Islands in June.
Professionals overseeing 3AC's liquidation have said that its founders fled overseas and are not cooperating with efforts to recover assets for creditors.
VOYAGER DIGITAL
Voyager, a New Jersey-based crypto lender, in July filed for bankruptcy in the United States after 3AC defaulted on a crypto loan worth more than $650 million.
Voyager had hoped to move its bankruptcy quickly through the U.S. court system, having reached an agreement in September to sell its assets for $1.4 billion in crypto to FTX.
The proposed sale fell through following FTX's implosion, and Voyager reopened discussions with other potential buyers, including the crypto exchange Binance.
CELSIUS NETWORK
Another crypto lender brought down by the Terra and Luna collapse, Celsius Network began its U.S. bankruptcy case in July on rockier footing than Voyager.
Since then, Celsius has been embroiled in disputes over fraud investigations, disparate treatment of customer accounts, customer privacy, and its spending on a new bitcoin mining facility.
Celsius' bankruptcy judge has appointed an examiner to investigate whether Celsius operated as a Ponzi scheme and to broadly review the company's finances. Celsius has said it welcomed an independent review, but it expressed concern about overlapping investigations undertaken by its creditors, state securities regulators and the bankruptcy examiner.
(Reporting by Dietrich Knauth in New York; Editing by Noeleen Walder, Alexia Garamfalvi and Matthew Lewis)
Pete Syme
Fri, December 2, 2022
Sam Bankman-Fried co-founded the crypto exchange FTX in 2019.FTX
Sam Bankman-Fried showed a Bloomberg reporter a spreadsheet of company finances.
He said that problems were discovered after FTX and Alameda finances were added together.
The company, which had no accounting department, had double-counted $8 billion.
Sam Bankman-Fried says he "misaccounted" $8 billion after some FTX customer funds were mistakenly counted twice, Bloomberg reported.
The news outlet interviewed Bankman-Fried at his $30 million Bahamas penthouse after the collapse of FTX.
The former billionaire – who now says he's down to his last $100,000 – showed Bloomberg's Zeke Faux a spreadsheet of FTX and Alameda's accounts.
"I thought the downside was not nearly as high as it was," Bankman-Fried said. "I thought that there was the risk of a much smaller hole. I thought it was going to be manageable."
He then explained how the balance sheet combined FTX and Alameda finances, because the latter had defaulted on its debt by this point.
On one line labelled "What I *thought*," the spreadsheet listed $8.9 billion in debts but also more than enough to cover it with $27.6 billion worth of assets.
"It looks naively to me like, you know, there's still some significant liabilities out there, but, like, we should be able to cover it," Bankman-Fried said.
But he then revealed a glaring oversight – the actual numbers were down $8 billion.
When the Bloomberg reporter asked Bankman-Fried if he had "misplaced $8 billion," the FTX founder replied: "Misaccounted."
He said that some FTX customers sent money directly to Alameda's account because some banks were more willing to work with the hedge fund than the crypto exchange.
Then, FTX's internal accounting system counted this money twice by crediting it to both companies.
Court documents filed by John J. Ray III – the FTX CEO appointed to oversee its bankruptcy – revealed that the company didn't have an accounting department.
Ray, who also handled Enron's bankruptcy, said FTX is full of "inexperienced" executives and demonstrates a "complete failure of corporate controls."
Company expenses were approved by emojis on online chats, too. Staff perks included a $200 daily allowance for food delivery, and private planes to deliver Amazon packages from Miami to the Bahamas.
Brian Evan
Thu, December 1, 2022
Mike Novogratz, CEO of Galaxy Investment Partners.Marco Bello / Stringer /Getty Images
Sam Bankman-Fried is "delusional" about the downfall of FTX and his level of culpability in it, Mike Novogratz said.
At the DealBook Summit, Bankman-Fried tried to deny having any knowledge of what was happening in his crypto empire.
"Markets are based on trust. And when you have trust broken like this, it questions everyone else," Novogratz told CNBC.
Sam Bankman-Fried is "delusional" about the downfall of FTX and his level of culpability in it, crypto bull Mike Novogratz said Thursday.
The comments came a day after Bankman-Fried spoke at the New York Times' DealBook Summit, where he tried to deny having any knowledge of what was happening in his crypto empire.
