Crypto? Sam Bankman-Fried? News Section Editor Zoe van der Merwe delves into the collapse of FTX and its implications for people and businesses across the globe.
In December 2022, US prosecutors charged founder and former CEO of FTX, Sam Bankman-Fried, with numerous financial crimes and violations. The indictment stated that from 2019, Bankman-Fried intentionally defrauded FTX customers and investors, diverting their money to pay off his own expenses. [1]
Bankman-Fried was arrested in the Bahamas and subsequently extradited back to the US, a month after FTX filed for bankruptcy. He was charged with eight criminal violations, with the Justice Department alleging he committed “one of the biggest financial frauds in American history.” [2]
Prior to his downfall, Bankman-Fried was one of the wealthiest people in the world with an estimated net worth of 32 billion US dollars. Nicknamed the ‘King of Crypto’, he was known for efforts to legitimise and regulate the world of cryptocurrency. He often made substantial donations to charity and publicly used his money to help support struggling businesses.
Shortly before his arrest on December 12, Bankman-Fried claimed he never “knowingly” misused customer funds. [3] However, the Securities and Exchange Commission (“SEC”) challenged this assertion, arguing that he used funds siphoned to affiliate company Alameda Research, “as his personal piggy bank to buy luxury condominiums, support political campaigns, and make private investments, among other uses.” The SEC allege he built FTX on a “foundation of deception,” raising more than 1.8 billion dollars from investors all the while promoting FTX as “one of the safest buildings in crypto.” [4]
Bankman-Fried now owes investors and customers billions of dollars he is unable to pay back. Here in Australia alone, 30,000 customers have seen their life savings drained, with doubt any money will ever be recovered. [5] Other crypto firms and exchanges have also been forced to close, with more customers withdrawing their funds as a result of the unstable market.
Two of Bankman-Fried’s former colleagues Caroline Ellison, former CEO of Alameda, and Gary Wang, co-founder of FTX, both pleaded guilty to varying charges of fraud on December 19. [6]
Sam-Bankman Fried, despite his arrest, was granted bail on December 21 with a record high bond of 250 million US dollars. He now faces house arrest while awaiting his upcoming trial. [7]
Chief executive, John Ray, who was named CEO of FTX after Bankman-Fried stepped down, is now overseeing the restructuring of the company. He stated that he had “never seen such an utter lack of record keeping”. [8] With no independent board to oversee company decisions and no internal controls, he compared Bankman Fried’s company practices to “old-fashioned embezzlement.” [9]
The FTX scandal has raised the call for clearer regulatory action in the cryptocurrency exchange. Paul Mazzola, a former international banking executive turned financial researcher, argues that reporting and governance requirements and conflict of interest rules should become prioritized. However, he adds that the regulatory changes to the world of crypto must be introduced with careful consideration as to prevent stifling innovation. [10]
[1] “Cryptocurrency FTX ex-CEO Sam Bankman-Fried Charged with Conspiracy to Commit Fraud After Bahamas Arrest.” ABC News, 13 Dec 2022, https://www.abc.net.au/news/2022-12-13/ftx-cryptocurrency-sam-bankman-friedcharged-with-fraud/101769030.
[2] Groch, Sherryn. “How Did FTX Go Bust – and What Does It Mean for Crypto?.” The Sydney Morning Herald, 22 Dec 2022, https://www.smh.com.au/business/banking-and-finance/how-did-ftx-go-bust-and-what-does-it-mean-forcrypto-20221216-p5c6zo.html.
[3] Ibid.
[4] Ibid.
[5] Ibid.
[6] Ibid.
[7] “FTX Founder Released to Parents on $250m Bail.” BBC News, 23 Dec 2022, https://www.bbc.com/news/business-64068810.
[8] Ibid.
[9] Ibid.
[10] Ibid.