New Delhi: Accused of one of the ‘biggest financial frauds’ in America, and in the cryptocurrency market globally, Sam Bankman-Fried, popularly known as SBF, awaits trial in October while remaining under house arrest in North California. He lives with his parents and a German shepherd named Sandor.
The once-celebrated young billionaire with an estimated worth of 26 billion dollars, is now disgraced, “almost penniless and friendless”, and is going down in history for besmirching the reputation of a crypto industry that was already struggling to be recognised as a reliable medium of exchange and investment asset class.
According to an interview published in Puck News this month, Bankman-Fried is not very sure where Sandor came from, but vaguely remembers it was a gift from his parents. His parents and Sandor, which means “defender of men”, are all that SBF has in the world at the moment.
Business Insider reported that SBF had told Puck News that he had “nothing left” — relationships and support wise — with “most of his friends” ditching him. “I don’t blame people for wanting to try and avoid getting drawn into the shitshow as best they can,” SBF had said.
The “shitshow” SBF is referring to is the major alleged financial fraud that unraveled around his crypto business in November 2022. A shocking departure, given SBF was Fortune’s cover boy for its August/September issue in the same year.
The US Commodities Futures Trading Commission estimates that the customer faced losses of up to 8 billion dollars in the alleged fraud.
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The ‘biggest financial fraud’
Born on 6 March 1992 in Stanford, California in Silicon Valley, Bankman-Fried’s parents are Stanford professors. SBF graduated with a major in physics from the Massachusetts Institute of Technology (MIT) and moved to Wall Street to trade in cryptocurrency at the age of 21, according to Vox.
In 2017, SBF cofounded a business venture named Alameda Research LLC — a quantitative trading firm — with another crypto trader, Tara Mac Aulay.
Two years later, in 2019, Bankman-Fried co-founded another company, named FTX Trading Ltd, with Gary Wang with whom he had studied at MIT. FTX was an online platform that retail investors could use to buy and sell cryptocurrencies. FTX went bankrupt in 2022 but at its peak, it was one of the largest crypto exchanges in the world and had at least five million customers sinking their savings on it.
The relationship between Alameda and FTX was tight and is one of the reasons why the whole scandal broke out.
According to a New York Times report SBF had started FTX in order to bring in capital for Alameda, a quantitative trading firm that operated like any old hedge fund, which used mathematical models to figure out when to buy and sell cryptocurrencies using arbitrage trading methods. This meant simultaneous buying and selling of an asset placed on different exchanges to earn profits from the price difference. That price difference lasted a few minutes or seconds so one needed sophisticated software based on mathematical models to identify trading opportunities.
The money required to buy crypto, Alameda received from lenders and later via FTX. For instance, FTX created a token named FTT. If customers used FTT to pay for other currencies they bought via FTX they got a discount, so usage of it picked up. Meanwhile, Alameda was the main trading firm buying and selling a majority of FTT tokens, so Alameda was able to control the price of FTT.
FTX then started using FTT to make investments worth billions of dollars in other crypto companies, while Alameda started using FTT as collateral to take more loans to fund its trading.
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SBF’s rise & the downfall
SBF subscribed to a slightly flawed, but very catchy, movement called effective altruism — earning as much as you can in order to give it away. The problem started when effective altruism is mainly driven by a few massively wealthy billionaires who decide how their philanthropies influence the masses.
After quitting Wall Street to start FTX, SBF became a billionaire pretty fast and was estimated to be worth 26 billion dollars in early 2022. Investors of FTX included venture capital firms like Sequoia that have a solid track record of investing in startups like Apple and Zoom, which are now billion-dollar tech giants.
SBF became a brand ambassador for the crypto industry. He was helping US Congress form its approach to regulating the crypto industry. SBF was among the “biggest individual donors” to Joe Biden’s campaign in 2020.
Then the cracks started to appear and the end came swift and fast.
According to a report published on 2 November last year, Alameda’s assets did not have much of other fiat currency or crypto assets and most of its assets were just a token called FTT that its sister firm FTX had issued.
The news triggered a run on FTT with customers rushing to sell off an asset that may be worthless.
Arguably the biggest impact came from world’s largest crypto exchange Binance selling off 500 million dollars worth of FTT around 7 November. By 9 November, Binance backed out of a deal to buy FTX to save the exchange.
Also, venture capitalists like Sequoia that had invested 150 million dollars in FTX, said it was reducing it to zero.
By 11 November, SBF stepped down as FTX CEO and the firm filed for bankruptcy.
On 17 November, SBF explained in a series of tweets how FTX was over-leveraged and could not pay all the customers trying to cash out. “I was on the cover of every magazine, and FTX was the darling of Silicon Valley…,” he said in a 32-tweets long thread.
“And then the crash came. In a few day period, there was a historic crash–over 50% in most correlated assets, with no bid side liquidity,” he added. “Roughly 25% of customer assets were withdrawn each day — $4b. As it turned out, I was wrong: leverage wasn’t $5b, it was $13b. $13b leverage, total run on the bank, total collapse in asset value, all at once.”
As the situation worsened, by 14 November reports came that “At least $1 billion of client funds” were missing at FTX and that SBF “secretly moved $10 billion in funds to trading firm Alameda”.
SBF was arrested a month later in Bahamas where he was living and was later extradited to the US. He was released on a $250 million bail, post which he moved to Stanford to his parent’s house.
SBF faces eight criminal charges that include a “sweeping fraud scheme that contributed to FTX’s collapse and for a campaign finance scheme that sought to influence public policy in Washington”, the US Department of Justice said in a press statement released on 22 December.
That is where Puck News caught up with him, with only his parents and Sandor to support him, in limbo, under house arrest at his parent’s home until his trial starts in October.
Other waking nightmares SBF has lived include trying to live on just peanut butter in the prison he was incarcerated in the Bahamas.
Till last year, SBF was a young billionaire working in the Bahamas, with lots of friends, and a great reputation. Today, he is at the centre of the “one of the biggest financial frauds in American history”. Now, he only has 100,000 US dollars in the bank, according to a report.
Meanwhile, SBF said, “Some people may have billions of dollars of customer assets to use for legal fees right now, but I’m not one of them”.
(edited by Anumeha Saxena)
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