Sam Bankman Fried’s fall from grace has been catastrophic. Once considered the darling of the cryptocurrency world, the former CEO of FTX and Alameda Research co-founder now faces serious time behind bars on fraud charges.
FTX’s collapse sent shockwaves throughout the crypto industry. After allegedly stealing customer funds to fund his own high-risk trading firm, Sam Bankman Fried’s crypto empire is in ruin. As a result, crypto regulators are circling like sharks and Wall Street is more discouraged from entering the crypto market than ever.
How did we get here? What caused the FTX crash? What happens to FTX customer funds?
SBF’s net worth was once estimated at over $26 B, making him the world’s youngest crypto billionaire. Today, the former FTX founder is wanted by the federal court on criminal charges.
Let’s dive in and unpack the man behind the story: FTX founder Sam Bankman Fried.
Sam Bankman Fried Before Crypto
Sam Bankman Fried grew up in sunny California. SBF attended high school in Hillsborough, where he excelled in mathematics. Joseph Bankman and Barbara Fried, SBF’s parents, were both Professors of Law at Stanford University.
From an early age, Sam was a passionate and competitive learner. While other kids enjoyed their vacations, SBF enrolled in summer programmes and mathcamps for gifted students.
What Did Sam Bankman Fried Major In?
In 2010, Sam Bankman Fried enrolled at the Massachusetts Institute of Technology (MIT). He joined a network of fellow learners called Epsilon Theta at the University, eventually graduating in 2014 with a Bachelor’s Degree of Physics and a minor in mathematics.
During 2013, SBF made good use of the time and opportunities provided to him. As an intern at Jane Street Capital, SBF learnt the ropes of currency and derivatives trading. Following gradution, Sam returned to Manhattan, New York, to work for Jane Street Capital fulltime.
After leaving Jane Street Capital, SBF joined the Centre of Effective Altruism. Despite only a short stint at the company, it seems to have a been a formative moment in his career. Many of Sam’s later charitable donations were made in the name of effective altruism, a practical approach to finding the best methods to help others.
It was there he met Tara Mac Aulay, the Centre’s chief executive who would go on to be Sam’s co-founder at Alameda Research. At the time, Alameda was a smaller quantitative trading firm without much a reputation in the crypto market. Through Alameda Research, Sam successfully executed crypto trading at scale, mainly through bitcoin arbitrage trades.
Arbitrage crypto trading experts like Sam Bankman Fried made a small fortune thanks to the ‘Kimchi Premium’. In 2018, bitcoin and other digital currencies would often trade at higher prices on cryptocurrency exchanges based in South Korea and Japan.
Buying bitcoin on a global exchange like Binance, then selling at a premium in South Korea was an easy trade. SBF amassed a small fortune, which would eventually lead to creation of his own crypto company.
The Birth of FTX
The crypto exchange FTX was founded by Sam Bankman Fried and co-founder Gary Wang in May 2019. FTX was notably separated into two distinct entities, FTX and FTX US. The global arm of the FTX crypto company was based in the Bahamas.
FTX was one of the crypto industry’s largest exchanges with Sam Bankman Fried’s kind and relatable public persona on display. Despite being one of the world’s youngest billionaires, SBF presented a humble image. For example, he always drove an old Toyota Corolla and regularly donated to charity and polictical groups.
The crypto company went on the secure blockbuster celebrity endorsements. These included household names like Tom Brady and Shaquille O’Neal, who helped promote the FTX brand and FTT tokens, the exchange’s native cryptocurrency. FTX even secured naming rights to the Miami Heat’s home court stadium.
Sam Bankman Fried was considered a thought leader and ambassador, fighting for the adoption and progress of crypto worldwide. The 30-year-old was well-respected amongst regulators. Mainstream news outlets like CNBC and the New York Times heralded SBF as crypto savior after surviving market downturns and bailing out insolvent lenders like Blockfi.
Where did it all go wrong for Sam Bankman Fried, FTX and Alameda Research?
What Caused the FTX Crash?
