FTX: The Crypto King Who Lost Billions

FTX crypto fraud came down to a hidden back door in the exchange’s code that let Sam Bankman-Fried’s separate trading firm borrow $8.9 billion in customer deposits without posting collateral. The exchange had marketed itself as the most credible institution in crypto — regulated, institutionally backed, with a CEO who testified before Congress. When customer withdrawals outpaced what the exchange actually held, the whole thing collapsed in ten days. Bankman-Fried was 30 years old and sentenced to 25 years in federal prison.

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How Sam Bankman-Fried Built a Reputation Around Ethics

Sam Bankman-Fried built an image around effective altruism, the utilitarian philosophy that treats all decisions as expected value maximization problems. He wore cargo shorts, slept on a beanbag at the office, and drove a Toyota Corolla while publicly planning to give away his fortune. He gave approximately $40 million to political campaigns before the 2022 midterms, making him one of the largest individual donors in American political history for that cycle.^1^ He appeared before the Senate Banking Committee and the House Financial Services Committee offering technical testimony about the need for crypto regulation. He was profiled in the New York Times as a potential future Warren Buffett.

By the time the bankruptcy was filed, he had been running a fraud.

What Was Alameda Research and Why Did It Matter?

Bankman-Fried had founded Alameda Research in 2017 as a crypto trading firm, and FTX in 2019 as a cryptocurrency exchange. Customers deposited money on FTX trusting that their deposits were held safely and available for withdrawal. They weren’t. FTX had given Alameda Research access to a back door in its code that allowed Alameda to borrow from FTX’s customer deposit pool without posting collateral and without triggering the risk management systems that would have flagged the exposure.^1^

Alameda used customer funds to make venture investments, executive loans, real estate purchases — including $300 million worth of luxury properties in the Bahamas — and leveraged trading bets that went badly. When crypto markets collapsed in 2022, Alameda’s portfolio fell in value, leaving a hole in FTX’s customer accounts.

The Bank Run That Ended It in Ten Days

The trigger was a tweet. On November 6, 2022, Binance CEO Changpeng Zhao announced that Binance — once an FTX investor — was liquidating its holdings of FTT, the token FTX had created and on which Alameda’s balance sheet partly depended. The announcement triggered a bank run. In three days, FTX customers attempted to withdraw $6 billion. The exchange froze withdrawals on November 8. On November 9, Zhao announced Binance would not rescue FTX after reviewing the books. On November 11, FTX filed for bankruptcy.

John Ray III — who had overseen the Enron bankruptcy — was brought in to manage FTX’s, and issued a statement describing conditions unlike anything he had seen in more than 40 years of legal and restructuring work.^2^ The company had no formal accounting processes. Expense reimbursements were approved via chat message. Corporate and personal funds were commingled. There were no complete lists of what the company owned or owed.

An Estimated One Million Customers Couldn’t Get Their Money Back

FTX had marketed itself to retail investors through celebrity endorsements — Tom Brady, Gisele Bundchen, Steph Curry, Larry David, Naomi Osaka — and a $135 million naming rights deal for the Miami Heat arena. An estimated one million customers had funds on FTX when withdrawals froze.^3^

Institutional investors including Sequoia Capital, SoftBank, and the Ontario Teachers’ Pension Plan also lost money — Sequoia had invested $214 million and wrote it to zero. Sequoia’s loss was a rounding error to the firm. The pension fund money belonged to Canadian teachers. The retail investors’ money was their savings. The pattern mirrors what happened to ordinary investors in the Enron collapse and to contract workers at WeWork: those with the least information absorbed the most concentrated damage.

The Conviction and the Philosophy That Enabled It

Federal prosecutors in the Southern District of New York indicted Bankman-Fried within weeks of the bankruptcy filing. He was arrested in the Bahamas in December 2022 and extradited to the United States. Several of his closest associates — including Alameda CEO Caroline Ellison, FTX co-founder Gary Wang, and engineering chief Nishad Singh — pleaded guilty and cooperated with prosecutors.

Bankman-Fried was convicted on all seven counts submitted to the jury on November 2, 2023. On March 28, 2024, he was sentenced to 25 years in federal prison — the same sentence Bernie Ebbers received for WorldCom. He was 32 years old.^3^

The effective altruism framing that surrounded SBF deserves direct examination. The philosophy holds that you should maximize your positive impact, which in practice can justify almost any means to any sufficiently large end. Bankman-Fried had articulated publicly an approach called “expected value” reasoning in which large bets are justified by large potential outcomes. Several associates later described him saying, in various ways, that the rules were for people who couldn’t calculate the math. The customers who lost their money weren’t inside that architecture. They were variables.

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Sources:

1. Lewis, Michael. Going Infinite: The Rise and Fall of a New Tycoon. W.W. Norton, 2023.
2. Ray, John J. III. Declaration in Support of Chapter 11 Petitions and First Day Pleadings. United States Bankruptcy Court, District of Delaware, 2022.
3. United States v. Bankman-Fried, No. 22-cr-673 (S.D.N.Y. 2023).
4. Faux, Zeke. Number Go Up: Inside Crypto’s Wild Rise and Staggering Fall. Currency, 2023.