For example, he said "didn't knowingly commingle" FTX customer funds with those of Alameda Research. "I wasn't running Alameda. I didn't know what was going on. A lot of the things were things I learned over the last month."
Bankman-Fried also said he "did not ever try to commit fraud" and didn't realize the risky positions his firms had taken until too late. And he said, "I don't know of times when I lied," adding that he "was as truthful as I'm knowledgeable to be."
But while speaking to CNBC on Thursday, Novogratz wasn't buying any of it.
"It was delusional. Let's be really clear. Sam was delusional about what happened and his culpability in it," the Galaxy Investment Partners chief executive said.
He added that Bankman-Fried is likely to face jail time while noting that he didn't act alone.
"They perpetuated a large fraud and it wasn't just Sam," Novogratz said. "You don't pull this off with one person."
He also said he hopes authorities get to the bottom of the FTX collapse, not just for sake of the crypto market but also for all markets.
"Markets are based on trust. And when you have trust broken like this, it questions everyone else. People start looking for black swans everywhere," Novogratz said.
Ava Benny-Morrison, Allyson Versprille and Chris Strohm
Fri, December 2, 2022
(Bloomberg) -- US authorities are asking crypto investors and trading firms that worked closely with FTX to hand over information on the company and its key figures, including founder Sam Bankman-Fried and the former head of his Alameda Research investment arm, Caroline Ellison.
The US Attorney’s Office for the Southern District of New York recently sent out a slew of requests, asking recipients to voluntarily hand over information on a list of FTX employees and associates, according to people familiar with the case.
Recipients include firms that frequently traded on FTX and may have had conversations with platform executives or hold other information that might help the criminal investigation, the people said. Such requests are often used to start tapping into potential sources of information held by witnesses, investors or customers without seeking grand jury subpoenas.
SEC Parallel
Attorneys from the US Securities and Exchange Commission’s enforcement division, which is running a parallel civil probe into the exchange-operator’s collapse, sent similar requests for information to companies that invested in or traded on the crypto platform, people familiar with those inquiries said.
The agency is seeking to learn more about relationships those companies had with the former crypto giant, as well as communications with former top brass at FTX and Alameda, including Bankman-Fried and Ellison, the people said. The SEC is also trying to get a better sense of what FTX representatives told investors and whether any misrepresentations were made that would violate securities laws, the people said.
The moves show authorities are casting a wide net as they embark on their investigations into FTX’s collapse, examining what the company and its leaders told investors and customers as the exchange imploded last month. So far, authorities haven’t accused anyone of wrongdoing.
Representatives for SDNY prosecutors and the SEC declined to comment. FTX and Bankman-Fried didn’t respond to requests for comment.
‘Egg on Their Face’
Galaxy Digital Chief Executive Officer Mike Novogratz, whose crypto financial-services firm disclosed a $76.8 million exposure to FTX, acknowledged in a Bloomberg Television interview Thursday that authorities have been getting in touch with firms that had interactions with FTX.
“Broadly, yes,” the prominent crypto investor said when asked if the SEC, Commodity Futures Trading Commission or Justice Department was reaching out to FTX clients such as his company. He declined to elaborate.
“Regulators have some egg on their face,” he said. “Sam was very far along at pitching to be the cash Bitcoin market here in the US, both with the SEC and CFTC.”
Employees and Allies
The flurry of activity from authorities provides an insight into the early innings of the criminal investigation.
FTX, Alameda or any of its former top executives haven’t been accused of any wrongdoing by US authorities. The opening of criminal or civil investigations doesn’t necessarily mean that they will press charges or take other actions.
The probe would start wide, focusing on customers and trading partners that had a lot of contact with FTX before narrowing down onto the crypto platform’s key figures.
Former prosecutors, who spoke on the condition of anonymity because their clients were tied up in the FTX bankruptcy case, said investigators would look for material false statements in what Bankman-Fried and his allies, including Ellison and Gary Wang, told customers or trading partners.
Slow Burn
Despite the public revelations about FTX’s chaotic recordkeeping and allegations about the misuse of customer funds, the investigation will likely be a slow burn.
“While the crypto industry is evolving, the statutory enforcement tools really aren’t,” said Seth DuCharme, a former acting US Attorney in Brooklyn.
