It’s only been a year since FTX imploded. In its heyday the exchange was one of the largest in the world, with millions of clients and billions of dollars in client funds. It was seen as the future of crypto – a high-tech offering of shiny wonder that wanted to play nice with regulators and usher in an era in which the industry went mainstream. But on November 2, 2022, CoinDesk, a crypto news outlet, published a leaked balance sheet. It showed that Alameda, FTX’s sister hedge fund also founded by Mr. Bankman-Fried, held few assets other than a handful of illiquid tokens he invented. Frightened customers began pulling properties from the exchange. Within days it became full and FTX stopped meeting withdrawal requests. Customers still had $8 billion deposited on the exchange. After frantically trying to raise funds, Mr. Bankman-Fried put FTX into bankruptcy.
Later, various reports emerged about what went wrong. Many came from Mr. Bankman-Fried himself, who spoke to dozens of journalists in the weeks following the FTX collapse. Michael Lewis, an author who was “embedded” with Mr Bankman-Fried for weeks before and after it failed, has published a book about him. Chips came from people tracking the movement of tokens on blockchains. The government has revealed its theory of the case in several indictments. But little compares to the reams of evidence that were revealed during the trial by former FTX insiders, some of whom testified in cooperation with the government, who have already pleaded guilty to fraud.
Some of the story remains the same regardless of the narrator. Mr Bankman-Fried was a gifted mathematician who graduated from the Massachusetts Institute of Technology (MIT) in 2014 before working as a trader at Jane Street Capital, a prestigious quantitative hedge fund. In 2017 he spied an opportunity to set up a fund that would take advantage of arbitrage opportunities in illiquid and fragmented crypto markets, which were, in his telling, “a thousand times larger” than those in traditional markets. He enlisted an old friend. , Gary Wang, a coder he met at math camp, to help set up the foundation he called Alameda Research. He hired Nishad Singh, another coder and friend, as well as Caroline Ellison, a businessman he met on Jane Street. .
The stories start to diverge from here. Ms. Ellison, Mr. Singh and Mr. Wang all testified for the prosecution in the trial, speaking for hours about their version of the dizzying rise and devastating collapse of Alameda and FTX.
As Ms. Ellison described it, Mr. Bankman-Fried was frustrated by how little capital Alameda had. He was “very ambitious”. In 2019 he described FTX to Ms. Ellison as “a good source of capital” for Alameda. Mr. Wang testified that he wrote code that allowed Alameda to have a negative balance in FTX—to withdraw more than the value of its assets—as early as 2019. Alameda received a line of credit that started small but eventually increased to $65 billion. . Mr. Wang also said he overheard a conversation in which a businessman asked Mr. Bankman-Fried if Alameda could continue to withdraw money from the company. OK, as long as withdrawals were less than FTX’s trading income, came the answer. But less than a year after FTX was founded, when Mr. Wang went to check its balance sheet, Alameda had already pulled back more than that.
Customer deposits are supposed to be sacred, can be withdrawn at any time. But even months later, Alameda already seemed to be borrowing that money for its own purposes. Mr. Bankman-Fried said he set up FTX because he thought he could create a great futures exchange, rather than satisfy a desire for capital. He explained away Alameda’s privileges by saying he was only vaguely aware of them and thought they were necessary for FTX to work, especially in the early days when Alameda was by far the largest market maker on the exchange and there were sometimes bugs in the code that liquidated . accounts If Alameda were liquidated it would be catastrophic. Mr. Bankman-Fried didn’t want that to happen, and he wanted the fund to be able to make markets.
This might have been an excuse a jury could swallow, even though, before last year, Alameda was only one of perhaps 15 major market makers on the exchange and the others received no such benefits. But two lines of argument undermined it. The first is how the privileges were used. The second is how Mr. Bankman-Fried described FTX and its relationship with Alameda.
