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On October 3 2023, Sam Bankman-Fried (SBF), founder of FTX attended his first trial for fraud and conspiracy in New York. But how did he get there? When customers rushed to pull money out of the exchange, FTX couldn’t meet the withdrawals. FTX filed for bankruptcy on November 11 and a month later, SBF was arrested in the Bahamas, where FTX’s headquarters are located. Bankman was accused of 13 criminal charges. Who is Bankman and what frauds did he commit?
FTX was a cryptocurrency trading platform. Even though they referred to themselves as exchanges, like the NYSE, they didn’t have much in common. While exchanges have strict regulations, crypto exchanges face few. They don’t have to disclose how customer money is handled, either to investors or to a regulatory body and internal financial controls can be insufficient. These regulations are essential as cryptocurrency exchanges act as bridges between traditional finance and digital assets. Alameda Research was a quantitative trading firm founded by SBF that provides liquidity in cryptocurrency and digital assets market worldwide . This case is of high importance as it underscores the importance of proactive compliance measures and constructive engagement with regulators to ensure long-term viability. Furthermore, its outcome could significantly influence regulatory discussions, market dynamics, and investor perceptions within the cryptocurrency ecosystem. The FTX case serves as a reminder of the industry’s evolving regulatory landscape and imperative for exchanges to prioritize compliance to maintain trust and sustainability.
Check out this deep dive performed by FT on the Fall of Bankman-Fried
The fraud revolves around the relationship between FTX and Alameda Research. To the public, Alameda focused on arbitrage trading and market-making, while supposedly being separate from FTX. An article posted by CoinDesk on November 2, 2022, alleged that a significant portion of Alameda’s balance sheet comprised illiquid FTT tokens, invented and issued by FTX. These tokens provided discounts on trading fees and other rewards for FTX customers, also serving as a fundraising location for FTX. Alameda’s ability to pay its debts was vulnerable as FTX owned most of the FTT’s that were valued in millions of dollars.
After the article was published, Binance announced that it would sell off its FTT holdings, causing a 75% price drop, significantly reducing Alameda0s assets. Concerns about FTX’s financial condition led to users withdrawing their funds. It is thought that FTX used its client’s deposits for loans to Alameda, with FTT as collateral, violating terms requiring one-to-one ratio asset storage. Investigations revealed that FTX funnelled deposits to a Alameda’s accounts, extended it a vast line of credit, and shared resources, indicating no clear division between the organisations.
Bankman-Fried, despite nominally ceding control, maintained decision-making authority over Alameda. Personal loans totalling over $1 billion were borrowed, including loans to family and FTX executives, poorly documented and allegedly funded by customer deposits. Regulators cited a severe failure of corporate controls within FTX, with Bankman-Fried accused of deliberately misleading clients and investors, exposing them to undisclosed risks. The indictment accuses him of exploiting trust to bolster his businesses and enrich himself.
The charges that Bankman-Fried faced were :
Conspiracy to commit wire fraud on customers of FTX
Wire fraud on customers of FTX
Conspiracy to commit wire fraud on lenders to Alameda Research
Wire fraud on lenders to Alameda Research
Conspiracy to commit fraud on customers of FTX in connection with purchase and sale of derivatives
Conspiracy to commit securities fraud on investors in FTX
Conspiracy to commit money laundering
His sentence was predicted to be between 5 and 100 years in prison. On April 2th 2024, he was sentenced to 25 years reduced to good behaviour in prison so far where he helped other innates to earn their high school diplomas.
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