Investigators will use blunt, well-established powers to determine the extent of any criminal wrongdoing, such as statutes dealing with wire fraud, money laundering and conspiracy, said DuCharme, now a partner at the Bracewell law firm, said.
“You can lose a lot of money and no one may have done anything intentionally wrong,” he added. “Mistake is a defense to a crime.”
The fact FTX was run out of the Bahamas and its founder still lives there adds a layer of complexity to the investigation.
If they need to act fast, prosecutors can seek a provisional warrant and request that Bahamian authorities arrest Bankman-Fried. The US then has 60 days, according to an agreement between the two countries, to file a formal extradition request through diplomatic channels.
Anyone arrested could waive their right to an extradition hearing in the Bahamas, in turn speeding up their arrival on US soil.
The entire process can be avoided if there is an agreement with US prosecutors to surrender.
Lack of Action
Short-changed investors have publicly criticized the lack of enforcement action to date and made comparisons to the swift arrest of notorious fraudster Bernie Madoff.
In an interview with Good Morning America aired on Thursday, Bankman-Fried said he understood the comparison with Madoff but it wasn’t who he was at all.
“I think when you look at the classic Bernie Madoff story there is no real business there,” he said from the Bahamas. “The whole thing as I understand it, I think, was just one big Ponzi scheme. FTX was a real business.”
(Updates with more context on the future of the investigations. An earlier version of this story corrected the date of Novogratz’s interview.)
Sam Bankman-Fried’s $30 million Bahamas penthouse looks like a dorm after the students have left for winter break. The dishwasher is full. Towels are piled in the laundry room. Bat streamers from a Halloween party are still hanging from a doorway. Two boxes of Legos sit on the floor of one bedroom. And then there are the shoes—dozens of sneakers and heels piled in the foyer, left behind by employees who fled the island of New Providence last month when his cryptocurrency exchange FTX imploded.
“It’s been an interesting few weeks,” Bankman-Fried says in a chipper tone as he greets me. It’s a muggy Saturday afternoon, eight days after FTX filed for bankruptcy. He’s shoeless, in white gym socks, a red T-shirt and wrinkled khaki shorts. His standard uniform.
This isn’t part of the typical tour Bankman-Fried gave to the many reporters who came to tell the tale of the boy-genius-crypto-billionaire who slept on a beanbag chair next to his desk and only got rich so he could give it all away, and it’s easy to see why. The apartment is at the top of one of the luxury condo buildings that border a marina in a gated community called Albany. Outside, deckhands buff the stanchions of a 200-foot yacht owned by a fracking billionaire. A bronze replica of Wall Street’s Charging Bull statue stands on the lawn, which is as manicured as the residents. I feel like I’ve crash-landed on an alien planet populated solely by the very rich and the people who work for them.
Bankman-Fried leads me down a marble-floored hallway to a small bedroom, where he perches on a plush brown couch. Always known for being jittery, he taps his foot so hard it rattles a coffee table, smacks gum and rubs his index finger with his thumb like he’s twirling an invisible fidget spinner. But he seems almost cheerful as he explains why he’s invited me into his 12,000-square-foot bolthole, against the advice of his lawyers, even as investigators from the US Department of Justice probe whether he used customers’ funds to prop up his hedge fund, a crime that could send him to prison for years. (Spoiler alert: It sure looks like he did.)
“What I’m focusing on is what I can do, right now, to try and make things as right as possible,” Bankman-Fried says. “I can’t do that if I’m just focused on covering my ass.”
But he seems to be doing just that, with me here and all along the apology tour he’ll later embark on, which will include a video appearance at a New York Times conference and an interview on Good Morning America. He’s been trying to blame his firm’s failure on a hazy combination of comically poor bookkeeping, wildly misjudged risks and complete ignorance of what his hedge fund was doing. In other words, an alumnus of both MIT and the elite Wall Street trading firm Jane Street is arguing that he was just dumb with the numbers—not pulling a conscious fraud. Talking in detail to journalists about what’s certain to be the subject of extensive litigation seems like an unusual strategy, but it makes sense: The press helped him create his only-honest-man-in-crypto image, so why not use them to talk his way out of trouble?
