CRIMINAL CRYPTO CAPITALI$M
FTX's alleged run-of-the-mill frauds depended entirely on crypto
How else do you create billions in collateral from thin air?
By Tim Fernholz
The arrest of FTX co-founder Sam Bankman-Fried on a variety of fraud charges has been greeted in some quarters as a vindication for the cryptocurrency economy. After all, the allegations focused on generic financial crimes, and the government agencies involved didn’t use the occasion to zero in on hot-button debates about how crypto assets should be regulated.
That has led to some celebration. “They’re not really crypto crimes—and that’s a big relief for the broader crypto industry,” is the summary offered by The Information. But don’t get it twisted. Beyond the court room, it’s clear that Bankman-Fried’s alleged fraud could not have been accomplished without crypto technology and the hype around it.
Related Stories
Sam Bankman-Fried's other big con was perfectly legal
Consider the alleged fraud: The best picture we have so far is that FTX, the cryptocurrency exchange, took money from customers in exchange for purchases of, or bets on, a variety of crypto assets, while Alameda Research, Bankman-Fried’s hedge fund, also made bets on the exchange. The money that customers sent to FTX wound up at Alameda and was used to pay for the hedge fund’s failed bets, as well as a variety of personal and philanthropic expenses by Bankman-Fried and his inner circle. When enough customers asked for their money back, FTX declared bankruptcy.
Crypto ingredient
Every con is a story. Why does the sucker part with their money? What compelled people to give $8 billion to FTX over its two and a half years of existence?
Analogous schemes in traditional finance, like commodities broker MF Global, which used $1.6 billion of customer funds to pay off a lost bet in 2011, or Bernie Madoff’s multi-decade Ponzi scheme, which robbed its victims of perhaps $19 billion before its collapse in 2008, did not manage to make off with so much money so fast. FTX depended on the crypto bubble and the perception that people were getting rich quick—an idea it drove with its own massive advertising campaign.
Of course, any asset class can be subject to bubble dynamics, from land in Florida to particularly attractive tulip bulbs. But usually there is some underlying material object, or at least a cash flow, behind the maniacal overbidding. The meme stock mania in recent years is likely to vaporize a lot of money, but however overvalued Gamestop’s stock is, the company still had revenue of more than $1 billion last quarter.
The underlying economic value behind FTX is a lot less clear.
Crypto ingredient 2: The power to create assets out of thin air
The balance sheet that Bankman-Fried was using in his last vain attempts to raise money showed that the bulk of the company’s “assets” were crypto tokens that were either created by or dependent upon FTX.
This included most famously FTT, a token issued by FTX that was effectively linked to the exchange’s value. But it also included Serum, MAPS, and Solana—other coins whose value depended at best on realizing venture capital-style risk, and on the fact that a relatively small number of the coins were tradeable.
FTX’s customers probably didn’t realize how much of their deposits at the exchange were backed by these tokens. Indeed, the public revelation that Alameda had a huge position in FTT led to a fire sale of the tokens and the run that collapsed the exchange.
But the people operating FTX and Alameda, if you believe their public story about their actions reflecting mismanagement and not outright theft, thought the coins they helped create were sufficient collateral for obligations in US dollars. Cynical or not, absent their belief in tokenomics, this fraud would have crashed to a halt sooner than it did.
If FTX isn’t crypto, what is?
Some crypto true believers argue that FTX’s existence as a centralized exchange was the real problem here, and that truly decentralized on-chain transactions wouldn’t have led to similar dynamics. But they need to reckon with the fact that the value of their crypto investments is enormously dependent on the investor access provided by centralized exchanges like Coinbase, Binance, or FTX. Crypto as we know it seems to require exchanges and dollar-pegged stablecoins simply to function.
Another argument is that if crypto assets were properly regulated, this sort of thing wouldn’t happen. That may be true, but it’s also not clear what “proper” regulation would be—or that much of crypto’s “value” as a speculative asset or tool for regulatory arbitrage might be eliminated by the kinds of disclosure and capital requirements that apply to traditional securities or commodities.
One thing to watch will be what kind of recovery there is for the victims of this alleged fraud. MF Global’s customers were made entirely whole, with the owners and counter-parties of the firm taking the losses. For the Madoff fraud, two different funds have together distributed more than $17 billion to victims and other creditors by clawing back cash from beneficiaries of the scheme.
Similar efforts will likely follow at FTX, but will there be anything left in the rubble for them to return to investors?
FTX’s Bankman-Fried could face long road to fraud trial
By Jack Queen
(Reuters) - FTX founder Sam Bankman-Fried was swiftly indicted after the collapse of his crypto empire, but a trial in New York is likely more than a year away as prosecutors build out their case and both sides spar over evidence.
The bare-bones indictment against Bankman-Fried - which could be amended with more details and co-defendants as the case progresses - suggests prosecutors have a long road ahead piecing together what they have described as one of the biggest financial frauds in American history. Pretrial litigation can also be a lengthy process as both sides argue over the admissibility of evidence, what can and cannot be argued at trial, and whether the case should be dismissed.
“A trial is probably 14 to 18 months out,” said Michael Weinstein, a white-collar criminal defense lawyer and former federal prosecutor.
