WHY THE FTX COLLAPSE HAS PLUNGED THE CRYPTO WORLD INTO UPHEAVAL
The Securities and Exchange Commission on Tuesday charged Sam Bankman-Fried with fraud, the latest development in the spectacular collapse of a former high-flying cryptocurrency executive who had spent lavishly on advertising and political donations as he attempted to transform finance.
Bankman-Fried was arrested Monday in the Bahamas after U.S. prosecutors filed another indictment against him. He had been scheduled to testify before Congress on Tuesday morning.
Police arrested Bankman-Fried “without incident” just after 6 p.m. at his apartment complex in Nassau, Bahamas, according to a statement from the Royal Bahamas Police Force. He will appear in Bahamian court Tuesday.
The arrest and charges mark a major step in the investigations into Bankman-Fried and FTX. The founder and his company have been under intense scrutiny since November, when, over a period of several days he first sought a bailout from a competing exchange and then filed for bankruptcy after FTX was unable to honor customers’ withdrawal requests.
The company owes its creditors at least $3 billion, according to bankruptcy filings, and investigators have sought answers on whether it used customer funds to lend money to Bankman-Fried’s investment arm, Alameda Research.
The arrest came at the request of the U.S. government, U.S. Attorney Damian Williams said in a statement. “We expect to move to unseal the indictment in the morning and will have more to say at that time.”
The SEC’s charges were expected after Bankman-Fried’s arrest, the agency said in a tweet Monday night.
“We allege that Sam Bankman-Fried built a house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto,” SEC Chair Gary Gensler said in a statement when charges were announced. “The alleged fraud committed by Mr. Bankman-Fried is a clarion call to crypto platforms that they need to come into compliance with our laws.
Bankman-Fried was slated to testify in front of the House Financial Services Committee on Tuesday. Rep. Maxine Waters (D-Calif.), who heads the committee, said in a statement the arrest will stop that from happening.
“The public has been waiting eagerly to get these answers under oath before Congress, and the timing of this arrest denies the public this opportunity,” Waters said. “Although Mr. Bankman-Fried must be held accountable, the American public deserves to hear directly from Mr. Bankman-Fried about the actions that’ve harmed over one million people, and wiped out the hard-earned life savings of so many.”
Rep. Lee Zeldin (R-N.Y.), a member of the House panel, tweeted Monday night that his committee was “ready to grill” Bankman-Fried “six ways to Sunday.” Zeldin still wanted that opportunity: “Why not allow him to 1st testify tomorrow and answer our many questions?” he wrote on Twitter.
The Bahamas and the United States have an extradition treaty agreeing to hand over people who have been charged with crimes that are illegal in both countries, but it’s unclear how long it might be before Bankman-Fried is turned over to U.S. authorities.
At least one legal expert does not expect a long waiting period.
“The Bahamas may be a place people go to get shelter and try to avoid getting dragged back to their home country,” said Carl Tobias, a professor at the University of Richmond School of Law. “But the Southern District of New York is the gold standard, and if they’re on this, I think it’s unlikely the Bahamas can get one past them for too long.”
A spokesperson for Bankman-Fried declined to comment. Spokespeople for the prime minister of the Bahamas, the attorney general of the Bahamas and the House Financial Services Committee did not respond to requests for comment.
Bankman-Fried has spent the past few weeks in his Bahamas estate, giving numerous interviews to reporters and making dozens of social media posts trying to explain how his company went from being one of the biggest and most-respected crypto exchanges to filing for bankruptcy.
Bankman-Fried has said he made grave mistakes but has denied any malicious wrongdoing.
“Look, I screwed up. I was the CEO of FTX. I say this again and again. That means I had a responsibility. We messed up big,” he said in a live-streamed interview with the New York Times last month. Bankman-Fried’s lawyers had discouraged him from appearing, he said.
The chief executive brought in to handle the restructuring, John J. Ray, has described a chaotic environment at FTX with “a complete absence of trustworthy financial information.” In prepared remarks for the congressional testimony, Ray said his initial investigation of the company showed “gross mismanagement, excessive leverage” and “failures of internal controls.”
The unraveling of FTX comes as the overall crypto market is floundering, and the situation has increased scrutiny of the entire industry.
Crypto assets have lost huge amounts of their value over the past year, as the potential for a recession, higher interest rates and high-profile collapses of crypto companies prompt people to withdraw the money they invested during the crypto bull market.
Bitcoin and ethereum, the two most popular crypto currencies, are both down around 65 percent for the year.
Bankman-Fried’s arrest is made more pointed by his longtime reputation as a savior of troubled crypto companies. When firms began collapsing in the spring and early summer, FTX would often spring to their rescue, offering bailout money to companies like digital brokerage Voyager and crypto lender BlockFi. “We take our duty seriously to protect the digital asset ecosystem and its customers,” Bankman-Fried tweeted at the time.
Now, those companies are in trouble, too. Voyager wound up declaring bankruptcy in July but FTX won a bid to buy its assets for $1.4 billion several months later. In the wake of the FTX bankruptcy, that deal was called off. BlockFi filed for bankruptcy in late November after it no longer had access to the credit FTX had extended.
Bankman-Fried founded FTX in 2019 as an exchange that made money by facilitating trades of cryptocurrencies and taking transaction fees. As the crypto boom unfolded and prices for bitcoin, ethereum and dozens of smaller tokens and coins exploded, the company grew to a valuation of $32 billion and received funding from major investors such as venture capital firm Sequoia and the Ontario Teachers’ Pension Plan.
As Bankman-Fried, who owned the majority of FTX, saw his own net worth balloon, he amassed political influence as well. He was the second-largest Democratic donor in the 2022 midterm elections. Before FTX’s collapse, Bankman-Fried frequented Capitol Hill, urging lawmakers to regulate the crypto industry. This put him at odds with other crypto industry leaders who oppose government intervention.
He was also a major proponent of effective altruism and longtermism — philanthropic ideologies that emphasize efficiently using money to help others and considering the impact of philanthropic projects on the lives of future humans who aren’t born yet. He also poured millions into pandemic prevention initiatives.
Many of the charities and organizations that had taken money from him were left in the cold after his company collapsed and his fortune evaporated.
CREDIT: THE WASHINGTON POST
