The failure of FTX and Sam Bankman-fried will leave deep scars
It is harder now to assert that crypto represents the future
NOBODY in crypto has slept in days. That, at least, is what it feels like in the never-ending Twitter “spaces” which have been running since ftx, a Bahamas-based crypto exchange and crown jewel in the empire of Sam Bankman-fried, its once-feted founder, filed for bankruptcy on November 11th. The scattered crypto-community often comes together in these online forums—they are where people shill tokens, organise pump and dumps, and occasionally even discuss exciting innovations. In the days after the fall of ftx and Mr Bankman-fried’s other firms, including ftx.us, an Americabased exchange, and Alameda Research, a trading firm, they became places for traders to mourn, former employees to spill the beans and other exchange operators, including Changpeng Zhao of Binance and Jesse Powell of Kraken, to try to reassure customers.
In other words, they are paces that now reek of despair— not just about the billions of dollars that are trapped on a defunct exchange, but about the architect of the mess. Mr Bankman-fried was crypto’s golden boy. He studied physics at the Massachusetts Institute of Technology and was supposed to have learned the craft of marketmaking and trading at Jane Street, an elite financial firm. It was this, along with the fact that ftx gobbled up market share after it was founded in 2019, that attracted investors like Sequoia, considered one of Silicon Valley’s sharpest venturecapital firms, and Temasek, Singapore’s sovereign-wealth fund. Mr Bankman-fried used his credentials and newfound wealth—ftx was worth $32bn at its peak in January—to donate to politicians, push his views on regulation and buy up competitors. He was supposed to be crypto’s future. Instead, he may have robbed the industry of one.
It was possible to get very rich, very fast in crypto. A certain type of winner got lucky, bought Lamborghinis and justified their riches by belligerently asserting that blockchain technology or bitcoin was the future. Those who disagreed got the nowfamiliar rejoinder: “Have fun staying poor.” It is tempting to see comeuppance in every scam, failure or hack that befalls the industry. The failure of ftx is certainly the closest thing to a death blow it has faced.
Everyone in ftx’s orbit has suffered a financial hit, but the real wound cuts deeper. Mr Bankman-fried has let down supporters, embarrassed investors and made fools of politicians. He has also damaged and exposed flaws in effective altruism, a movement that aims to safeguard humanity’s future, and to which he donated time and money. The result of the mess will be less sympathetic regulators. Institutions and punters who embraced crypto will shun the Wild West.
The details of precisely what went wrong at ftx will spill out in bankruptcy proceedings and possibly criminal ones over the coming months and years. But the early evidence, in particular a balance-sheet obtained by the Financial Times, does not make for pretty reading. In the spreadsheet, which metadata suggest Mr Bankman-fried created, ftx appears to hold about $1bn of real money or money-like assets, including currencies and stablecoins (crypto-tokens pegged to the dollar), against some $9bn of liabilities owed to customers. Mr Bankman-fried claims to hold an additional $3.5bn in equity or venture investments. Almost everything else on the balance-sheet—assets claimed to be worth around $5bn—are either tokens ftx minted itself, had a hand in creating or those known in the vernacular as “shitcoins”, which are not worth the energy needed to render the pixels on a screen. To add insult to injury, ftx has since lost most of its liquid assets, worth around $500m, in a hack that seems to have been orchestrated by an insider.
Astute readers may notice this is not how an exchange should work. Normal ones hold customer deposits, not a mix of venture investments and tokens. Then there is an apparent hole in the accounts. In a grovelling note left in them seemingly by Mr Bankman-fried, the writer claims not to have realised $8bn was missing, an amount worth more than half that deposited in the firm’s care. This is put down to a “poorly labelled” internal account.
In messages published by Vox, an online publication, Mr Bankman-fried said ftx had directed customers to send money directly to Alameda but never checked it got passed along (Mr Bankmanfried has since tweeted he thought the messages were private). This does not tally with what Caroline Ellison, chief executive of Alameda and reputedly a former girlfriend of Mr Bankman-fried, is reported to have mentioned on a call with colleagues on November 9th. According to the Wall Street Journal, Ms Ellison said that she and Mr Bankman-fried knew of a decision to move ftx customer funds to Alameda. Since Mr Bankman-fried resigned from ftx on November 11th, the firm has declined to comment, but on November 16th the new boss issued a statement pointing out Mr Bankman-fried has no role at ftx or Alameda and does not speak on the firms’ behalf. To the moon...and beyond The balance-sheet of Alameda—information about which has been reported by Coindesk, a news website—appears similarly full of holes. It shows the trading firm owed $8bn in loans and that its assets again consisted largely of tokens created by ftx. Combining the two balance-sheets in a rough calculation, it appears that before things went south, Mr Bankman-fried’s firms had taken in around $14bn of deposits, borrowed $8bn and raised almost $2bn of equity capital from investors. His firms gave back $5bn to those savvy enough to run away fast, and probably hold around $5.7bn in equity and venture investments plus $1bn in cash. This means a hole of perhaps somewhere between $4bn and $12bn, depending on how much of Alameda’s debt is owed to ftx. Mr Bankman-fried insisted on November 15th that the trading firm’s problem was liquidity, not solvency, because it held lots of illiquid but valuable assets. But the balance-sheets appear to have exposed what Mr Bankman-fried counts as a valuable asset.