He doesn’t say so, but one reason he might be willing to speak with me is that I’m one of the reporters who helped build him up. After spending two days at FTX’s offices in February, I flew past the bright red flags at his company—its lack of corporate governance, the ties to his Alameda Research hedge fund, its profligate spending on marketing, the fact that it operated largely outside US jurisdiction. I wrote a story focused on whether Bankman-Fried would follow through on his plans to donate huge sums to charity and his connections to an unusual philanthropic movement called effective altruism.
It wasn’t the most embarrassingly puffy of the many puff pieces that came out about him. (“After my interview with SBF, I was convinced: I was talking to a future trillionaire,” one writer said in an article commissioned by a venture capital firm.) But my tone wasn’t entirely dissimilar. “Bankman-Fried is a thought experiment from a college philosophy seminar come to life,” I wrote. “Should someone who wants to save the world first amass as much money and power as possible, or will the pursuit corrupt him along the way?” Now it seems pretty clear that a better question would’ve been whether the business was a scam from the start.
I tell Bankman-Fried I want to talk about the decisions that led to FTX’s collapse, and why he took them. Earlier in the week, in late-night DM exchanges with a Vox reporter and on a phone call with a YouTuber, he made comments that many interpreted as an admission that everything he said was a lie. (“So the ethics stuff, mostly a front?” the Vox reporter asked. “Yeah,” Bankman-Fried replied.) He’d spoken so cynically about his motivations that to many it seemed like a comic book character was pulling off his mask to reveal the villain who’d been hiding there all along.
I set out on this visit with a different working theory. Maybe I was feeling the tug of my past reporting, but I still didn’t think the talk about charity was all made up. Since he was a teenager, Bankman-Fried has described himself as utilitarian—following the philosophy that the correct action is the one likely to result in the greatest good for the greatest number of people. He said his endgame was making and donating enough money to prevent pandemics and stop runaway artificial intelligence from destroying humanity. Faced with a crisis, and believing he was the hero of his own sci-fi movie, he might’ve thought it was right to make a crazy, even illegal, gamble to save his company.
To be clear, if that’s what happened, it’s the logic of a megalomaniac, not a martyr. The money wasn’t his to gamble with, and “the ends justify the means” is a cliché of bad ethics. But if it’s what he believed, he might still think he’d made the right decision, even if it didn’t work out. It seemed to me that’s what he meant when he messaged Vox, “The worst quadrant is sketchy + lose. The best is win + ???” I want to probe that, in part because it might get him to talk more candidly about what had happened to his customers’ money.
I decide to approach the topic gingerly, on terms I think he’ll relate to, as it seems he’s in less of a crime-confess-y mood. He’s said he likes to evaluate decisions in terms of expected value—the odds of success times the likely payoff—so I begin by asking: “Should I judge you by your impact, or by the expected value of your decision?”
“When all is said and done, what matters is your actual realized impact. Like, that’s what actually matters to the world,” he says. “But, obviously, there’s luck.”
That’s the in I’m looking for. For the next 11 hours—with breaks for fundraising calls and a very awkward dinner—I try to get him to tell me exactly what he meant. He denies that he’s committed fraud or lied to anyone and blames FTX’s failure on his sloppiness and inattention. But at points it seems like he’s saying he got unlucky, or miscalculated the odds.
Bankman-Fried tells me he’s still got a chance to raise $8 billion to save his company. He seems delusional, or committed to pretending this is still an error he can fix, and either way, the few supporters remaining at his penthouse seem unlikely to set him straight. The grim scene reminds me a bit of the end of Scarface, with Tony Montana holed up in his mansion, semi-incoherent, his unknown enemies sneaking closer. But instead of mountains of cocaine, Bankman-Fried is clinging to spreadsheet tabs filled with wildly optimistic cryptocurrency valuations.
Think of FTX like an offshore casino. Customers sent in money, then gambled on the price of hundreds of cryptocurrencies—not just Bitcoin or Ether, but more obscure coins. In crypto slang, the latter are called shitcoins, because almost no one knows what they’re for. But in the past few years, otherwise respectable people, from retired dentists to heads of state, convinced themselves that these coins were the future of finance. Or at least that enough other people might think so to make the price go up. Bankman-Fried’s casino was growing so fast that earlier this year some of Silicon Valley’s top venture capitalists invested in it at a $32 billion valuation.