Start with how Alameda used its privileges. Ms. Ellison, whom Mr. Bankman-Fried made co-CEO of Alameda in 2021 when he stepped down to focus on his exchange, described the many times Alameda withdrew serious money from FTX. The first was when Mr. Bankman-Fried wanted to buy a stake in FTX, which Binance, a rival, owned. His relationship with the head of Binance soured and he worried that regulators would not like its involvement. It will cost about $1 billion to buy the stake, about the same amount of capital that FTX has raised from investors. Ms. Ellison said she told Mr. Bankman-Fried “we really don’t have the money” and that Alameda would need to borrow from FTX to make the purchase. He told her to do it – “that’s okay, I think this is really important. .”
Borrowing to cover venture investments that were illiquid made the hole deeper. At the end of 2021, however, Mr. Bankman-Fried wanted to make another $3 billion in investments. He asked Ms. Ellison what would happen if the value of stocks, cryptocurrencies and venture capital collapsed and, moreover, FTX and Alameda struggled to secure more funds. She calculated that it would be “almost impossible” for Alameda to pay back what they had borrowed. However, he told her to continue the investment. By the next summer, Ms. Ellison was proven right.
Mr. Singh testified at length about “excessive” spending. About $1 billion went on marketing, including Super Bowl ads and endorsements from the likes of Tom Brady, an American football player—roughly the same as FTX’s revenue in 2021. Ultimately, Alameda had made about $5 billion in “relative” loans to Mr Bankman-Fried, Mr Wang and Mr Singh to cover project investments, real estate purchases and personal expenses. At one point, under cross-examination, Danielle Sassoon, the prosecutor, asked Mr. Bankman-Fried to confirm whether he had flown to the Super Bowl on a private jet. When he said he wasn’t sure, she drew a picture of him lying in the plush interior of a small plane. “It was a chartered plane, at least,” he shrugged.
The prosecution often used Mr. Bankman-Fried’s own words against him. Ms. Sassoon would have Mr. Bankman-Fried say whether he agreed with a statement, such as whether he was removed from business decisions at Alameda. Mr. Bankman-Fried would obfuscate, but eventually she would pin him. “In general I didn’t make business decisions, but I wasn’t removed from information from Alameda,” he admitted. Ms. Sassoon then played a clip of him claiming that he “is completely out of business at Alameda.” Ms. Sassoon did this over and over again. Like an archer she would string her bow asking a question, then release the arrow of evidence to prove a lie. Sometimes his lawyer slowed the pace of evidence by interrupting and asking if a document was offered for its truth. “Your honor, it’s the defendant’s statements,” the prosecutor said. “No, it is not offered for its truth.”
Perhaps the most compelling moments of the trial were emotional. Ms Ellison was in tears as she told how, in the week of the FTX collapse, “one of the feelings I had was an overwhelming sense of relief.” Meanwhile, Mr Singh described a cinematic confrontation with Mr Bankman-Fried in September last year when he realized how big “the hole” was. He described pacing the balcony of the penthouse (cost: $35 million) where many FTX employees lived, expressing dismay that some $13 billion in customer money had been borrowed, much of which could not be repaid. In response, Mr. Bankman-Fried, resting on deck, replied: “That’s right. We’re a little short on deliveries.”
As customers rushed to get their money in the week FTX collapsed, employees quit in droves. Adam Yedidia, one of Mr Bankman-Fried’s friends and employees, who has not been charged with any crimes and was apparently in the dark, texted him: “I love you Sam, I’m not going anywhere.” Days later, when he learned the reality of what had happened, he was gone. Many of those who were close to Mr. Bankman-Fried and knew what was going on, foresaw how it would end—those who did not, horrified when they found out. So there was the jury.
(The story was first published on 3 November 2023)
© 2023, The Economist Newspaper Limited. All rights reserved.
From The Economist, published under license. The original content can be found at www.economist.com
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Published: 30 Mar 2024, 21:30 IST