What did Sam Bankman Fried Do and What Does it Mean for Cryptocurrency?

Economic Policy Brief #57 | By: Arvind Salem| November 26, 2023

Photo taken from: npr.org

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Policy Summary:

On November 2, 2023, Sam Bankman Fried, the former CEO of FTX, one of the largest cryptocurrency trading companies, was found guilty of fraud and money laundering. Fried was found guilty on 7 counts of fraud, including wire fraud, securities fraud and money laundering, all of which he took from customers of FTX for his own personal gain. His sentencing trial will be in March, in addition to his trial regarding allegations of foreign bribery.

This verdict is the conclusion of a yearlong saga that took down FTX, and later its CEO Sam Bankman Fried. In November of 2022,  CoinDesk reported that the assets in FTX’s sister firm, Alameda research, also founded by Fried, were mostly in the form of an FTX token, FTT. This led to widespread concerns over FTX’s value due to the clear conflict of interest using FTX’s resources as assets for Alameda, leading to widespread withdrawals from FTX. To fix the crisis, FTX was in negotiations with rival exchange firm, Binance, to acquire its international division, but they backed out after conducting a due diligence study. Compounded with the Alameda research news, this led to mass withdrawals from FTX. These events led FTX to file for Chapter 11 bankruptcy protection. The nail in the coffin, was a hack that stole $477 million from the company, although that number was arrived at by external analysts and not released by FTX themselves. Throughout the whole way, the company committed fraud to convince skeptical investors that the company was in good financial health, including using inflated valuations of speculative assets, and most glaringly hiding huge amounts of missing money, which we now know went to Fried, using fake balance sheets.

Shortly after, a class action lawsuit was filed in Florida against celebrity promoters of FTX, arguing that they misled customers by lending credibility to unregistered securities. If they were going to promote these securities, they were required  to disclose the details of their financial agreements governing the endorsements under Florida law. FTX had a large number of celebrity endorsers including famous athletes Tom Brady, Stephen Curry, and Naomi Osaka, and most famously Shark Tank host Kevin O’Leary. The exchange was also famously close to closing a $100 million deal with Taylor Swift, who backed out after conducting her own due diligence study. This September, Jacksonville Jaguars quarterback Trevor Lawrence, and YouTube influencers Tom Nash and Kevin Paffrath all reached settlements concerning their endorsements of FTX.

For a month after FTX collapsed, it was unclear if FTX’s failure was due to any criminal activity from management, specifically its CEO, but in December 2022, it was announced that Sam Bankman Fried would face both federal civil and criminal charges for fraud and diverting FTX’s money for his own personal gain. Among other things, Fried used FTX funds to purchase homes in the Bahamas, sponsor the FTX Arena in Miami, buy a Formula One Racing Team, and contribute $93 million to various political campaigns. During his trial, nearly all of his top aides testified against him in exchange for leniency. He made the bold decision to testify in his own defense, but had his inconsistencies exposed during cross examination when the prosecution attorney brought up the stark contrast between his public and private statements. Additionally, Sam has been in prison since August, due to having his bail revoked after it was determined he tried to intimidate witnesses.

Under new leadership to oversee its post bankruptcy operations, FTX has announced that 90% of its available funds will go to customers. However management could only recover $6.9 billion in funds, leaving them $8.7 billion short to fully compensate their customers.

Policy Analysis:

The collapse of FTX and the corruption exposed in this trial represent the need for tighter regulation fthe cryptocurrency industry. This saga in specific, has drawn Congressional attention and many lawmakers are now recognizing the need for cryptocurrency regulations. Additionally, this highlights how prone to scams and fraud the cryptocurrency industry can be. If seasoned investors like Kevin O Leary were fooled, what hope does the average person have?

However, this trial also bears some good news for cryptocurrency. First of all, regulation might not even be a bad thing. The heightened consumer confidence could lead to more people joining, not less. After all, one of the chief allures of cryptocurrency would remain, the ability for its value to remain independent of any government, but a key downside, its lack of widespread acceptance and security, would be vastly diminished. However, it is worth noting that the idea of bitcoin as a hedge against inflation has taken a large blow due to the fact that bitcoin’s value plummeted, when inflation rose this past year, although that could be due to other factors. Additionally, the industry’s efforts to position Sam Bankman Fried as a bad actor taking advantage of cryptocurrency rather than FTX’s downfall being innate to the industry as a whole appear to be working. The barometer for the cryptocurrency market, bitcoin prices, indicate that cryptocurrency is recovering from its record lows after the collapse of FTX, although it still has not hit its peak that it enjoyed in late 2021 and early 2022. Moreover, companies in the traditional finance industry, like Blackrock and Fidelity, are moving into cryptocurrency: both have applications before the Securities and Exchange Commission (SEC) to introduce crypto ETFs, which would allow their customers to gain exposure to the cryptocurrency market in a secure way, and potentially lead to future growth for the cryptocurrency.

Engagement Resources:

• Coinbase is a cryptocurrency trading company that allows users to trade cryptocurrency. Readers interested in looking into other cryptocurrency trading sites other than FTX may wish to visit this site, and decide if it is something they would like to invest in after knowing all of the risks associated with it.
• BlackRock is a company that manages investments for clients that is looking to launch ways for their clients to get involved in the cryptocurrency market in a secure way. Readers who want to explore the cryptocurrency market in the future in a secure way may wish to explore Blackrock’s options in the future after SEC approval.