Walking uncharted territory; rise and fall of FTX’s Sam Bankman-Fried

The $32 billion trading platform’ crash is believed to represent one of the biggest exchange failures.

Bankman Fried's investment and finance and business activities were profitable and made 8 million in net income in 2021, over 2000% more than it made in 2020. (Picture Courtesy: Reuters)
Bankman Fried's investment and finance and business activities were profitable and made $388 million in net income in 2021, over 2000% more than it made in 2020. (Picture Courtesy: Reuters)

Samuel Bankman-Fried, the founder and former CEO of cryptocurrency exchange FTX, was charged by the US government on Tuesday with a number of financial crimes. It has been alleged that he had the intention to defraud customers and investors to enrich himself and others associated with him. “The regulatory scrutiny faced by FTX is one of the reasons behind their fall. Some investors have grown cautious as a result of governments’ tightened regulatory frameworks,” Prayag Singh, co-founder, SOCLLY, a decentralised Web3.0 platform, told FE Blockchain.

According to prosecutors, in a 13-page indictment, Fried illegally diverted user funds to pay for costs, debts, and risky trades at the cryptocurrency hedge fund he founded in 2017, Alameda Research. Furthermore, funds were utilised by opulent real estate and made sizable political contributions. It is to be noted, Bankman was arrested on Monday in the Bahamas and remains in custody after being denied bail.

After causing much chaos, in the virtual assets and currencies market Bankman-Fried vanished. At the same time, his company filed for Chapter 11 bankruptcy protection on November 11 and 14.

Bankman-Fried and Zixiao “Gary” Wang co-founded the FTX trading platform in May 2019. Alameda Research, a cryptocurrency trading company established in 2017 by Bankman-Fried and others, was where was FTX formed. 

On November 9, Binance pulled out from the FTX deal. Bloomberg Billionaires Index, reported that his net worth fell by 94% in just one day to $991 million. 

On November 8, 2022, the whole scene changed as FTX crashed. All this is thanks to the Chinese cryptocurrency firm Binance. The largest cryptocurrency exchange just before the crash had made its intentions of acquiring FTX.  “The cryptocurrency world has seen these centralised entities’ failures. Likewise, Mt.Gox to FTX and multiple centralised exchanges, prove the importance and necessity of decentralisation and self-custody,” Akshay Bajaj, CEO, and co-founder, DeFiVerse, a cryptocurrency trading platform said.

On November 7, it was reported that FTX had gone through a liquidity crisis after the company sold its holdings in altcoin FTT, decimating the token’s real worth. Meanwhile, CoinDesk released a report stating that Bankman-Fried had used the FTT token as an asset for his trading business, Alameda Research. Soon after the release of the report, Changpeng Zhao, the founder of Binance, announced that the company would sell all of its FTT holdings, which caused the coin to lose over 85% of its value.

It is to be noted before his empire crumbled, former Sam Bankman-Fried, former CEO, FTX was among the richest people in the cryptocurrency sector. The $32 billion trading platform’s crash is believed to be the biggest failure of any exchange. John Ray III, current CEO of FTX, in a tweet on Tuesday, said that FTX’s collapse was a failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”Decentralised autonomous organisation (DAO) will be managing money collected for public goods. RWAs and non-fungible tokens along with decentralised finance (DeFi) will be the most appealing areas,” Vikas Singh, co-founder, Bliv Club, Web3.0 fintech platform, said. 

In the last two years, FTX’s valuation rose more than $10 billion. FTX managed $385 billion in annual cryptocurrency trading volume in 2020.

Furthermore, in August 2020, FTX acquired Blockfolio, a cryptocurrency portfolio tracking application for $150 million. This gave Blockfolio access to one of the largest cryptocurrency services for retail investors. Most of the mobile users that FTX has come from this application. At the time it claimed to have over one million users on its mobile and desktop platforms. FTX further tied up with several firms including Reddit to launch its tokenised community.

It is to be further noted that with the absence of any board of finance, Bankman Fried’s investment and finance activities were profitable. He made $388 million in net income in 2021, over 2000% more than he earned in 2020. Various reports had estimated Bankman Fried’s net worth to be valued at $26 billion this year, though he averaged around $10-$16 billion in the month of October. 

FTX resisted creating an official board of directors until January. Its main office was in the Bahamas and both the board of directors and audited financials were absent. The venture capitalists (VCs) who had invested in FTX did not receive board seats, and the company’s finances were a complete mess.

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First published on: 15-12-2022 at 08:00 IST
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