November 30, 2022

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FTX: How Sam Bankman-Fried built a house of cards

FTX: How Sam Bankman-Fried built a house of cards

Lawyers for collapsing cryptocurrency exchange FTX have argued the company Bankruptcy hearing Tuesday that the company worked as a personal “fiefdom” for founder Sam Bankman-Fred, and reached a market capitalization of $40 billion as of January before collapsing in recent weeks to its current value of about $422 million.

Those who looked under the hood in the aftermath of the crash, including new FTX CEO John J. Ray III, resented the company’s lack of basic bookkeeping and compliance protocols, raising questions about how Bankman-Fried managed to build such a building. A colossal, unsupervised operation that necessitated him incredible influence and political power.

Sam Bankman-Fried, Founder and CEO of FTX, speaks during an interview on “Bloomberg Wealth with David Rubinstein” in New York August 17, 2022. (Jenna Moon/Bloomberg via Getty Images/Getty Images)

So, how did Bankman Fried do it? Ben McMillan, co-founder of IDX Digital Assets, explains this with a simple analogy:

In a hypothetical scenario, imagine that someone owns every home in a 100-home neighborhood and forces one home to sell for $1 million, then uses that sale to prove they have $100 million in “equity.” But then the owner is forced to sell all 99 remaining homes, and the homes only sell for $100,000 each — meaning $90 million in alleged equity is gone.

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But that fairness wasn’t there in the first place.

Macmillan said Fox Business This is exactly what Bankman-Fried did with its FTT tokens, as it controlled the float.

FTX logo seen in Miami

The FTX logo appears at the entrance to the FTX Arena in Miami in November. 12, 2022. (Reuters/Marco Bello/File/Reuters Photo)

According to Macmillan, FTX makes sure that a small portion of FTT and other coins like Serum are traded at a favorable enough dollar rate to create “equity” that is reflected on the balance sheet. then Bankman Fried He will borrow a lot of money for a very large – and very fake – asset number.

This, in turn, allowed FTX and its hedge fund, Alameda Research, to artificially inflate assets.

Why these investment advantages have been a source of attraction for FTX

“This is not new or unique to cryptocurrency, by the way,” McMillan explained. “This was done by more than a few hedge funds during the 2008 crash — especially in the distressed debt space.”

FTX and Alameda have accelerated the scenario by using the inflated asset number to take out very real liabilities, according to Macmillan. It also appears that Bankman-Fried has been acquiring companies and forcing them to be “guarded” with FTX so that it can stay in the cycle with clients’ assets.

Alameda Research CEO Caroline Ellison

Alameda Research CEO Caroline Ellison via Twitter (@carolinecapital twitter)

Macmillan says one of the biggest news came when Changpeng Zhao, founder and CEO of major cryptocurrency exchange Binance, made the announcement on November 11. 6 that his company was selling a large amount of FTT on the open market, and Alameda CEO Caroline Ellison He responded quickly by offering to buy all the icons for $22 each.

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That amount, many are now speculating, was the crucial number that FTT had to trade above for FTX and Alameda to remain solvent.

Macmillan points out, “Once FTT traded sharply lower on November 8th, the house of cards collapsed.”