The problem surfaced last month. After a rival crypto-casino kingpin raised concerns about FTX on Twitter, customers rushed to cash in their chips. But when Bankman-Fried’s casino opened the vault, their money wasn’t there. According to multiple news reports citing people familiar with the matter, it had been secretly lent to Bankman-Fried’s hedge fund, which had lost it in some mix of bad bets, insane spending and perhaps something even sketchier. John Ray III, the lawyer who’s now chief executive officer of the bankrupt exchange, has alleged in court that FTX covered up the loans using secret software.
Bankman-Fried denies this again to me. Returning to the framework of expected value, I ask him if the decisions he made were correct.
“I think that I’ve made a lot of plus-EV decisions and a few very large boneheaded decisions,” he says. “Certainly in retrospect, those very large decisions were very bad, and may end up overwhelming everything else.”
The chain of events, in his telling, started about four years ago. Bankman-Fried was in Hong Kong, where he’d moved from Berkeley, California, with a small group of friends from the effective-altruism community. Together they ran a successful startup crypto hedge fund, Alameda Research. (The name itself was an early example of his casual attitude toward rules—it was chosen to avoid scrutiny from banks, which frequently closed its accounts. “If we named our company like, Shitcoin Daytraders Inc., they’d probably just reject us,” Bankman-Fried told a podcaster in 2021. “But, I mean, no one doesn’t like research.”)
The fund had made millions of dollars exploiting inefficiencies across cryptocurrency exchanges. (Ex-employees, even those otherwise critical of Bankman-Fried, have said this is true, though some have said Alameda then lost some of that money because of bad trades and mismanagement.) Bankman-Fried and his friends began considering starting their own exchange—what would become FTX.
The way Bankman-Fried later described this decision reveals his attitude toward risk. He estimated there was an 80% chance the exchange would fail to attract enough customers. But he’s said one should always take a bet, even a long-shot one, if the expected value is positive, calling this stance “risk neutral.” But it actually meant he would take risks that to a normal person sound insane. “As an individual, to make a bet where it’s like, ‘I’m going to gamble my $10 billion and either get $20 billion or $0, with equal probability,’ would be madness,” Rob Wiblin, host of an effective-altruism podcast, said to Bankman-Fried in April. “But from an altruistic point of view, it’s not so crazy.”
“Completely agree,” Bankman-Fried replied. He told another interviewer that he’d make a bet described as a chance of “51% you double the earth out somewhere else, 49% it all disappears.”
Bankman-Fried and his friends jump-started FTX by having Alameda provide liquidity. It was a huge conflict of interest. Imagine if the top executives at an online poker site also entered its high-stakes tournaments—the temptation to cheat by peeking at other players’ cards would be huge. But Bankman-Fried assured customers that Alameda would play by the same rules as everyone else, and enough people came to trade that FTX took off. “Having Alameda provide liquidity on FTX early on was the right decision, because I think that helped make FTX a great product for users, even though it obviously ended up backfiring,” Bankman-Fried tells me.
Part of FTX’s appeal was that it was mostly a derivatives exchange, which allowed customers to trade “on margin,” meaning with borrowed money. That’s a key to his defense. Bankman-Fried argues no one should be surprised that big traders on FTX, including Alameda, were borrowing from the exchange, and that his fund’s position just somehow got out of hand. “Everyone was borrowing and lending,” he says. “That’s been its calling card.” But FTX’s normal margin system, crypto traders tell me, would never have permitted anyone to accumulate a debt that looked like Alameda’s. When I ask if Alameda had to follow the same margin rules as other traders, he admits the fund did not. “There was more leeway,” he says.
That wouldn’t have been so important had Alameda stuck to its original trading strategy of relatively low-risk arbitrage trades. But in 2020 and 2021, as Bankman-Fried became the face of FTX, a major political donor and a favorite of Silicon Valley, Alameda faced more competition in that market-making business. It shifted its strategy to, essentially, gambling on shitcoins.
As Caroline Ellison, then Alameda’s co-CEO, explained in a March 2021 post on Twitter: “The way to really make money is figure out when the market is going to go up and get balls long before that,” she wrote, adding that she’d learned the strategy from the classic market-manipulation memoir, Reminiscences of a Stock Operator. Her co-CEO said in another tweet that a profitable strategy was buying Dogecoin because Elon Musk tweeted about it.
