The Fall of the Crypto-King: How Sam Bankman-Fried’s Empire Unravelled

Just months ago, Sam Bankman-Fried was a celebrated crypto billionaire, deemed a prodigy that had pioneered the crypto industry and built an empire worth a combined 32bn dollars. However, important questions about FTX’s collapse remain unanswered.

17 February, 2023

The collapse of FTX and Alameda Research has been the most severe watershed for the crypto industry so far. But what happened? And how did Sam Bankman-Fried, one of the most trusted and esteemed figures in crypto, cause the collapse of his empire?

This unfolding comes with the glitz and glam of the rich and famous. The exceptions to the general rules were made for the likes of Tom Brady, Steph Curry, and Larry David. The company chose to give the option of buying smaller blocs to megastars and their agents as these promoters played a prominent role in the company’s rise and fall. In this case, just the glorious fall.

Just months ago, Sam Bankman-Fried was a celebrated crypto billionaire, deemed a prodigy that had pioneered the crypto industry and built an empire worth a combined 32bn dollars. But since the beginning of November, the tide has turned for SBF whose crypto exchange FTX collapsed and had to file for bankruptcy. On the 12th of December 2022, SBF was arrested in the Bahamas after the U.S. Attorney for the Southern District of New York opened an investigation into his business conduct and accused him of large-scale investor fraud.

However, important questions about FTX’s collapse remain unanswered. At this point, the breadth and severity of wrongdoing by its former CEO and his accomplices can only be estimated. This article tries to shine a light on what exactly caused the collapse of FTX and its adjacent hedge fund Alameda research and examines the broader implications of this for the crypto industry.

The intricacies of FTX’s and Alameda Research’s collapse are quite complex. SBF’s crypto empire consisted of two firms: FTX, a crypto exchange, where customers could exchange fiat money for crypto tokens, and Alameda Research, a quantitative trading firm which made investments in the crypto market to generate returns. However, an integral part of why both firms collapsed was the use of a crypto token called FTT. The FTT token functions in a similar way to existing cryptocurrencies such as Ethereum and Bitcoin but was originated by FTX. FTT plays an important role in the FTX ecosystem by incentivizing users to hold and use the token, and by providing a means for FTX to distribute value back to its users.

On November 2, CoinDesk, a news outlet specialised in the crypto industry, published an article stating that Alameda Research held a $5bn position in the FTT token and that the majority of its net equity, i.e., the value of the business, was based on its position in the FTT token. While there is nothing wrong per se about this, the fact that Alameda Research’s balance sheet was in large parts made up of a token that was invented by its sister company FTX prompted great concerns within the crypto industry. Subsequently, another crypto exchange, Binance, announced that it would sell a large position that it held in the FTT token due to concerns about FTX’s use of leverage and general solvency.

Binance’s move to sell its FTT position led to general fear in the market, and people that had stored their cryptocurrencies on the FTX platform demanded withdrawals. However, FTX was unable to serve its liquidity needs and obligations that were prompted by the withdrawals which led SBF to declare that withdrawals would no longer be allowed. After FTX was unable to secure emergency funding, the exchange had to declare bankruptcy and Bankman-Fried was ousted as its CEO.

A lot more has since happened. It was revealed that about 400 million dollars of customer funds were stolen from FTX after an infamous cyber-attack took place around mid-November 2022 by an unidentified hacker. At a congressional hearing, John J. Ray III, FTX’s new CEO, declared that he had never seen such broad-scale negligence of business principles, accounting standards and reporting. Furthermore, it was revealed that FTX customer funds were co-mingled with funds at Alameda Research and loans were extended between the two firms. Commingling funds is generally considered a violation of financial regulations, as it makes it difficult to trace the origin and destination of specific funds, and could lead to potential conflicts of interest or fraud. All this ultimately contributed to FTX being unable to meet customer withdrawal demands and its bankruptcy. Now, thousands of people have lost their money, and the crypto industry has once again been severely disrupted.

The secondary effects of FTX’s collapse have already been felt in the industry. Binance and Coinbase, two other prominent crypto exchanges were rattled with customer withdrawal demands, as general trust in exchanges from investors diminished. Another crypto exchange called Genesis had to halt withdrawals because of the disruption caused by the FTX collapse.

In the market, people have differing opinions about the meaning of FTX’s collapse. Some have likened it to the Dot-com bubble in the 1990s, where a lot of tech companies ultimately went out of business, but the industry subsequently matured and good businesses survived. Others see themselves confirmed in their view that the crypto industry is a Ponzi scheme or generally fraudulent.

As the FTX saga is still unfolding, the broad-based implications remain to be seen. In light of a tough macroeconomic environment and a looming recession, FTX’s collapse has certainly further exposed the structural weaknesses of the crypto industry and undermined the trust of investors and customers alike.