This article was co-authored by Mike Ermolaev and Alina Chepurchenko.
FTX, one of the world’s biggest crypto exchanges, has gone down in flames in front of the entire world.
Within several days, it experienced a bank run, stopped customer withdrawals, entered unsuccessful acquisition talks with Binance, faced up to $8 billion in shortfall, had nearly $500 million stolen from its wallets, filed for bankruptcy, and was exposed for what appeared to be malfeasance by Alameda/FTX entity.
But let’s find out if there's more to it than meets the eye and distinguish between facts and fiction.
Former FTX head Sam Bankman-Fried's (SBF) mainstream media portrayal was in stark contrast to media depictions of crypto enthusiasts as anarchists bent on undermining centuries-old finance systems. Why was that so?
Is this related to his advocacy of crypto oversight rather than resistance to regulation? He peddled tighter crypto regulation and maximum compliance, seeking to bring the crypto world closer to government control. This might explain why he gained overwhelming media adoration and was hailed as "the next Warren Buffett", "the white knight of crypto", and other accolades.
How SBF's empire crumbled
A house of cards started to collapse on November 6 when Binance’s Changpeng Zhao said that he would liquidate FTT tokens on his exchange, thus triggering FTX's bleeding.
Afterward, he confirmed the liquidation of about $584 million in FTT.
The question of whether CZ intentionally dumped its FTT holdings has polarized opinion. Some argue he could have sold directly to FTX instead of openly dumping and causing the most damage. This rumor was denied by CZ, however:
After that, SBF announced Binance would acquire FTX, which was confirmed by Zhao, but a day later Binance withdrew from the potential deal after reviewing FTX's finances.
CZ pointed out that he did not "master plan" this and advised the community not to see the event as a success. “People now think we are the biggest and will attack us more,” he said.
A run on deposits forced the FTX crypto exchange into bankruptcy after an $8 billion shortfall caused it and more than 100 affiliated companies to file for Chapter 11 protection.
According to the filing, FTX has more than 100,000 creditors, assets between $10 billion and $50 billion, and liabilities between $10 billion and $50 billion.
While we can only speculate about CZ's motivation, SBF's decision to bail out BlockFi this summer was allegedly intended to reap the benefits of BlockFi's settlement with the Securities and Exchange Commission (SEC), essentially extending the amnesty to FTX.
Crypto community also notes that Bankman-Fried graduated from Massachusetts Institute of Technology, where Securities and Exchange Commission Chair Gary Gensler was a professor. SBF's girlfriend Caroline Ellison, CEO of Alameda Research, is the daughter of Gensler's boss at MIT, Glenn Ellison. There are now questions as to why Gensler, who was pushing to crack down on crypto, overlooked the FTX debacle.
They discussed a new SEC-approved crypto trading platform during their Zoom call earlier this year. The former head of FTX would have a leg up on competitors with a platform that meets the SEC's standards.
Furthermore, FTX's tie-up with IEX Group would have allowed it to dominate the US market, lobbying for legislation that could have destroyed competitors like Binance.
Obviously, CZ was enraged by this. “We gave support before, but we won't pretend to make love after divorce. We are not against anyone. But we won't support people who lobby against other industry players behind their backs,” he tweeted.
Then, just when it seemed that things couldn't get any worse, FTX said there had been “unauthorized access” to its accounts and $477 million was missing, according to blockchain research firm Elliptic.
A heated debate raged on social media about whether the exchange was hacked or if funds were stolen by insiders, with the latter version appearing more likely simply because FTX uses cold storage wallets which require plugged-in devices to access.
FTX now faces a massive global investigation, involving US federal prosecutors, regulators from the Securities and Exchange Commission, Commodity Futures Trading Commission (CFTC), as well as international regulatory bodies.
The FTX collapse left a huge swath of destruction behind. You can see the myriad of companies and funds that FTX and Alameda invest in below.
Source: The Block Research
What caused the collapse?
According to claims, Bankman-Fried diverted billions of dollars of customer funds to finance his girlfriend’s trading firm, Alameda Research. SBF allegedly altered FTX's financial records without accountability through a backdoor in its bookkeeping system. By conniving with Alameda, Bankman-Fried may have been able to conceal $10 billion in client funds.
