Samuel Bankman-Fried’s poster in downtown San Francisco.
MacKenzie Sigalos | CNBC
The Kimchi Swap put Sam Bankman-Fried on the map.
The yr was 2017, and the ex-Jane Street Capital quant dealer observed one thing humorous when he appeared on the web page on CoinMarketCap.com itemizing the worth of bitcoin on exchanges world wide. Today, that worth is just about uniform throughout the exchanges, however again then, Bankman-Fried beforehand instructed CNBC that he would typically see a 60% distinction within the worth of the coin. His instant intuition, he says, was to get in on the arbitrage commerce — shopping for bitcoin on one change, promoting it again on one other change, after which incomes a revenue equal to the worth unfold.
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“That’s the lowest hanging fruit,” Bankman-Fried mentioned in September.
The arbitrage alternative was particularly compelling in South Korea, the place the exchange-listed worth of bitcoin was considerably greater than in different international locations. It was dubbed the Kimchi Premium – a reference to the standard Korean aspect dish of salted and fermented cabbage.
After a month of personally dabbling out there, Bankman-Fried launched his personal buying and selling home, Alameda Research (named after his hometown of Alameda, California, close to San Francisco), to scale the chance and work on it full-time. Bankman-Fried mentioned in an interview in September that the agency typically made as a lot as 1,000,000 {dollars} a day.
Part of why SBF, as he is additionally known as, earned avenue cred for finishing up a comparatively simple buying and selling technique needed to do with the truth that it wasn’t the best factor to execute on crypto rails 5 years in the past. Bitcoin arbitrage concerned organising connections to every one of many buying and selling platforms, in addition to constructing out different difficult infrastructure to summary away quite a lot of the operational features of creating the commerce. Bankman-Fried’s Alameda grew to become excellent at that and the cash rolled in.
From there, the SBF empire ballooned.
Alameda’s success spurred the launch of crypto change FTX within the spring of 2019. FTX’s success begat a $2 billion enterprise fund that seeded different crypto companies. Bankman-Fried’s private wealth grew to over $16 billion at its peak in March.
Bankman-Fried was all of a sudden the poster boy for crypto all over the place, and the FTX emblem adorned every little thing from Formula 1 race automobiles to a Miami basketball enviornment. The 30-year-old went on an infinite press tour, bragged about having a stability sheet that would in the future purchase Goldman Sachs, and have become a fixture in Washington, the place he was one of many Democratic social gathering’s prime donors, promising to sink $1 billion into U.S. political races (earlier than later backtracking).
It was all a mirage.
As crypto costs tanked this yr, Bankman-Fried bragged that he and his enterprise had been immune. But in reality, the sector-wide wipeout hit his operation fairly arduous. Alameda borrowed cash to spend money on failing digital asset companies this spring and summer time to maintain the trade afloat, then reportedly siphoned off FTX clients’ deposits to stave off margin calls and meet instant debt obligations. A Twitter battle with the CEO of rival change Binance pulled the masks off the scheme.
Alameda, FTX and a number of subsidiaries Bankman-Fried based have filed for chapter safety in Delaware. He’s stepped down from his management roles and misplaced 94% of his private wealth in a single day. It is unclear precisely the place he’s now, as his $40 million Bahamas penthouse is reportedly up on the market. The photographs of his face plastered throughout FTX ads all through downtown San Francisco function an unwelcome reminder of his rotting empire.
It was a steep fall from hero to villain. But there have been quite a lot of indicators.
Bankman-Fried instructed CNBC in September that one in all his basic ideas with regards to enjoying the markets is working with incomplete data.
“When you can sort of start to quantify and map out what’s going on, but you know there are a lot of things you don’t know,” he mentioned. “You know you’re being approximate, but you have to try to figure out what trade to do anyway.”
The following account relies on reporting from CNBC, Bloomberg, the New York Times, the Wall Street Journal, and elsewhere. Piecing collectively bits and items from numerous information sources paints an image of an investor who over-extended himself, frantically moved to cowl his errors with questionable and maybe unlawful techniques, and surrounded himself with a decent cabal of advisors who couldn’t or wouldn’t curb his worst impulses.
What went unsuitable within the final yr
At some level within the final two years, in accordance with experiences, Alameda started borrowing cash for numerous functions, together with to make enterprise investments.
Six months in the past, a wave of titans within the crypto sector folded as depressed token costs sucked liquidity out of the market. First got here the spectacular failure of a preferred U.S. dollar-pegged stablecoin undertaking — the stablecoin referred to as terraUSD (or UST, for brief) and its sister token luna — wiping out $60 billion. That collapse helped to bring down Three Arrows Capital, or 3AC, which was one of the industry’s most respected crypto hedge funds. Crypto brokers and lenders like Voyager Digital and Celsius had significant exposure to 3AC, so they fell right along with it in quick succession.
