Crypto contagion

FTX was the world’s second largest crypto exchange. It allowed people to buy digital currencies with traditional ones like pounds, dollars or yen. You could also use it to deposit your digital earnings like an online bank.

It was founded in 2019 by an ex-Google employee and a former trader called Sam Bankman-Fried.

On the face of it FTX was successful. Before it went bankrupt it was trading about $10 billion dollars of cryptocurrencies a day.

Sam Bankman-Fried was worth more than $16 billion dollars and seen as a young successor to legendary investor Warren Buffett.

But things started to go wrong when stories emerged about FTX’s questionable financial dealings with a company called Alameda Research… a crypto trading firm also owned by Sam Bankman-Fried.

With investors starting to worry, Binance, the world’s largest crypto exchange, offered to buy FTX.

But when it looked more closely at its rival’s finances – it changed its mind.

“I sat down with Binance’s chief strategy officer here in Chicago. He essentially said he was shocked at what he saw when he went through FTX’s numbers.”

CNBC

That triggered a run on the exchange. In 72 hours $6 billion dollars was withdrawn and a few days later it filed for bankruptcy.

Its sudden demise sent shockwaves through the crypto world. So what exactly is Sam Bankman-Fried accused of doing – and what does it mean for the industry?

“This arrest is really the first concrete move by regulators to hold someone accountable for the multi-million dollar implosion of FTX last month.”

CNBC

Sam Bankman-Fried was arrested in the Bahamas and faces extradition back to the United States.

There are eight criminal charges against him, which range from wire fraud to money laundering.

If convicted he could go to prison for decades.

Separately, a US regulator has brought a civil case. It says Sam Bankman-Fried raised more than $1.8 billion dollars from investors – and then orchestrated “a massive, years-long fraud, diverting billions of dollars of the trading platform’s customer funds for his own personal benefit and to help grow his crypto empire”.

This is what Sam Bankman-Fried told ABC’s Good Morning America after FTX collapsed.

Interviewer: “Did you know that FTX deposits were used to pay off Alameda creditors?”

Sam Bankman-Fried: “I don’t know of FTX deposits being used to pay off Alameda creditors… Which creditors are you referring to?”

Good Morning America

The regulator says he “built a house of cards on a foundation of deception” and called on other platforms to comply with US laws.

“Things are very dark today… I might have lost tens of thousands of dollars.”

The Baguette Investor Youtube channel

When FTX stopped trading it left many users unable to withdraw their money.

Since then, other crypto platforms have also trapped customer funds.

A crypto lender called BlockFi was fined and found that it couldn’t redeem a $680 million loan from Alameda Research. BlockFi went bust.

Then there’s cryptocurrencies themselves. Late last year, when bored investors were locked inside due to Covid, Bitcoin was trading at an all-time high. Now it’s lost 60 per cent of its value. Other cryptocurrencies have also slumped.

The one winner from the collapse of FTX could have been Binance, the world’s largest crypto exchange, which was thinking about buying Sam Bankman-Fried’s company. But Binance is also subject to a long-running criminal investigation by the US Department of Justice.

It’s not clear whether the charges against Sam Bankman-Fried will speed up the investigation into Binance or slow it down. The news agency Reuters recently reported that prosecutors are split over whether to bring charges.

But the whole saga does look like it will accelerate global regulation of the crypto industry. 

The world’s most powerful financial watchdogs have said they’ll lay out firm steps in early 2023 – and other crypto bosses will have the words of the US securities regulator ringing in their ears.

This episode was written by Lewis Vickers and mixed by Xavier Greenwood.

A verdict

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