sbf: the virtue was the con

What H-A-P-P-E-N-E-D?

Sam Bankman-Fried pitched himself as a humanity-saving crypto genius. Then he spent other people’s money to save himself.

Illustration: Zohar Lazar
Illustration: Zohar Lazar
Illustration: Zohar Lazar

It’s possible that you don’t fully understand what Sam Bankman-Fried did or what transpired at his company, FTX. This may help.

Explain it to me like I’m … 5 years old.

A silly-haired wizard sold magic beans. The villagers loved it! Until they stopped believing in magic and demanded their money back, only to find out that the wizard had already spent it.

Explain it to me like I’m … 10.

A really smart guy owned a bank. He was also a terrible poker player. He used made-up money to buy his way into a high-stakes game and then he lost, so he paid his gambling tab by robbing his own bank. (Allegedly.) When his customers heard about his gambling losses, they stormed the bank to pull their money out, but there wasn’t enough in the vault to pay them all back.

Explain it to me like I’m … a crypto newbie.

Sam Bankman-Fried founded what he claimed were two separate companies: a hedge fund called Alameda Research and a cryptocurrency exchange called FTX. A crypto exchange is a website where users can buy and sell digital currencies. Another cool thing an exchange can do is create its own cryptocurrency, which is like printing money out of thin air. FTX’s currency was called FTT. Reportedly, the company printed lots of it, much of which got sent to Alameda (which turned out to be not so separate), making it seem like the fund was healthy. When FTX’s customers found out, they panicked and tried to withdraw their money. They were in for an even bigger surprise: It looked like Bankman-Fried had secretly shifted $10 billion of their funds to Alameda.

Explain it to me like I’m … a crypto sophisticate.

Alameda specialized in big bets on crypto companies. To finance those bets, SBF courted investors with promises of high returns and zero risk, which sounds dumb in retrospect but plenty of rich people believed it at the time. FTX was, until recently, the world’s fifth-largest exchange. It had its own token, FTT, which functioned like a loyalty program for customers, giving them perks like discounted transaction fees. But FTT was also bought and sold like a normal token, once trading for as much as $80. (Today, it’s around $1.50.) FTX minted tons of this highly valuable yet extremely imaginary money—there are currently about 300 million FTT tokens in circulation—and reportedly used it as collateral to take out loans for Alameda. This was dangerous because if the price of FTT fell below a certain level, it would leave Alameda unable to pay back its lenders. (When the entire crypto market slumped earlier this year, people were mystified to see FTX bail out several failing companies. SBF may have been trying to prevent those companies from selling their FTT at a discount.)

In early November, CoinDesk reported that two-fifths of Alameda’s $14.6 billion balance sheet was held in FTT, sparking panic among FTX customers, who were aware that problems at Alameda could mean problems for the exchange. Changpeng Zhao (a.k.a. CZ), the CEO of rival exchange Binance, dumped 23 million FTT, sending its price into free fall. Twisting the knife, CZ announced a tentative deal to buy FTX, then abandoned it after finding too many holes in the company’s finances. One reason for those holes, according to Reuters: SBF had created a secret backdoor in FTX’s bookkeeping system that allowed him to move depositors’ money off the exchange to Alameda without alerting customers or most of his own employees. Oh, and another plot twist: Turns out SBF had given himself a $1 billion personal loan out of Alameda’s coffers.

Explain it to me like I’m … into Shakespeare.

“No, they cannot touch me for coining. I am the king himself.” King Lear, Act 4, Scene 6.

Got it. Now explain

What Happened to FTX?