It's only been a year since FTX imploded. At its peak, the exchange was one of the largest in the world, with millions of customers and billions of dollars in customer funds. It was seen as the future of cryptocurrencies: a high-tech offering from a brilliant wunderkind who wanted to play nice with regulators and usher in an era in which the industry would go mainstream. But on November 2, 2022, CoinDesk, a cryptocurrency news outlet, published a leaked balance sheet. It showed that Alameda, FTX's sister hedge fund also founded by Bankman-Fried, had few assets aside from a handful of illiquid tokens it had invented. Frightened clients began to withdraw their shares from the exchange. Within days, it had become an all-out race and FTX had stopped honoring withdrawal requests. Clients still had $8 billion deposited in the stock market. After frantically trying to raise funds, Bankman-Fried drove FTX into bankruptcy.
Several accounts of what went wrong have since emerged. Many came from Bankman-Fried himself, who spoke to dozens of journalists in the weeks after the FTX collapse. Michael Lewis, an author who was "integrated" with Bankman-Fried for weeks before and after he failed, has published a book about him. The shards come from people who track the movement of tokens on blockchains. The government revealed its theory of the case in several indictments, but little compares to the large amount of evidence that was disclosed during the trial by former members of FTX, some of whom testified in cooperation with the government, having pleaded guilty to fraud.
Part of the story remains the same regardless of the narrator. Bankman-Fried was a talented mathematician who graduated from the Massachusetts Institute of Technology (MIT) in 2014 before going to work as a trader at Jane Street Capital, a prestigious quantitative hedge fund. In 2017, he saw an opportunity to create a fund that would take advantage of arbitrage opportunities in fragmented and illiquid cryptocurrency markets, which were, he said, "a thousand times larger" than those in traditional markets. He recruited an old friend, Gary Wang, a coder he had met at math camp, to help create the fund, which he called Alameda Research. He hired Nishad Singh, another coder and friend, as well as Caroline Ellison, a shopkeeper he had met on Jane Street. .
The stories begin to diverge from here. Ms. Ellison, Mr. Singh and Mr. Wang testified for the prosecution at trial, speaking for hours about their version of the dizzying rise and devastating collapse of Alameda and FTX.
As Ellison described it, Bankman-Fried was frustrated by how little capital Alameda had. He was "very ambitious." In 2019, he described FTX to Ms. Ellison as “a good source of capital” for Alameda. Wang testified that he wrote code that allowed Alameda to go negative on FTX (withdraw more than the value of its assets) as early as 2019. Alameda received a line of credit, which started out small but eventually grew to $65 billion. Dollars. . Wang also said he overheard a conversation in which a trader asked Bankman-Fried if Alameda could continue withdrawing money from the company. Well, as long as the withdrawals were less than FTX's trading income, was the answer. But less than a year after FTX was founded, when Wang went to check his balance, Alameda had already withdrawn more than that.
Customer deposits are supposed to be sacred and can be withdrawn at any time. But even months later, Alameda already appeared to be borrowing that money for its own purposes. Bankman-Fried said he created FTX because he thought it could create a great futures exchange, rather than satisfy a desire for capital. He explained Alameda's privileges by saying that he was only vaguely aware of them and had thought them necessary for FTX to work, especially in the early days when Alameda was by far the largest market maker on the exchange and there were sometimes bugs in the code that They settled accounts. If Alameda were liquidated it would be catastrophic. Bankman-Fried did not want this to happen and he wanted the fund to be able to make markets.
This might have been an excuse that a jury might have swallowed, even though, last year, Alameda was only one of perhaps 15 major market makers on the stock market and the others made no such profits. But two plot lines undermined it. The first is how the privileges were used. The second is how Bankman-Fried described FTX and its relationship with Alameda.
Start with how Alameda used its privileges. Ellison, whom Bankman-Fried named Alameda's co-CEO in 2021 when she stepped back to focus on her exchange, described the many times Alameda withdrew a lot of money from FTX. The first was when Bankman-Fried wanted to buy a stake in FTX owned by rival Binance. Her relationship with the Binance boss had soured and she was worried that regulators wouldn't like his involvement. Buying the stake would cost about $1 billion, about the same amount of capital FTX was raising from investors. Ellison said she told Bankman-Fried "we really don't have the money" and that Alameda would need to borrow from FTX to make the purchase. He told her to do it: “okay, I think this is really important.” ".
Loans to cover risky investments that were illiquid made the hole deeper. However, at the end of 2021, Bankman-Fried wanted to invest another $3 billion. He asked Ellison what would happen if the value of stocks, cryptocurrencies and venture investments collapsed and FTX and Alameda had difficulty raising more funds. She calculated that it would be “almost impossible” for Alameda to pay back what they had borrowed. Still, he told her to go ahead with the investment. The following summer, Mrs. Ellison was proven right.
Singh testified at length about "excessive" spending. About $1 billion went into marketing, including Super Bowl ads and endorsements from people like Tom Brady, an American footballer, about the same as FTX's revenue in 2021. In the end, Alameda had awarded about $5 billion on “related party” loans to Bankman-Fried, Wang and Singh to cover risky investments, property purchases and personal expenses. At one point during questioning, Danielle Sassoon, the prosecutor, asked Mr. Bankman-Fried to confirm whether he had flown to the Super Bowl on a private jet. When he said he wasn't sure, she pulled out a photo of him reclining in the plush interior of a small plane. “At least it was a chartered plane,” she shrugged.
The prosecution often used Mr Bankman-Fried's own words against him. Sassoon would ask Bankman-Fried to say whether he agreed with a statement, such as whether he was isolated from business decisions at Alameda. Mr. Bankman-Fried would obfuscate him, but eventually she would catch him. "Overall, he was not making business decisions, but he was not excluded from Alameda's information," he admitted. Sassoon then played a clip of him stating that he "was totally excluded from commerce in Alameda." Mrs. Sassoon did this again and again. Like an archer, she would draw her bow by asking a question and then release the arrow of evidence to prove a lie. At one point her attorney slowed the pace of the evidence by interrupting and asking if she was offering any documents to prove her veracity. "Your Honor, these are the defendant's own statements," the prosecutor said. "No, they are not offered for the truth of him."
Perhaps the most compelling moments of the trial were the emotional ones. Ellison cried when he recounted how, in the week of FTX's collapse, "one of the feelings I had was an overwhelming sense of relief." Meanwhile, Singh described a cinematic confrontation with Bankman-Fried in September last year. when he realized how big “the hole” was. He described pacing the balcony of the penthouse (cost: $35 million) where many FTX employees lived, expressing horror that some $13 billion of customer money had been borrowed, much of it unpaid. it could be returned. In response, Mr Bankman-Fried, lounging on a sun lounger, replied: “Right, that. "We are a little short on results."
When customers rushed to take their money the week FTX crashed, employees quit en masse. Adam Yedidia, one of Bankman-Fried's friends and employees, who has not been charged with a crime and appears to have known nothing, texted him: "I love you Sam, I'm not going anywhere." "He had discovered the reality of what had happened, he was gone. Many of those who were close to Mr Bankman-Fried and knew what was happening foresaw how this would end; those who did not know were horrified when they found out. It was the jury.
(Story was first published November 3, 2023)
© 2023, The Economist Newspaper Limited. All rights reserved.
From The Economist, published under license. Original content can be found at www.economist.com
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Posted: Mar 30, 2024, 09:30 pm IST
