Samuel Bankman-Fried’s poster in downtown San Francisco.
MacKenzie Sigalos | CNBC
Two years ago, Sam Bankman-Fried was a 30-year-old multi-billionaire living in a $35 million Bahamas penthouse, partying with his friends while running one of the world’s most valuable crypto companies.
Today, he is a 32-year-old inmate at the Metropolitan Detention Center in Brooklyn, waiting for a judge to tell him how long he will spend behind bars for masterminding “one of the biggest financial frauds in American history,” in the words. of US Attorney Damian Williams.
Modernize: FTX founder Sam Bankman-Fried sentenced to 25 years for crypto fraud, to pay $11 billion in forfeiture
Bankman-Fried, the founder and former CEO of failed crypto exchange FTX, will appear in federal court in midtown Manhattan on Thursday, where US District Judge Lewis Kaplan will hand down his sentence. Prosecutors recommended a prison sentence of 40 to 50 years.
Jurors needed only about three hours of deliberations in November to find Bankman-Fried guilty of all seven criminal counts against him. For a month-long high-profile trial involving nearly 20 witnesses and hundreds of exhibits, experts said at the time that they had never seen such a swift decision. Bankman-Fried plans to appeal his conviction and sentence.
It was a sharp and swift fall from grace for Bankman-Fried, who was once hailed as an industry titan and had a peak net worth — on paper — of about $26 billion.
FTX founder Sam Bankman-Fried leaves US court in New York on July 26, 2023.
Amr Alfiky | Reuters
Bitcoin arbitrage
It started with Kimchi Swap.
In 2017, as a quant trader on Jane Street, Bankman-Fried noticed something funny when he looked at bitcoin pricing on CoinMarketCap.com. Instead of a single price between exchanges, Bankman-Fried would sometimes see a 60% difference in the value of the digital currency. His immediate instinct, he said, was to get into arbitrage trading – buying bitcoins on one exchange and selling them back on another, earning the difference.
“That’s the lowest hanging fruit,” Bankman-Fried he told CNBC in September 2022.
The arbitrage opportunity was particularly compelling in South Korea, where the listed price of bitcoin was significantly higher than in other countries. It was called Kimchi Premium, a reference to the traditional Korean side dish of salted and fermented cabbage.
After a month of personally dealing with the market, Bankman-Fried started Alameda Research, named after the California county that housed his first office. Bankman-Fried told CNBC that the company sometimes made up to a million dollars a day trading bitcoins.
Alameda’s success spurred the launch of FTX. In April 2019, Bankman-Fried co-founded FTX.com, an international cryptocurrency exchange that offered customers innovative trading features, a responsive platform and a trusted experience. FTX’s success led to a $2 billion venture fund that spawned other crypto companies.
The FTX logo soon graced everything from Formula One racing cars to a Miami basketball arena. Bankman-Fried talked about buying Goldman Sachs one dayand became a fixture in Washington as one of the top donors to the Democratic Party.
Then the market turned.
The so-called crypto winter of 2022 wiped out hedge funds and lenders across the cryptocurrency universe. Bankman-Fried boasted that he and his business were immune. Behind the scenes, Alameda was borrowing money to invest in failed digital asset companies to keep the industry afloat.
May 2022 brought the crash of stablecoin Luna, creating a domino effect that sent crypto prices plummeting, ruining other lenders.
Alameda had borrowed from lenders including Voyager Digital and BlockFi, both of which ended up going bankrupt. Alameda secured its loans with FTT tokens, which were minted by FTX. The Bankman-Fried empire controlled the vast majority of the available currency, with only a small amount of FTT actually circulating at any given time.
Alameda marked down the entire FTT stock at the prevailing market price, despite the fact that it was essentially an illiquid asset. The fund used the same methodology with other coins, including Solana and Serum (a token created and promoted by FTX and Alameda), using them to secure billions of dollars in loans. Industry insiders dubbed the chips “Sam coins.”
Virtual banking
Faced with margin calls due to falling prices, Bankman-Fried turned to FTX’s billions of dollars in customer deposits through mid-2022. According to the company’s own bankruptcy filings, it had almost nothing in the way of record keeping.
On November 2, 2022, crypto trading site CoinDesk published details of Alameda’s balance sheet, which showed assets of $14.6 billion. Over $7 billion of those assets were either FTT tokens or Bankman-Fried backed coins like Solana or Serum. Another $2 billion was locked into equity investments.
Investors began to withdraw their holdings from FTX, creating the threat of a virtual bank. Alameda and FTX now faced a liquidity crisis.
On November 6, four days after the CoinDesk article, Binance founder Changpeng Zhao dropped the hammer. Binance was the first outside investor in FTX in 2019. Two years later, FTX bought back its stake with a combination of FTT and other currencies, according to Zhao.
Zhao wrote in a tweet that, due to “recent revelations that have come [sic] light, we decided to liquidate any remaining FTT on our books.” FTX executives tried to limit the damage, and Alameda traders were able to stave off outflows for a few days.
On Nov. 7, Bankman-Fried tried to sound confident, tweeting, “FTX is fine. Assets are good.” The post was deleted.
Sam Bankman-Fried, the jailed founder of the bankrupt cryptocurrency exchange FTX, is sworn in as he appears in court for the first time since being convicted of fraud in November in a court in New York, U.S., February 21, 2024 in this court sketch hall.
Jane Rosenberg | Reuters
The internal discussions were different. Bankman-Fried and other executives admitted to each other that “FTX’s customer funds were irretrievably lost because Alameda misappropriated them.” By November 8, the customer shortfall had grown to $8 billion. Bankman-Fried courted outside investors for a bailout but found no suitors.
FTX issued a freeze on all customer withdrawals that day. The price of FTT fell over 75%. Out of options, Bankman-Fried turned to Zhao, who announced that he had signed a “non-binding” letter of intent to acquire FTX.com.
But a day later, on November 9, Binance said it would not go ahead with the acquisition, citing reports of “mismanagement of customer funds” and federal investigations.
FTX filed for bankruptcy on November 11, and Bankman-Fried stepped down as CEO of FTX and related entities. He he immediately lost 94% of his personal fortune.
Sullivan & Cromwell, FTX’s longtime lawyers, approached John J. Ray, who oversaw Enron during its bankruptcy, to take over Bankman-Fried’s former position.
On December 12, Bankman-Fried was arrested by Bahamian authorities and extradited to the US, where he was taken into custody. Federal prosecutors and regulators accused Bankman-Fried of committing fraud “from the beginning,” according to a Securities and Exchange Commission filing.
Bankman-Fried was released on $250 million bail and initially lived under house arrest with a court-ordered ankle monitor at his parents’ home in Palo Alto, California, on the Stanford University campus. He was soon taken back into custody for allegedly tampering with witnesses.
While Bankman-Fried awaited trial, many of his closest friends and confidants turned key prosecution witnesses, leaving the former crypto billionaire to defend himself. Less than a year after his arrest, the 12-person jury found Bankman-Fried guilty of all criminal charges against him.
— CNBC’s Rohan Goswami contributed to this report.