The big problem was that everyone was borrowing from one another, which only works when the price of all those crypto coins keeps going up. By June, bitcoin and ether had both tumbled by more than half for the year.
“Leverage is the source of every implosion in financial institutions, both traditional and crypto,” said Hart Lambur, a former Goldman Sachs government bond trader who provided liquidity in U.S. Treasuries for central banks, money managers and hedge funds.
“Lehman Brothers, Bear Stearns, Long-Term Capital, Three Arrows Capital and now FTX all blew up due to bad leverage that got sniffed out and exploited by the market,” continued Lambur, who now works in decentralized finance.
As the dominoes fell, SBF jumped into the mix in June to try to bail out some of the failing crypto firms before it was too late, extending hundreds of millions of dollars in financing. In some cases, he made moves to try to buy these companies at fire-sale prices.
Amid the wave of bankruptcies, some of Alameda’s lenders asked for their money back. But Alameda didn’t have it, because it was no longer liquid. Bankman-Fried’s trading firm had parked the borrowed money in venture investments, a decision he told the Times was “probably not really worth it.”
To meet its debt obligations, FTX borrowed from customer deposits in FTX to quietly bail out Alameda, the Journal and the Times reported. The borrowing was in the billions. Bankman-Fried admitted the move in his interview with the Times, saying that Alameda had a large “margin position” on FTX, but he declined to disclose the exact amount.
“It was substantially larger than I had thought it was,” Bankman-Fried told the Times. “And in fact the downside risk was very significant.”
Reuters and the Journal both reported that the lifeline was around $10 billion, and Reuters reports that $1 billion to $2 billion of that emergency financing is now missing. Tapping customer funds without permission was a violation of FTX’s own terms and conditions. On Wall Street, it would be a clear violation of U.S. securities laws.
The two firms – one of the world’s biggest crypto brokers and one of the world’s biggest crypto buyers – were supposed to be separated by a firewall. But they were, in fact, quite cozy, at one point extending to a romantic relationship between Bankman-Fried and Alameda CEO Caroline Ellison, he acknowledged to the Times.
“FTX and Alameda had an extremely problematic relationship,” Castle Island Venture’s Nic Carter told CNBC. “Bankman-Fried operated both an exchange and a prop shop, which is super unorthodox and just not really allowed in actually regulated capital markets.”
The borrowing and lending scheme between the two firms was more convoluted than just using customer funds to make up for bad trading bets. FTX tried to paper over the hole by denoting assets in two crypto tokens that were essentially made up – FTT, a token created by FTX, and Serum, which was a token created and promoted by FTX and Alameda, according to financial filings reported by Bloomberg’s Matt Levine.
Firms make up crypto tokens all the time – indeed, it’s a big part of how the crypto boom of the last two years was financed – and they usually offer some sort of benefit to users, although their real value to most traders is simple speculation, that is, the hope that the price will rise. Owners of FTT were promised lower trading costs on FTX and the ability to earn interest and rewards like waived blockchain fees. While investors can profit when FTT and other coins increase in value, they’re largely unregulated and are particularly susceptible to market downturns.
These tokens were essentially proxies for what people believed Bankman-Fried’s exchange to be worth, since it controlled the vast majority of them. Investor confidence in FTX was reflected in the price of FTT.
The key point here is that FTX was reportedly siphoning off customer assets as collateral for loans, and then covering it with a token it made up and printed at will, drip-feeding only a fraction of its supply into the open market. The financial acrobatics between the two firms somewhat resembles the moves that sunk energy firm Enron almost two decades ago – in that case, Enron essentially hid losses by transferring underperforming assets to off-balance sheet subsidiaries, then created complicated financial instruments to obscure the moves.
As all this was happening, Bankman-Fried continued his press tour, lionized as one of the great young tech entrepreneurs of the age. It only began to unravel once Bankman-Fried got into a public spat with Binance, a rival exchange.
What went wrong in the last two weeks
The relationship between Binance and Bankman-Fried goes back almost to the beginning of his time in the industry. In 2019, Binance announced a strategic investment in FTX and said that as part of the deal it had taken “a long-term position in the FTX Token (FTT) to help enable sustainable growth of the FTX ecosystem.”
Flash forward a couple years to the summer of 2022. Bankman-Fried was pressing regulators to look into Binance and criticizing the exchange in public. It’s unclear precisely why – it might have been primarily based on official suspicions. Or it might merely have been as a result of Binance was a serious competitor to FTX, each as an change and as a possible purchaser of different distressed crypto firms.