The demise of FTX is also attributed to SBF's expansion of his business interests too quickly across a wide range of industries, ignoring the warning signs.
Prior to this scandal breaking, Tesla's Elon Musk rejected SBF's $15 billion offer to help him take over Twitter. “I talked to him for about half an hour. And I know my bullshit meter was redlining. It was like, this dude is bullshit—that was my impression,” Musk said during a Twitter conversation with CoinBase.
Aside from investing in a variety of crypto companies and helping struggling ones, Bankman-Fried’s FTX.US donated more than $70 million to Democrats and Republicans in the 2021-2022 cycle, with over $44 million going to Democrats, making SBF the second largest Democratic donor after George Soros.
In his own words, SBF donated to both parties to prevent pandemics, encourage bipartisanship, and support a permissionless finance agenda.
There is no clarity as to where Bankman-Fried's donation money came from. It could take months for forensic accountants and bankruptcy courts to unravel FTX's intricate money-mixing system.
Even though FTX investors used to receive quarterly performance with all kinds of financial information, they have never seen the company's balance sheet. It was only disclosed to investors prior to bankruptcy, and recently revealed by the Financial Times.
SBF's tangled ties with Democrats
A thorny question is how Bankman-Fried became so liquid. In a strange coincidence, FTX was founded just after Biden announced he would run for president in April 2019. The exchange became popular almost overnight.
SBF came into politics “out of nowhere”, according to Bradley Beychok, co-founder of American Bridge 21st Century, a liberal super PAC that conducts opposition research in support of Democratic candidates. He said SBF built an "organized campaign" and supported a variety of causes and candidates.
In 2018, SBF's mother, Barbara Fried, a Stanford University law professor, co-founded Mind the Gap, a group aimed at turning the Republican-controlled US House of Representatives blue. According to a secret internal memo made public by Vox, Mind the Gap raised more than $20 million from Silicon Valley bigwigs, such as Facebook co-founder Dustin Moskovitz and former Google CEO Eric Schmidt.
SBF's father, Joseph Bankman, is also a Stanford Law professor. The crypto community speculates that he may have used his expertise in federal and state tax shelters to build his son's overseas empire, with over 130 subsidiaries.
In addition to being a Legislative Correspondent for the House of Representatives, Sam's brother Gabe Bankman-Fried was also a political advisor for large Democratic donors. He founded Guarding Against Pandemics to "support" the $30 billion budget for pandemic planning allocated by the Biden administration.
Also close to Dems were SBF’s colleagues, including Amy Wu, the Head of Ventures and Commercial at FTX Ventures, who started at the Clinton Foundation years ago. FTX Director of Engineering Nishad Singh was the fourth-largest donor to the Democratic Party since November 2020. Mark Wetjen, Obama's Commissioner of Commodity Futures Trading, was in charge of FTX’s policy and regulation.
The WEF's once beloved, now forgotten boy?
Linda Fried, SBF's aunt, is an epidemiologist at Columbia University with ties to the World Economic Forum (WEF).
For a bit of context, the WEF is a global organization run by Klaus Schwab, who uses tech-speak and promotes Modern Monetary Theory (MMT). However, his views seem to be identical to those of traditional socialists who favor high taxes and high government spending, less individual liberty, and a stronger government role.
A superficial look at the WEF's mission shows that it is concerned with improving the world. In practice, the WEF appears to be a cabal of moneyed leftists flying to Davos on private jets to make their case. They want us to eat bugs, use bikes instead of cars, pay 75% income tax, use Central Bank Digital Currency (CBDC), and own nothing and be happy.
We don't know how deep SBF's relationship with the WEF goes, but we do know that FTX was a WEF partner and that the now disgraced boy king of crypto spoke at Davos last May.
The WEF's website boasted of its partnership with FTX before removing all references to the exchange days after it collapsed. “FTX was a World Economic Forum partner. In light of last week’s events, their partnership was suspended and they were removed from the Partners section of our website,” a spokesman for the organization said.
Is Ukraine-FTX a smokescreen for Dems' money laundering?
