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It’s Worse Than We Thought

Former FTX CEO and crypto golden boy has been arrested for fraud, leaving the crypto market at an impasse.

According to prosecutors, Sam Bankman-Fried lied from the start of his company. Although Mr Bankman-Fried became a billionaire very quickly, the founding of FTX, his cryptocurrency exchange, only happened in 2019. From the start, prosecutors posit that the CEO used customer deposits to buy real estate, finance political activities, and invest in other companies. Essentially, the charge is that Mr Bankman-Fried ran crypto’s largest Ponzi scheme.

From the beginning, FTX’s customers were deceived about how the exchange was handling their billions of dollars. Specifically, civil and criminal charges maintain that FTX engaged in widespread fraud regarding their business structure and dealings. As FTX collapsed, the exchange did not keep customers abreast of what was happening, intentionally keeping their hundreds of thousands in the dark. To make matters worse, Mr Bankman-Fried claimed that their money was safe, which has since been revealed to be a lie.

The Arrest

Because the United States has an extradition agreement with the Bahamas, where FTX is based, police in the island nation arrested him Monday evening. In previous weeks, when details of FTX’s collapse stunned the industry, there were immediate calls to arrest the CEO. According to the CEO, “Bankman-Fried was orchestrating a massive, yearslong fraud, diverting billions of dollars of the trading platform’s customer funds for his own personal benefit and to help grow his crypto empire”. The CEO is only 30 years old, and just a month ago, he was considered by many to be the golden boy of the crypto industry. FTX had celebrity endorsements from Tom Brady and Stephen Curry, and their express goal was to bring crypto to the American mainstream.

The SEC’s civil complaint alleges that Mr Bankman-Fried lied to dozens of major VC firms by saying that he raised nearly 2 billion USD since the company’s founding. Regulators also accuse the CEO of misleading investors about the financial health of FTX and its sister company, Alameda Research. Alameda is a crypto trading platform that Mr Bankman-Fried cofounded. It seems that everybody was misled about the nature of the relationship between the two companies, especially since Alameda used FTX’s coffers like an ATM machine to fund its ventures. But when the crypto market started struggling earlier this year, lenders to Alameda demanded repayment of their loans, forcing FTX to take even more money from its customers to back Alameda’s debts. Keeping its sister company afloat was only tenable until customers began withdrawing their money in droves in the fall, leading to an 8 billion USD gap that FTX could not fill. The downfall of FTX may end up being the downfall of mainstream crypto in the United States.