The reason they were bragging about what sounded like a high schooler’s tactics was that it was working better than anyone knew. When we spoke in February 2022, Bankman-Fried told me that Alameda had made $1 billion the previous year. He now says that was Alameda’s arbitrage profits. On top of that, its shitcoins gained tens of billions of dollars of value, at least on paper. “If you mark everything to market, I do believe at one point my net worth got to $100 billion,” Bankman-Fried says.
Any trader would know this wasn’t nearly as good as it sounded. The large pile of tokens couldn’t be turned into cash without crashing the market. Much of it was even made of tokens that Bankman-Fried and his friends had spun up themselves, such as FTT, Serum or Maps—the official currency of a nonsensical crypto-meets-mapping app—or were closely affiliated with, like Solana. While Bankman-Fried acknowledges the pile was worth something less than $100 billion—maybe he’d mark it down a third, he says—he maintains that he could have extracted quite a lot of real money from his holdings.
But he didn’t. Instead, Alameda borrowed billions of dollars from other crypto lenders—not FTX—and sunk them into more crypto bets. Publicly, Bankman-Fried presented himself as an ethical operator and called for regulation to rein in crypto’s worst excesses. But through his hedge fund, he’d actually become the market’s most degenerate gambler. I ask him why, if he really thought he could sell the tokens, he didn’t. “Why not, like, take some risk off?”
“OK. In retrospect, absolutely. That would’ve been the right, like, unambiguously the right thing to do,” he says. “But also it was just, like, hilariously well-capitalized.”
Near the peak of the great shitcoin boom, in April 2022, FTX hosted a lavish conference at a resort and casino in Nassau. It was Bankman-Fried’s coming out party. He got to share the stage with quarterback Tom Brady. Also there: former Prime Minister Tony Blair and ex-President Bill Clinton, who extended a fatherly hand when the young crypto executive seemed nervous. The author Michael Lewis, who’s working on a book about Bankman-Fried, praised him in a fawning interview onstage. “You’re breaking land speed records. And I don’t think people are really noticing what’s happened, just how dramatic the revolution has become,” Lewis said, asking when crypto would take over Wall Street.
The next month, the crypto crash began. It started when a popular set of coins called Terra and Luna collapsed, wiping out $60 billion. Terra and Luna were almost openly a Ponzi scheme, but some of the biggest crypto funds had invested in them with borrowed money and went bankrupt. This made the lenders who’d lent billions of dollars to Alameda nervous. They asked Alameda to repay the loans, with real money. It needed billions of dollars, fast, or it would go bust.
There are two different versions of what happened next. Two people with knowledge of the matter told me that Ellison, by then the sole head of Alameda, had told her side of the story to her staff amid the crisis. Ellison said that she, Bankman-Fried and his two top lieutenants—Gary Wang and Nishad Singh—had discussed the shortfall. Instead of admitting Alameda’s failure, they decided to use FTX customer funds to cover it, according to the people. If that’s true, all four executives would’ve knowingly committed fraud. (Ellison, Wang and Singh didn’t respond to messages seeking comment.)
When I put this to Bankman-Fried, he screws up his eyes, furrows his eyebrows, puts his hands in his hair and thinks for a few seconds.
“So, it’s not how I remember what happened,” Bankman-Fried says. But he surprises me by acknowledging that there had been a meeting, post-Luna crash, where they debated what to do about Alameda’s debts. The way he tells it, he was packing for a trip to DC and “only kibitzing on parts of the discussion.” It didn’t seem like a crisis, he says. It was a matter of extending a bit more credit to a fund that already traded on margin and still had a pile of collateral worth way more than enough to cover the loan. (Although the pile of collateral was largely shitcoins.)
“That was the point at which Alameda’s margin position on FTX got, well, it got more leveraged substantially,” he says. “Obviously, in retrospect, we should’ve just said no. I sort of didn’t realize then how large the position had gotten.”
“You were all aware there was a chance this would not work,” I say.
“That’s right,” he says. “But I thought that the risk was substantially smaller.”