In addition to his affiliation with Democrats, SBF was an outspoken supporter of Ukraine. His exchange partnered with a fundraising site, Aid for Ukraine, which allowed people to donate cryptocurrency to help the war effort in the country. In this project, FTX facilitated the conversion of cryptocurrency into fiat currency.
Did Democrats use the now failed exchange to launder Ukrainian funds in the 2022 midterm elections? Is it nothing more than a conspiracy theory or, as Elon Musk said, “a question worth asking”?
The internet is awash with reports alleging that FTX was used as a Ponzi scheme involving Democrats and Ukraine, with US military aid invested in FTX rather than being used to fight Russia. The money was allegedly sent to Ukraine, which laundered it back to Democrats through FTX. This seems like a sensational story, but what exactly do we know?
Ukraine's deputy minister for digital transformation, Alex Bornyakov, denied this claim in his tweet, "Ukraine's gov never invested any funds into FTX. The whole narrative that Ukraine allegedly invested in FTX, who donated money to Democrats is nonsense, frankly," emoji-ing a facepalm.
Ukraine's exchanged crypto donations cannot be traced financially. The timing of SBF's donations to Democrats supports this theory indirectly. Following the Ukraine partnership, the amounts he donated to Democrats increased dramatically.
As reported by Politico in April 2022, Protect Our Future, a super PAC that supports candidates who take a long-term view of policy planning, received $13 million from Sam Bankman-Fried, and $1 million from FTX’s engineering director Nishad Singh.
In May 2022, two months after the start of FTX’s Ukrainian partnership, SBF said he would spend at least $100 million in the 2024 election, with a "soft ceiling" of $1 billion and with more spending likely if former President Trump runs again. However, he recently retracted this statement, saying, "That was a dumb quote."
In the meantime, several House Republicans have written to US Secretary of State Antony Blinken expressing concern about Ukrainian military aid being inappropriately invested in FTX.
Is trust in crypto even re-buildable now?
It remains to be seen how the investigations turn out and whether SBF will get away with this. As he pumped dozens of millions of dollars into the ruling party, many believe he won't be held accountable. Furthermore, he is in the Bahamas currently, where the US doesn't have jurisdiction to arrest him.
“The White House sanctions and arrests kids for the "crime" of building privacy tools to protect you, while "regulators" were quietly palling around with the thieves who just robbed 5 million people. The difference? The thieves were big political donors,” Edward Snowden tweeted in reference to the Tornado Cash developer.
FTX's importance to the crypto ecosystem went beyond its size. In an instant, billions of dollars vanished from the crypto market. More importantly, however, the crypto dream to displace the existing financial system was shattered when one of crypto’s most trusted voices turned out to be nothing but a crook who bilked customers of their funds and did shady deals.
This is arguably the worst FUD moment and the most shocking failure of an exchange since Mt Gox in 2014. The ripple effect has caused many crypto companies to go bust, further eroding confidence in a market already suffering a brutal downturn.
In an interesting twist, just when the trust in the decentralized crypto space is in tatters, Wells Fargo, Citigroup, Mastercard, and others, are launching a 12-week experimental digital dollar pilot with the New York Federal Reserve. The above-mentioned SEC Chair Gary Gensler is attending these meetings. Is SBF connected to this? We can only guess.
There’s one thing that is blindingly obvious: governments will use this debacle to stifle decentralized crypto market, cutting off alternative income streams and making people use traditional financial systems only. The crypto breathing space would probably be very limited. We will have to wait and see if exchanges or possibly some stablecoins will be targeted.
Final thoughts
We'll have to wait to see what happens next; more details are appearing at lightning speed, and some might not be included in this article. Investigations may uncover some inconvenient truths, or they may be suppressed altogether.
Our knowledge of the extent of the crypto market devastation is still fuzzy at this point, as we are still in the middle of the storm. One thing is for sure: SBF screwed things up. There is a feeling of frustration throughout the crypto world, like it has been shot in the back.
As a glimmer of hope, CZ said Binance is forming an industry recovery fund. He explained it is designed to assist strong projects facing liquidity problems: “Crypto is not going away. We are still here. Let's rebuild.”
That's strikingly different from SBF's oops moment: "I'm sorry. I f---ed up, and should have done better."
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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