Sam Bankman-Fried, the decline of FTX, and the future of cryptocurrency

William Merritt

All over the news, the name Sam Bankman-Fried has appeared numerous times, mainly because of his arrest and the epic flameout of FTX. But who is he? What is FTX? And has he single-handedly destroyed the cryptocurrency industry?

Sam Bankman Fried is a finance and cryptocurrency entrepreneur and the CEO of the now bankrupt cryptocurrency exchange known as FTX. A cryptocurrency exchange is a marketplace where you can buy and sell cryptocurrencies such as Bitcoin or Ethereum. It is similar to a stock exchange, but for digital assets. The exchanges make money by acting as an intermediary between buyer and seller, profiting from commissions and transaction fees.

Prior to the collapse of FTX, Bankman was hailed as the ‘JP Morgan of crypto’, and was worshipped as a philanthropic survivor in a struggling market. This then begs the question, how could one crypto exchange cause the loss of over USD $150 billion from the fifteen biggest cryptocurrencies in the world? The root of the problem is the cryptocurrency token FTT, the brainchild of FTX, and the catalyst for the destruction.

To understand why this singular cryptocurrency has caused such devastation, we must go back to 2017, when Bankman founded his first crypto trading firm, ‘Alameda research’. Two years later he also created ‘FTX’. This aroused skepticism amongst industry players, investors, traders and stakeholders, that there could be a conflict of interest regarding which company was receiving preferential treatment. However, the two were stated by Bankman as separate companies, not working together.

Upon launch, FTX attracted major investment and grew into the fourth-largest crypto exchange for derivatives trading (where traders speculate on the future price action of an asset via buying or selling contracts).  FTX continued to grow and began rivalling the biggest crypto exchanges. It received funding from some of the largest investors in the world, such as Silicon Valley and Wall Street, as well as being promoted by celebrities. This image was short-lived, and on the 2nd of November, the FTT token plummeted. But why?

‘Coindesk’, a site specialising in cryptocurrencies, published a report based on a leaked Alameda balance sheet, which stated that Alameda claimed it had $14bn in assets. But most of that was FTX’s tokens. FTX executives attempted to deny these claims, stating that not all assets had been accounted for. However, the market responded badly to this, and many traders withdrew their FTT tokens.  Binance, the leading crypto exchange, said it would offload hundreds of millions of FTT without issuing an explanation, sparking mass withdrawals. This loss ballooned and by the 7th, FTX finances were in crisis.  Finally on the 10th, the Wall Street Journal reported that FTX had been using customer money to fund Alameda’s risky company bets.

This shocked the industry; billions of customer funds were being funnelled into Alameda.

On the 11th of November 2022, Bankman-Fried resigned as CEO. Furthermore, FTX and Alameda declared bankruptcy. It was later unveiled that Alameda and FTX executives were aware of the scheme. But how did no one see this coming?

It resolves down to the fact that FTX is such a dominant player in the industry, and the worrying ignorance of some of the most highly regarded intellects in the world. People did not understand what SBF (Sam Bankman-Fried) was saying, and so assumed him a genius. Adam Fisher, a business journalist, wrote ‘I don’t know how I know, but I do. SBF is a winner’.

The greater repercussion of the collapse of FTX is the effect it will have on cryptocurrencies, and the ultimate question of whether Sam Bankman-Fried has killed crypto. Undoubtedly, the cryptocurrency industry will suffer a major blow from the collapse of FTX, which undermines the trust previously held by investors. Now users will have a hard time getting their money back. This is because, as FTX’s collateral is falling, they can’t liquidate it, and so customers can’t withdraw their money. For example, a teacher’s pension fund in Canada invested almost $100 million in FTX, and now innocent people who had nothing to do with crypto could have a dent in their retirements.

Conversely, changes could be made to regain confidence and prevent a similar situation in the future. Unlike stock exchanges, crypto trading is very different - there is currently much less disclosure from the exchanges, who then trade against their customers.  Customers are now demanding transparency, regulation, and the same rules that every other exchange that deals in stocks and bonds have. The fallout has led many other companies to show proof of reserves, and to demonstrate their full transparency in the industry.

Since the collapse, Samuel Bankman-Fried has been taken into custody and is awaiting trial, with his pre-trial bail being set at 250 million dollars - the biggest in history. FTX is being dubbed ‘The largest Ponzi scheme in history’, and the ripples of its collapse continue to affect the crypto world. However, early indications suggest that crypto will live to fight another day.