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FTX fallout: SBF trial could set precedent for the crypto industry

January 18, 2023No Comments


After the major cryptocurrency exchange FTX collapsed in November 2022, former CEO Sam "SBF" Bankman-Fried was arrested by Bahamian authorities on December 12. Just one day later, the United States Securities and Exchange Commission and the Commodity Futures Trading Commission filed charges against him for allegedly defraud investors and violate securities laws.

On December 22, Bankman-Fried was granted bail on $250 million bond paid by your parents against the equity in your home. The bail order added that it would require "strict pretrial supervision," including treatment and mental health evaluation. The former CEO faces eight criminal charges in the United States, which could result in 115 years in prison if convicted.

Bankman-Fried had been under house arrest at her parents' California home since Dec. 22, but returned to New York for her plea hearing. Later, at a court hearing on January 3, he pleaded not guilty to all criminal charges related to the collapse of the crypto exchange. The charges included wire fraud, securities fraud and violations of campaign finance laws.

In addition to Bankman-Fried, Caroline Ellison, former CEO of FTX's bankrupt sister company Alameda Research, and former FTX co-founder Gary Wang were slapped with fraud charges. The SEC alleged that Ellison manipulated the price of the FTX token (FTT), which is described as a cryptosecurity token in the document. Said manipulation was carried out through the "purchase of large quantities on the open market to prop up its price", which took effect between 2019 and 2022.

Both Ellison and Wang later pleaded guilty to fraud charges and were cooperating with the Justice Department's investigation into Bankman-Fried. Ellison also accepted a plea agreement under which she only be prosecuted for criminal tax violations.

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Doug Brooks, a senior adviser at XinFin, told Cointelegraph that Ellison has already provided evidence to prosecutors, apparently indicating that he will be a powerful witness in the case against Bankman-Fried. Brooks added:

โ€œIt is a common strategy for US prosecutors in high-profile cases to build the case from the bottom up. This includes catching smaller fish and offering deals where necessary, to make the strongest possible case against the main target. Given that Ellison has already pleaded guilty and offered to cooperate after saying she's "really sorry," it won't be a surprise if she walks away relatively unscathed with a lesser punishment on lesser charges, even more likely if the evidence she provides against SBF is so explosive as we expected.

With the involvement of US authorities and the arrest of Bankman-Fried, many FTX users and investors were hopeful that there would be concrete action and a plan to get some of their funds back. However, the turn of events surrounding Bankman-Fried's bail, his not guilty plea, and Ellison's plea agreement has cast doubt on the minds of many. However, Richard Mico, legal director at crypto infrastructure service provider Banxa, told Cointelegraph that prosecutors take the Bankman-Fried thing very seriously:

โ€œThe amount of bail he had to post, a staggering $250 million, would only indicate the degree of seriousness prosecutors are taking in this case. In addition, the regulators do not protect Sam from possible consequences. Despite SBF getting comfortable with regulators before its fall from grace, both the CFTC and SEC have filed civil lawsuits against it.โ€

Mico noted that there is a large body of evidence that SBF mishandled client funds, and while โ€œit is disheartening to see SBF out on bail now, I strongly believe that the crypto community will finally see justice.โ€

Crypto community baffled by the movement of funds

The uncertainty of investors grew when they were linked to Alameda wallets began funneling millions of dollars just days after Bankman-Fried was released on bail. A total of $1.7 million moved, but it was more the way in which these transactions were carried out that raised many eyebrows. The funds were routed using decentralized exchanges and mixing services to hide the origin of the transactions.

A portion of these funds reportedly goes back to Bankman-Fried himself. He allegedly cashed out $684,000 worth of cryptocurrency on an exchange in Seychelles while under house arrest, according to an on-chain investigation by decentralized finance educator BowTiedIguana.

On Dec. 28, according to BowTiedIguana's analysis, Bankman-Fried's public Ethereum address sent all of its remaining Ether (ETH) to a newly created address. BowTiedIguana claimed that SBF agreed to take over the management, originally owned by SushiSwap creator Chef Nomi, in August 2020.

Within hours, the new address received transfers totaling $367,000 from 32 addresses identified as Alameda Research wallets, with an additional $322,000 coming from other wallets. All the funds were sent to a crypto exchange in Seychelles and the RenBridge crypto bridge.

Richard Gardner, CEO of fintech infrastructure firm Modulus, told Cointelegraph that events after the bailout should have been taken into account, explaining:

โ€œHe is the very definition of a flight risk, and bail should have been impossible. He must consider that, given his political donations, there are a number of important people whose fate is closely tied to that of SBF. I think there is an overwhelming sense that the public wants justice for the FTX debacle. However, his friends in politics may well help him put his thumb on the scales.

Amid growing rumors that Bankman-Fried was behind the movement of funds, the former chief executive tweeted that he had nothing to do with it.

Will the FTX case set a precedent for the crypto ecosystem?

Bankman-Fried will face a four-week trial starting October 2, the outcome of which could have a lasting impact on the crypto ecosystem. A test focused on one of the largest crypto exchanges of its time could turn out to be a watershed moment, at least for centralized entities and service providers.

Some observers believe that Bankman-Fried's desire to help himself rather than prioritize the goals of the crypto community, combined with the clout against him, makes him the perfect puppet for prosecutors.

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Ari Redbord, head of legal and government affairs at digital asset risk management firm TRM Labs, told Cointelegraph that FTX represented the failure of centralized institutions rather than cryptocurrencies, explaining:

โ€œIt is important to remember that in the case of FTX, it is about corporate fraud and corporate embezzlement, not crypto. What happened to FTX is more like Enron, Lehman Brothers or WorldCom. The fraud here did not take place on blockchain, but in opaque centralized financial institutions, and it is important to separate the technology from the business.โ€

Speaking about the potential impact of the Bankman-Fried prosecution, RA Wilson, CTO at crypto exchange 1GCX, told Cointelegraph that the fallout from FTX would likely only affect centralized entities, but would set off a slippery slope that would set precedents for future regulations:

โ€œAt best, regulation is avoided as long as possible in favor of the free market and only applied to truly protect investors. I anticipate that scenario is likely not to be the case, actually, considering the ways in which regulators have been seeking avenues to gain jurisdiction and regulatory power over these innovative technologies."