On Tuesday, U.S. Attorney Damian Williams in Manhattan said a grand jury had indicted Bankman-Fried on wire fraud, securities fraud, commodities fraud, campaign finance law violations and conspiracy charges. Williams said the investigation is "ongoing" and that more announcements are to come.
The indictment came just weeks after Bankman-Fried's $32 billion crypto exchange collapsed - an extraordinarily fast turnaround for prosecutors.
Bankman-Fried has apologized to customers but said he is not guilty of any crime. A representative of the crypto entrepreneur declined to comment.
Bankman-Fried was arrested in the Bahamas on Monday but indicated he would fight extradition to the United States. He is behind bars in a Bahamian correctional center and will not enter a plea until he is arraigned in the United States. His absence keeps potentially years-long pretrial litigation on hold.
COMPLICATIONS
Legal experts are doubtful Bankman-Fried will prevail fighting extradition, though he could relent in the coming months after a Bahamian judge denied him bail. Bankman-Fried's lawyers filed a new bail request on Thursday.
Regardless of where Bankman-Fried is held, prosecutors will spend the coming months poring over evidence and interviewing witnesses before potentially filing a so-called superseding indictment with new details or co-defendants. The limited information in the indictment unveiled on Tuesday suggests there is plenty of work to do, according to legal experts.
“The indictment does not have smoking-gun details like emails and documents that you’re used to seeing in fraud cases,” said Renato Mariotti, a former federal prosecutor with experience in financial fraud cases. “That suggests that they put this together quickly, but they wouldn’t bring high-profile charges like this if they didn’t think they had the goods.”
FTX has been described by its restructuring executive as a chaotic operation that shuffled assets without basic accounting or record-keeping protocols, which will likely complicate prosecutors' efforts to build out their case further.
Securing the help of former FTX employees who can make sense of the incomplete records could take a long time, especially if negotiations for immunity or plea deals in exchange for cooperation are involved.
“They will need an insider who was part of the decision-making process or was privy to how things worked internally,” Weinstein said.
Williams, the U.S. attorney, on Tuesday pointedly addressed people who may have information about FTX's downfall.
"If you have not reached out to us to talk to us, I would encourage you to do so, and do so quickly."
(Reporting by Jack Queen in New York; Editing by Noeleen Walder and Matthew Lewis)
FTX files in bankruptcy court to sell four of its businesses
Aislinn Murphy
Thu, December 15, 2022
In a filing submitted Thursday to the Delaware bankruptcy court, FTX said it is soliciting bids for Embed Financial Technologies, LedgerX, FTX Japan and FTX Europe.
According to the filing, the cryptocurrency exchange said the four businesses have "experienced regulatory pressures which merit an expeditious sale process," as well as "significant customer and employee attrition pressures," according to the filing.
WHERE DID THE MONEY GO IN FTX CRYPTO COLLAPSE?
Representations of cryptocurrencies are seen in front of an FTX logo and decreasing stock graph in this illustration from Nov. 10, 2022.
"Because each of the Businesses was acquired by the Debtors fairly recently, but before the Debtors commenced these Chapter 11 Cases, the Businesses have each operated on a generally independent basis from the Debtors’ other operations, holdings and investments," the filing stated.
"The relative independence of each of the Businesses’ operations from the remainder of the Debtors’ core business operations make a potential sale process for each of the Businesses relatively less complex."
FTX FRAUD WILL MAKE ‘ENRON LOOK LIKE PEANUTS’: FORMER US ATTORNEY
FTX has received "significant interest expressed by third parties" about acquiring the units and determined "pursuing one or more sales of the Businesses is important to preserve and maximize the value of the Debtors’ estates," according to the filing.
The court document included a detailed outline of how bidding and auctioning the businesses would work, including deadlines for submitting bids, conducting auctions and holding hearings to consider any sales.
This illustration photo shows a smartphone screen displaying the logo of FTX, the crypto exchange platform, with a screen showing the FTX website in the background Feb. 10, 2022.
FTX, once valued at $32 billion, filed for Chapter 11 bankruptcy in November along with Alameda Research, West Realm Series and 130 affiliated companies. At the same time, founder Sam Bankman-Fried stepped down as the crypto exchange’s CEO, handing over the position to former Enron liquidator John J. Ray III.
Authorities arrested Bankman-Fried in the Bahamas earlier in the week. He has since been hit with charges from the Southern District of New York and the Securities and Exchange Commission.
Sam Bankman-Fried, co-founder and CEO of FTX, in Hong Kong, China.
Bankman-Fried is accused of "perpetuat[ing] a scheme to defraud customers of FTX by misappropriating billions of dollars of those customers’ funds," according to the Department of Justice’s press release.
SAM BANKMAN-FRIED'S RELATIVES ASKED BAHAMAS PRISON IF HE COULD GET VEGAN MEALS THERE: REPORT
He allegedly used customer funds for "his personal use to make investments and millions of dollars of political contributions to federal political candidates and committees and to repay billions of dollars in loans owed by Alameda Research, a cryptocurrency hedge fund also founded by the defendant," the release said.
No comments:
Post a Comment