The sustained cryptocurrency bear market of 2022 was not kind to anyone. Between Do Kwon’s Terra Luna Crash and the cascading bankruptcies of crypto companies like Three Arrows Capital, Celsius and Voyager, the crypto industry suffered significant losses. Despite this, other crypto exchanges like Binance have weathered the storm. Why was FTX insolvent?
Alledgedly, the lines and accounts seperating the FTX crypto exchange and Alameda Research were blurred. Evidence suggests that Sam Bankman Fried and Caroline Ellison opened a backdoor between the two companies. Effectively, FTX customer funds were being used to fund Alameda’s trading strategies. According to Coindesk, Alameda Research was secretly exempt from liquidation. This may have resulted in trapped positions spiralling out of control.
Despite presenting a humble lifestyle, Sam Bankman Fried and other FTX employees enjoyed a luxurious Bahamian lifestyle. SBF regularly hosted extravagent parties at his $30M penthouse in the Bahamas, alledgedly funded by FTX customer funds and deposits.
Rumours that FTX was insolvent started circulating when the Alameda Research balance sheet got leaked in Q4 2022. According to the leak, FTX and Alameda assets were made up primarily of illiquid digital currencies like the FTT token and other proprietry ‘Samcoins’ like SERUM and MAPS. Essentially, FTX wouldn’t be able to handle a high volume of customer withdrawals.
As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books. 1/4— CZ 🔶 Binance (@cz_binance) November 6, 2022
Changpeng ‘CZ’ Zhao was the final nail in the coffin for FTX. On November 6, Zhao announced that Binance would be liquidating their remaining holdings of FTT tokens. This started a panicked bank run that ultimately spelled doom for the FTX crypto exchange. Without the liquidity or funds to meet the withdrawal demands, FTX’s insolvency was exposed.
Sam Bankman Fried stood down as the CEO of the FTX crypto exchange and announced the company’s bankruptcy on November 11. His replacement, John J Ray III, claims he has never seen “such a complete failure of corporate controls and such a complete absence of trustworthy financial information”.
Fried Pleads Not Guilty
Despite an estimated $8B hole in the FTX balance sheet, Sam Bankman Fried denies the criminal charges. In an interview with the New York Times, SBF claimed he “did not knowingly commingle funds”, or had any involvement in the financial decision making at Alameda Research.
If Sam Bankman Fried was found guilty of the charges laid by US Federal Prosecutors, he would face up to a maximum of 115 years in prison.
On the Flipside
- Sam Bankman Fried, Alameda Research and FTX Ventures provided plenty of early stage funding to emerging projects in the crypto industry. Some of the crypto spaces’ largest blockchains, like Solana and Aptos, might not have achieved their success without SBF’s support.
Why You Should Care
The rise of fall of Sam Bankman Fried and the FTX collapse serve as an important reminder about self custody. There are always risks associated with storing your crypto on a centralized exchange.
As the saying goes: Not your keys, not your crypto.
Why is FTX Famous?
Founded by Sam Banman Fried in 2019, FTX is one of the world’s largest cryptocurrency exchanges. In November 2022, FTX was exposed for insolvency and was declared bankrupt.
Who are Sam Bankman Fried’s Parents?
Sam Bankman Fried’s parents are Joseph Bankman and Barbara Fried, former Law Professors at Stanford University, California.
What did Sam Bankman Fried Major in?
Sam Bankman Fried attended the Massachusetts Institute of technology, where he graduated with a Bachelor of Physics and minor in Mathematics.
How much is FTX worth?
At the beginning of 2022, the FTX crypto exchange was valued at $32 billion USD. FTX has since declared Chapter 11 bankruptcy.
Who is FTX owned by?
The FTX cryptocurrency exchange is owned by co-founders Sam Bankman Fried and Gary Wang.
Is FTX Regulated in the US?
The FTX Company operates as two separate entities. FTX US is regulated in the US, while FTX Global is regulated in the Bahamas.
How does FTX Make its Money?
The FTX cryptocurrency exchange primarily makes money by collecting trading fees from users.