Sam Bankman-Fried (SBF) is second only to George Soros in donations to Democrats for the 2021–22 cycle to the tune of $39.8 million. FTX, the exchange he founded that made him billions, is now bankrupt, and account holders are left out in the cold. The perpetually scruffy if not disheveled former billionaire and his brother Gabe, a former Democratic congressional staffer, visited President Joe Biden at the White House several times. SBF’s political contributions are already helping him avoid accountability for the crypto collapse, highlighted by a soft-focus New York Times interview with the critical edge one would expect of a school lunch lady whose cashbox came up short.
On Nov. 15, a Senate Banking Committee hearing revealed the differing views of the FTX collapse that are based on party affiliation. CoinDesk, a news site devoted to cryptocurrency, reported: “Democrats hail their financial regulators as heroes whose caution saved the disaster from threatening the wider financial system, and Republicans argue it proves resistant agencies chased crypto firms away from the U.S. and into dangerous, unregulated territory.” That story started the trickle that became the flood leading to FTX’s bankruptcy filing.
Crypto Sleight of Hand
On Nov. 2, CoinDesk described a leaked document detailing that SBF’s hedge fund, called Alameda Research, held billions in assets of a cryptocurrency created by FTX. Crypto reporter Ian Allison wrote: “While there is nothing per se untoward or wrong about that, it shows Bankman-Fried’s trading giant Alameda rests on a foundation largely made up of a coin that a sister company invented, not an independent asset like a fiat currency or another crypto.”
Enter Binance, the world’s largest crypto exchange and competitor of FTX. It announced in response to the leak it would dump more than $2 billion worth of the FTX cryptocurrency, creating a double-run on the exchange. First, coin holders rushed to sell and beat the flood of supply and decimation of value the Binance sell-off would yield. That frenzy then made the entire exchange vulnerable to failure, no matter the asset. Like an old-fashioned bank run, account holders in the know got assets off the exchange immediately. Bankman-Fried told staff that $6 billion was withdrawn in 72 hours. Those who didn’t get out early are now at the mercy of the Delaware bankruptcy courts.
Bankman-Fraud
Sam Bankman-Fried (Photo by Alex Wong/Getty Images)
Bankman-Fried made a small fortune trading in Bitcoin and turned it into a large one by establishing an exchange to profit from others’ trades in cryptocurrency. Is he now a criminal or a victim of circumstance? Reports suggest he stole billions in deposits from FTX for trading at Alameda. If you get your news from The Times, you might think he’s a pretty swell guy who got in over his head. In an interview with the paper, we learn the “Crypto King” is not having trouble sleeping and is playing a favorite video game to relieve stress. Matt Novak of Gizmodo wrote: “[T]he interview with SBF, as he’s often called, is presented with such a gauzy lens that you have to start wondering what the hell is going on with crypto reporting at the Times.”
The son of two Stanford law professors with a degree in physics from MIT, Bankman-Fried was building a reputation as a progressive political superstar. Given the financial havoc he has visited on just about every cryptocurrency holder, he would seem to be a valid target of criticism. Instead, “[i]t reads like if the Times had conducted an interview with Bernie Madoff after his Ponzi scheme collapsed and ultimately suggested he just made some bad investments.”
Yeah, but still…
Progressive media outlet Vox published an interview with Mr. Bankman-Fried on Wednesday, November 16. Conducted via Twitter direct messages, the disgraced Democratic donor said he had “2 weeks to raise $8b” in a bizarre exchange where he is blasé and slightly contrite. SBF said his “biggest single f-------” was filing for bankruptcy. Asked if he only saw talking about ethics (which he often did) as a game, he said “ya,” “hehe,” and “it’s what reputations are made of, to some extent.”
One positive outcome from this scandal could be that regulators finally act to allow domestic financial institutions to offer various crypto-based products. The blame here lies with Presidents Obama, Trump, and Biden who could have – and should have – directed the Securities and Exchange Commission to issue regulations clearing the way for US-based operations. Brian Armstrong, co-founder and CEO of Coinbase, another crypto trading platform, addressed the issue in response to recent events, saying, “regulators have refused to provide clear, sensible regulations for crypto that would protect consumers.” He said developers of crypto-based financial products legal in traditional financial markets “are all but outlawed in the U.S.”
“Entrepreneurial teams building new decentralized products are afraid to build out of the U.S. for fear of litigation. They don’t want to break the rules, and right now they don’t know what the rules are.
As a result, American consumers and advanced traders alike have been engaging with risky, offshore platforms outside the jurisdiction — and protection — of U.S. regulators. Today, more than 95% of crypto trading activity happens on overseas exchanges.”
The fallout from Bankman-Fried’s fraud is still making its way through the markets. BlockFi, a cryptocurrency lender, is preparing to file for bankruptcy protection due to “significant exposure” to FTX. Bankman-Fried is under investigation by the SEC and the Department of Justice. There may be more than one million creditors vying for a chance to recoup their funds from the bankruptcy court.
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