I try to imagine what he could’ve been thinking. If FTX had liquidated Alameda’s position, the fund would’ve gone bankrupt, and even if the exchange didn’t take direct losses, customers would’ve lost confidence in it. Bankman-Fried points out that the companies that lent money to Alameda might have failed, too, causing a hard-to-predict cascade of events.
“Now let’s say you don’t margin call Alameda,” I posit. “Maybe you think there’s like a 70% chance everything will be OK, it’ll all work out?”
“Yes, but also in the cases where it didn’t work out, I thought the downside was not nearly as high as it was,” he says. “I thought that there was the risk of a much smaller hole. I thought it was going to be manageable.”
Bankman-Fried pulls out his laptop (an Acer Predator) and opens a spreadsheet to show what he meant. It’s similar to the balance sheet he reportedly showed investors when he was seeking a last-minute bailout, which he says consolidated FTX and Alameda’s positions because by then the fund had defaulted on its debt. On one line—labeled “What I *thought*”—he lists $8.9 billion in debts and way more than enough money to pay them: $9 billion in liquid assets, $15.4 billion in “less liquid” assets and $3.2 billion in “illiquid” ones. He tells me this was more or less the position he was considering when he had the meeting with the other executives.
“It looks naively to me like, you know, there’s still some significant liabilities out there, but, like, we should be able to cover it,” he says.
“So what’s the problem, then?”
Bankman-Fried points to another place on the spreadsheet, which he says shows the actual truth of the situation at the time of the meeting. This one shows similar numbers, but with $8 billion less liquid assets.
“What’s the difference between these two rows here?” he asks.
“You didn’t have $8 billion in cash that you thought you had,” I say.
“That’s correct. Yes.”
“You misplaced $8 billion?” I ask.
“Misaccounted,” Bankman-Fried says, sounding almost proud of his explanation. Sometimes, he says, customers would wire money to Alameda Research instead of sending it directly to FTX. (Some banks were more willing to work with the hedge fund than the exchange, for some reason.) He claims that somehow, FTX’s internal accounting system double-counted this money, essentially crediting it to both the exchange and the fund.
That still doesn’t explain why the money was gone. “Where did the $8 billion go?” I ask.
To answer, Bankman-Fried creates a new tab on the spreadsheet and starts typing. He lists Alameda and FTX’s biggest cash flows. One of the biggest expenses is paying a net $2.5 billion to Binance, a rival, to buy out its investment in FTX. He also lists $250 million for real estate, $1.5 billion for expenses, $4 billion for venture capital investments, $1.5 billion for acquisitions and $1 billion labeled “fuckups.” Even accounting for both firms’ profits, and all the venture capital money raised by FTX, it tallies to negative $6.5 billion.
Bankman-Fried is telling me that the billions of dollars customers wired to Alameda is gone simply because the companies spent way more than they made. He claims he paid so little attention to his expenses that he didn’t realize he was spending more than he was taking in. “I was real lazy about this mental math,” the former physics major says. He creates another column in his spreadsheet and types in much lower numbers to show what he thought he was spending at the time.
It seems to me like he is, without saying it exactly, blaming his underlings for FTX’s failure, especially Ellison, the head of Alameda. The two had dated and lived together at times. She was part of Bankman-Fried’s Future Fund, which was supposed to distribute FTX and Alameda’s earnings to effective-altruist-approved causes. It seems unlikely she would’ve blown billions of dollars without asking. “People might take, like, the TLDR as, like, it was my ex-girlfriend’s fault,” I tell him. “That is sort of what you’re saying.”
“I think the biggest failure was that it wasn’t entirely clear whose fault it was,” he says.
Bankman-Fried tells me he has to make a call. After a while, the sun goes down and I’m hungry. I’m allowed to join a group of Bankman-Fried’s supporters for dinner, as long as I don’t mention their names.
With the curtains drawn, the living room looks considerably less grand than it does in pictures. I’ve been told that FTX employees gathered here amid the crisis, while Bankman-Fried worked in another apartment. Addled by stress and sleep deprivation, they wept and hugged one another. Most didn’t say goodbye as they left the island, one by one. Many flew back to their childhood homes to be with their parents.
The supporters at the dinner tell me they feel like the press has been unfair. They say that Bankman-Fried and his friends weren’t the polyamorous partiers the tabloids have portrayed and that they did little besides work. Earlier in the week, a Bahamian man who’d served as FTX’s round-the-clock chauffeur and gofer also told me the reports weren’t true. “People make it seem like this big Wolf of Wall Street thing,” he said. “Bro, it was a bunch of nerds.”
