eBusiness Weekly
Relatively little is known about Sam Bankman-Fried (pictured right), the supposed crypto wizard who built a multi-billion-dollar exchange and in a few days saw it disappear in a puff of smoke.
FTX and about 130 affiliate companies were put into liquidation last week and its CEO, Bankman-Fried, resigned following a run on the company as questions were asked about the sturdiness of the FTX balance sheet.
Even less is known about FTX co-founder Gary Wang, who until a week ago was worth an estimated US$11 billion. One of the only known publicly available pictures of him shows the back of his head on Twitter.
Virtually nothing is known about Wang and how he made his initial wealth, besides that he is a MIT graduate and former Google employee.
Then there’s FTX’s regulatory officer, Dan Friedberg, who was previously involved in an online poker cheating scandal at Ultimate Bet. He evidently skated smoothly over that hole in his resume to land a plumb job at FTX at a time when the company was eager to ingratiate itself with regulators.
Adding to the intrigue, CoinDesk reported that FTX was run out of the Bahamas by Bankman-Fried and a gang of mates who appeared to have dated each other.
Bankman-Fried was once worth $25 billion but lost 94 percent of that in one day when Binance, a rival exchange and large investor in FTX, started dumping the FTT token, which is used as the house currency by FTX. The stampede was on, and soon everyone was trying to withdraw their funds before all withdrawals were suspended.
What has shocked the industry to its core is that Bankman-Fried, the mop-haired “crypto king” who slept on a futon on the Bahamas, was publicly calling for more crypto regulation to bring respectability to an industry already taking water following some spectacular collapses, such as crypto lenders Celsius and Voyager, and crypto hedge fund Three Arrows Capital.
Contagion
The collapse of FTX and its trading affiliate Alameda Research will likely be much bigger in impact than any of these, and we are yet to know how far the contagion will spread.
Alameda Research’s balance sheet was crammed with FTX home-made currency, the FTT token, which was then used as collateral on leveraged bets.
Bankman-Fried is also reported to be the second largest donor to the Democratic Party in the US.
Back in May this year, legendary short seller Marc Cohodes called FTX the best short sell in the market and started tweeting about it.
This was long before there was any suspicion of wrongdoing at a company that was regarded as the humane face of crypto. FTX is not a stock, so shorting it is not an option. “That’s fine,” says Cohodes.
“I’m putting this one out there for free.”
Cohodes says he knows nothing about crypto and doesn’t invest in it, but what grabbed his attention were the inconsistencies surrounding Bankman-Fried’s story about how he made his billions.
Bankman-Fried was all over the press, talking about his projects, advising regulators and calling for an industry clean-up. All that’s been thrown back in his face this past week.
When asked by Bloomberg who gave him financial backing, he vaguely replied that the company cobbled together some lines of credit, which makes little sense considering the US$42 billion market cap once claimed by FTX. It’s an extraordinary story of a wealth bubble made to disappear in just a few days.
“I started paying attention to him because something didn’t make sense. He talks in a figure eight, nothing adds up. They call him the next Warren Buffett, yet (he has) no background, no resume, no mentor,” said Cohodes on the Hidden Forces podcast, adding that this is probably one of the biggest frauds since Bernie Madoff defrauded investors of an estimated US$64,8 billion.
In the midst of a crypto winter, FTX was supposedly doing fine. Bankman-Fried had his face plastered on billboards across the US and brought in legendary sports starts such as American footballer Tom Brady and basketball legend Steph Curry as ambassadors.
He exemplified the mystique of crypto, where a mop-haired geek with no obvious credentials can become one of the richest people in the world.
Yet how he made his start in crypto, who bankrolled him, and who were his mentors – these remain mysteries.
FTX took customers’ money and used it for themselves, claims Cohodes. You should be able to touch, feel, talk to, examine and ask questions of co-founder Wang. You should at least be able to email them. Yet, in this case, you cannot.
FTX was supposedly a crypto exchange like scores of others, but actually doubled as a kind of crypto bank where customer funds were lent to affiliate company, Alameda Research, which took that money to make risky bets.
FTX reportedly had US$16 billion in customer assets, and lent more than half of its customer funds to Alameda, according to the Wall Street Journal. Alameda also borrowed US$1,5 billion from outside financial firms.
FTX put a freeze on customer withdrawals after it was hit with an estimated US$5 billion “bank-run”.
The Financial Times reports that the exact size of the company’s assets and liabilities remains unknown, but an estimated US$5,4 billion was invested by FTX and Alameda in almost 500 crypto companies and venture capital funds — the largest investment being US$1,15 billion that Alameda ploughed into crypto mining group Genesis Digital Assets (which has said it remains profitable and debt-free, and is not affected by the collapse of FTX and Alameda).
Cohodes says none of the top people in FTX had any prior experience running an exchange, nor did they have any obvious talent.
People who end up in charge of multi-billion-dollar companies on the stock exchange are held to high standards of transparency and accountability. They also have a track record of leadership and competence.
FTX had none of that because crypto, while unregulated, is held to a lower standard.
Investors are bamboozled with arcane terms such as “hash rate” and “Layer 2” and expected to make sense of the gibberish often peddled as token value by snake oil salespeople.
The collapse of FTX has stripped crypto of its sheen and concealed its genuine utility – the ability to transfer funds across the globe in seconds without an intermediary such as a bank, the ability to hedge against reckless central bank money printing and its attendant inflation, and the ability to make digital assets truly scarce. These are spectacular improvements in our financial ecology.
Bankman-Fried may end up in jail for the wreckage he stewarded as accusations of fraud swirl around him.
We have a lot to learn about what went on. At this stage, billions of dollars are unaccounted for.
There are those arguing that the answer to FTX, a centralised exchange controlled by a few, is decentralisation or DeFi where there are no counter-party risks. Buying and selling assets on a DeFi platform does not expose your assets to the kind of leveraged (and fraudulent) lending of which FTX is accused.
The crypto industry has had a terrible year, but the winter may not be over yet. – Moneyweb Crypto
