How FTX’s Sam Bankman-Fried Went from Crypto Golden Boy to V…

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How FTX’s Sam Bankman-Fried Went from Crypto Golden Boy to Villain
The exchange’s founder, once seen as a steady hand in the world of digital assets, is under investigation and his company filed for bankruptcy
By Gregory ZuckermanLinks
In a matter of days, Sam Bankman-Fried has gone from crypto hero to villain.
His billion-dollar fortune has collapsed. He is facing Justice Department and Securities and Exchange Commission investigations His firm, FTX, is bankrupt and with it many hopes for the future of crypto itself.
An outwardly genial 30-year-old commonly referred to as SBF, Mr. Bankman-Fried was until this week the industry’s leading championLinks to an external site.. His firm’s finances were opaque, but he seemed to be an open book on Twitter and in scores of media interviews.
In one week, FTX went from being one of the biggest cryptocurrency exchanges to bankruptcy, shaking the entire digital-asset market. Coinbase CFO Alesia Haas discusses what comes next for the industry.
Bill Clinton, Tom Brady, Katy Perry and other boldfaced names trekked to FTX Bahamas base to appear with him at a conference he organized to promote his vision of a sophisticated financial system built around digital assets. He spoke recently of becoming the world’s first trillionaire. He gave liberally to political candidates and causes, and he became an advocate of effective altruism, a trendy philosophical movement that encourages young people to make big bucks so they can donate fortunes to charity.
Another side to Mr. Bankman-Fried emerged as his firm grew. He was brusque and insulting with overseas regulators and others, said people involved in the meetings. He demonstrated a cocksure style in negotiations to buy struggling crypto companies. He courted U.S. politicians and regulators, and seemed to egg on their scrutiny of his rivals.
And behind the scenes, FTX was using billions of dollars of customer money to fund risky trades by Alameda Research, a digital-currency firm he also founded. Revelations of the practice this week shocked Mr. Bankman-Fried’s admirers, as well as many of his own employees. The undisclosed loans tore a hole in FTX’s finances that set the stage for the exchange’s swift implosion earlier this week.
Favoring Regulation
In the end, one of Mr. Bankman-Fried’s fatal mistakes might have been antagonizing members of the crypto world by advocating for crypto regulation. In particular, he made an enemy of Changpeng Zhao, the billionaire founder of Binance, the world’s biggest crypto exchange by trading volume. Mr. Zhao, who goes by CZ, was an early financial backer of FTX.
Last weekend, he helped pull it apart—tweeting that Binance was dumping its stash of more than $500 million worth of FTT, a token created by FTX.
The Binance founder said the move was for “risk management” purposes, citing a recent report on crypto website CoinDesk revealing that billions of dollars worth of the illiquid token were sitting on the balance sheet of FTX’s sister firm, Alameda.
That was a problem because it showed Alameda was dangerously dependent on FTT, a token with uncertain value, and Alameda’s finances might collapse if selling caused the token’s price to crash. It was unclear at the time whether Alameda’s troubles would extend to FTX, but fears quickly mounted in the market about FTX’s stability, given the intertwined nature of the two firms.
Later that day Mr. Zhao added a dig: Binance couldn’t support those who lobby against other players behind their backs, he tweeted. It was a clear reference to Mr. Bankman-Fried’s activities in Washington, where the FTX chief had emerged as one of the largest political donors.
Mr. Bankman-Fried in Washington after testifying on Feb. 9.PHOTO: SARAH SILBIGER/BLOOMBERG NEWS
Almost immediately, hedge funds and other firms yanked money from FTX, causing a crisis that jeopardized the exchange’s future. On Sunday alone, customers slammed FTX with $5 billion worth of withdrawals, according to a tweet posted later by Mr. Bankman-Fried.
Seeking a rescuer, FTX turned to the same rival who had sparked the crisis: Mr. Zhao. Binance agreed to buy FTX, only to withdraw its bid a day later. Adding salt to the wound was that Mr. Bankman-Fried only learned about the deal falling apart after it was reported in the media, he told employees in a Slack message seen by The Wall Street Journal.