Whatever the explanation, Binance CEO Changpeng Zhao, referred to as CZ, quickly noticed his likelihood to strike.
On Nov. 2, CoinDesk reported a leaked stability sheet displaying {that a} important quantity of Alameda’s property had been held in FTX’s illiquid FTT token. It raised questions each concerning the buying and selling agency’s solvency, in addition to FTX’s financials.
Zhao took to Twitter on Sunday, Nov. 6, saying that Binance had about $2.1 billion price of FTT and BUSD, its personal stablecoin.
Then he dropped the bomb:
“Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books,” he mentioned.
Investors raced to tug cash out of FTX. On Nov. 6, in accordance with Bankman-Fried, the change had roughly $5 billion of withdrawals, “the largest by a huge margin.” On a mean day, internet inflows had been within the tens of tens of millions of {dollars}.
The pace of the withdrawals underscores how the largely unregulated crypto market is commonly working in an data vacuum, which means that merchants react quick when new details come to mild.
“Crypto players are reacting quicker to news and rumor, which in turn builds up a liquidity crisis much faster than one would have seen in traditional finance,” mentioned Fabian Astic, head of decentralized finance and digital property for Moody’s Investors Service.
“The opacity of the market operations often leads to panic reactions that, in turn, spark a liquidity crunch. The developments with Celsius, Three Arrows, Voyager, and FTX show how easy it is for crypto investors to lose confidence, prompting them to withdraw large sums and causing a near-death crisis for these firms,” continued Astic.
As the FTT token plunged in worth in tandem with the mass withdrawals, SBF quietly sought buyers to cowl the multibillion-dollar gap from the cash that had been withdrawn by Alameda. That worth might have been as excessive as $10 billion, in accordance with a number of experiences. They all declined, and in a transfer of desperation, SBF turned to CZ.
In a public tweet on Nov. 8, CZ mentioned Binance agreed to buy the company, although the deal had a key time period: non-binding. The sudden public revelation that FTX was in want of a bailout prompted FTT’s worth to plunge off a cliff.
The subsequent day, CZ claimed he did due diligence and did not like what he noticed, primarily sealing FTX’s demise. Bankman-Fried purported to the Times that CZ by no means meant to purchase it within the first place.
On Friday, Nov. 11, FTX and Alameda each filed for chapter. FTX, which was valued at $32 billion in a financing spherical earlier this yr, has frozen buying and selling and buyer property and is looking for to discharge its collectors in chapter courtroom. Bankman-Fried is not the boss at both agency.
A brand new chapter submitting posted on Tuesday exhibits that FTX might have a couple of million collectors. It plans to file a listing of the 50 largest ones this week.
Lawyers for the change wrote that FTX has been involved with “dozens” of regulators within the U.S. and abroad within the final 72 hours, together with the U.S. Attorney’s Office, the Securities and Exchange Commission and the Commodity Futures Trading Commission. The SEC and Department of Justice are reportedly investigating FTX for civil and felony violations of securities legal guidelines. Financial regulators within the Bahamas are additionally reportedly taking a look at the opportunity of felony misconduct.
CEO of FTX Sam Bankman-Fried testifies throughout a listening to earlier than the House Financial Services Committee at Rayburn House Office Building on Capitol Hill December 8, 2021 in Washington, DC.
Alex Wong | Getty Images
Binance is now poised to assert absolute dominance over the trade.
“Binance clearly comes out stronger from all of this,” mentioned William Quigley, co-founder of the U.S. dollar-pegged stablecoin tether. “CZ claims Binance has no debt, and doesn’t use its BNB token as collateral. Both of those are good practices in the highly volatile crypto markets.”
Quigley added that extra institutional buying and selling and custody will doubtless shift to Binance.
“The cryptocurrency industry’s entire ethos is founded on disintermediation and decentralization, so Binance’s ever-growing dominance raises reasonable fears over how further centralization will affect the average trader,” mentioned Clara Medalie, director of analysis at information agency Kaiko.
“FTX’s collapse benefits no one, not even Binance, which will now face growing questions over its monopoly of market activity,” Medalie instructed CNBC, speculating that we’re simply seeing the tip of the iceberg of market members affected by the autumn of FTX and Alameda.
“Each entity has numerous twisted and over-lapping financial ties to projects throughout the industry that now stand to lose support or go under themselves,” she mentioned.
In the meantime, although, Binance took a shower on the collapse of the FTT token, which CZ says the agency held after Bankman-Fried requested for a bailout.
“Full disclosure,” CZ tweeted last Sunday.
“Binance never shorted FTT. We still have a bag of as we stopped selling FTT after SBF called me. Very expensive call.”
– CNBC’s Ari Levy, Kate Rooney and Ryan Browne contributed to this report.
Source: www.cnbc.com”