By the time I finish my plate of off-the-record rice and beans, Bankman-Fried is free again. We return to the study. He’s barefoot now, having balled up his gym socks and stuffed them behind a couch cushion. He lies on the couch, his computer on his lap. The light from the screen casts shadows of his curls on his forehead.
I notice a skin-colored patch on his arm. He tells me it’s a transdermal antidepressant, selegiline. I ask if he’s using it as a performance enhancer or to treat depression. “Nothing’s binary,” he says. “But I’ve been borderline depressed for my whole life.” He adds that he also sometimes takes Adderall—“10 milligrams at a time, a few times a day”—as did some of his colleagues, but that talk of drug use is overblown. “I don’t think that was the problem,” he says.
I tell Bankman-Fried my theory about his motivation, sidestepping the question of whether he misappropriated customer funds. Bankman-Fried denies that his world-saving goals made him willing to take giant gambles. As we talk more, it seems like he’s saying he made some kind of bet but hadn’t calculated the expected value properly.
“I was comfortable taking the risk that, like, I may end up kind of falling flat,” he says, staring at his computer screen, where he had pulled up a game and was leading an army of cartoon knights and fairies into battle. “But what actually happened was disastrously bad and, like, no significant chance of that happening would’ve made sense to risk, and that was a fuckup. Like, that was a mass miscalculation in downside.”
I read Bankman-Fried a post by Will MacAskill, one of the founders of the effective-altruism movement. He recruited Bankman-Fried into it when he was a junior at MIT and this year had joined the board of Bankman-Fried’s Future Fund. On Nov. 11, MacAskill wrote on Twitter that Bankman-Fried had betrayed him. “For years, the EA community has emphasized the importance of integrity, honesty and the respect of common-sense moral constraints,” MacAskill wrote. “If customer funds were misused, then Sam did not listen; he must have thought he was above such considerations.”
Bankman-Fried closes his eyes and pushes his toes against one arm of the couch, clenching the other arm with his hands. “That’s not how I view what happened,” he says. “But I did fuck up. I think really what I want to say is, like, I’m really fucking sorry. By far the worst thing about this is that it will tarnish the reputation of people who are dedicated to doing nothing but what they thought was best for the world.” Bankman-Fried trails off. On his computer screen, his army casts spells and swings swords unattended
I ask what he’d say to people who are comparing him to the most famous Ponzi schemer of recent times. “Bernie Madoff also said he had good intentions and gave a lot to charity,” I say.
“FTX was a legitimate, profitable, thriving business. And I fucked up by, like, allowing a margin position to get too big on it. One that endangered the platform. It was a completely unnecessary and unforced error, which like maybe I got super unlucky on, but, like, that was my bad.”
“It fucking sucks,” he adds. “But it wasn’t inherent to what the business was. It was just a fuckup. A huge fuckup.”
To me, it doesn’t really seem like a fuckup. Even if I believe that he misplaced and accidentally spent $8 billion, he’s already told me that Alameda had been allowed to violate FTX’s margin rules. This wasn’t some little technical thing. He was so proud of FTX’s margining system that he’d been lobbying regulators for it to be used on US exchanges instead of traditional safeguards. In May, Bankman-Fried himself said on Twitter that exchanges should never extend credit to a fund and put other customers’ assets at risk. He wrote that the idea an exchange would even have that discretion was “scary.” I read him the tweets and ask: “Isn’t that, like, exactly what you did, right around that time?”
“Yeah, I guess that’s kind of fair,” he says. Then he seems to claim that this was evidence the rules he was lobbying for were a good idea. “I think this is one of the things that would have stopped.”
“You had a rule on your platform. You didn’t follow it,” I say.
By now it’s past midnight, and—operating without the benefit of any prescription stimulants—I’m worn out. I ask Bankman-Fried if I can see the apartment’s deck before I leave. Outside, crickets chirp as we stand by the pool. The marina is dark, lit only by the spotlights of yachts. As I say goodbye, Bankman-Fried bites into a burger bun and starts talking about potential bailouts with one of his supporters. —With Annie Massa and Gillian Tan