“I’m deeply sorry that we got into this place, and for my role in it,” he wrote in the Slack message. “That’s on me, and me alone, and it sucks, and I’m sorry, not that that makes it any better.”
As recently as last month, Mr. Bankman-Fried was boasting about his plans for expansion. He was in talks with investors for fresh cash to pursue “efficient acquisitions,” he said at the Journal’s Tech Live conference. He said FTX was already well known among crypto pros; he was interested in buying something that would get more mom-and-pop traders on board, he said.
On Friday, Mr. Bankman-Fried resigned as chief executive The bankruptcy put an end to his frantic efforts to find suitors to save FTX—an ironic twist given that FTX itself bailed out ailing crypto firms earlier this year.
And after previously criticizing bad actors in crypto, Mr. Bankman-Fried is himself facing federal probes. He has described the decision to use customer funds as a poor judgment call, according to someone close to the matter.
In traditional finance, regulators require brokerages to segregate customer funds from any capital they use for trading. But in the Wild West of crypto, the rules are murkier. It wasn’t immediately clear what legal consequences Mr. Bankman-Fried or FTX might face for the loss of customer funds.
Alameda and FTX haven’t yet detailed what happened to the missing money, though Mr. Bankman-Fried has promised to share more information. Alameda was known to engage in risky trading strategies and was more vulnerable to volatility in the crypto markets than FTX.
On Thursday, Bahamas regulators froze the assets of a key FTX subsidiary and appointed a provisional liquidator. On Friday morning, FTX and its U.S. unit filed for bankruptcy.
Market Implications
“What’s shocking is the fall from grace, it was so rapid,” said crypto analyst Dan Dolev of Mizuho Securities. “We’re learning that value can evaporate within minutes in crypto, that’s the most shocking thing.”
FTX’s collapse is the most serious setback yet for crypto’s wider goal—to build an alternative financial architecture that could supplant the system of banks and brokers that dominates the world of money today. A brutal decline in the price of bitcoin and other digital currencies this year led to a string of crypto-firm bankruptcies that revealed loose lending practices and rampant risk-taking.
FTX, which advertised sophisticated risk-management capabilities and gained a rapid following, was viewed as a stabilizing force, while Mr. Bankman-Fried was seen as a visionary capable of leading the digital-currency world to a bright future.
“The question now is can you trust any crypto investment,” Mr. Dolev said. “Will it expire worthless in a matter of seconds?”
Cryptocurrency exchange FTX was seen as a survivor in a struggling industry, but over the course of six days the exchange collapsed due to a sudden liquidity crunch. WSJ explains the factors that drove FTX’s growth and what led to its downfall. Illustration: Alexandra Larkin
The broader investment and financial worlds have long held their collective breath as the crypto universe evolved and expanded. A collapse of these investments was always possible, and financial players worried they might take down more entrenched firms or investors, creating potential problems for the broader financial system.
For now, there have been few signs of broader impact, reassuring professionals and others. When hedge-fund Long-Term Capital Management imploded in 1998, the Federal Reserve was forced to step in to help stabilize the financial system, and the downfall of Lehman Brothers and other financial institutions in 2008 also required the government and Fed to help bolster the economy. That’s not happening today. The stock market suffered a setback earlier this week amid the crypto troubles, but it has rallied in recent days on reassuring inflation data, and the pain seems contained to the crypto world.
Still, the financial world remains on edge because FTX had hundreds of mainstream investors and lenders, including some of the leading venture-capital firms and others. They likely have suffered enormous losses from FTX’s downfall and the resulting tumbles for bitcoin and other crypto investments. FTX, Alameda and other affiliates estimated in their bankruptcy filings that they have more than 100,000 creditors and face liabilities of between $10 billion and $50 billion. Plagiarism Free Papers
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