On October 17, local time, Nishad Singh, the former engineering director of FTX, walked out of the Federal District Court at 500 Pearl Street, Southern District of New York, accompanied by a crowd of people, to complete his second day of court questioning. This game is aimed at the former "golden boy of the currency circle" andFTX founder and CEO Sam Bankman-Fried (SBF) is accused of huge financial fraud and money laundering in the "trial of the century", since the court session began on October 3 under the spotlight of the outside world, it has now entered its third week.
On November 11 last year, FTX, the world's second largest cryptocurrency exchange, suddenly collapsed and filed for bankruptcy. US$32 billion in market value was wiped out overnight, and 1 million creditors were implicated, triggering a major earthquake in the cryptocurrency industry. With the bankruptcy and liquidation, the long-hidden darkness, sin, madness and unbearability behind FTX also surfaced. Many company executives, including SBF, were all arrested and faced multiple criminal charges from the U.S. judicial department.
So far, three figures in the core circle of the FTX cryptocurrency empire who once surrounded SBF have reached plea agreements with prosecutors and appeared in court as key witnesses.
Let’s get to know each other first:
Gary Wang, co-founder of FTX and its sister hedge fund Alameda Research, served as CTO of these two companies. He met SBF at a high school math summer camp, and the two were not only admitted to MIT together, but also became roommates. In 2017, Gary Wang resigned from Google and co-founded Alameda with SBF. He testified at the trial that he was instructed by SBF to provide special treatment to Alameda and illegally used FTX customer funds to fill Alameda's financial gap from the beginning of the exchange's establishment. SBF also asked him to create a software vulnerability that gave hedge fund Alameda a $65 billion credit line and "unlimited withdrawal" rights at FTX.
Image from YukiIwamura/Bloomberg
NishadSingh, co-founder and former head of engineering at FTX. He graduated from UC Berkeley and was a close friend of the SBF brothers in high school and a roommate in their early stages of entrepreneurship. After reaching the peak of their lives, they moved together into a 10-person luxury penthouse in the Bahamas. NishadSingh stated that he knew that SBF had transferred approximately US$8 billion in FTX customer assets to Alameda accounts and abused them privately.
Picture from YukiIwamura|Bloomberg|GettyImages
Caroline Ellison, the most interesting of the three witnesses. This female Stanford academic was a colleague of SBF when he was a trader at JaneStreet Company on Wall Street. She was also his confidant and ex-girlfriend. She will be promoted to co-CEO of Alameda starting in August 2021. In her testimony, she admitted that Alameda illegally used FTX’s customer funds to conduct transactions, and identified SBF as the person with the final decision-making power of the two companies.
Image from Michael M. Santiago|GettyImages
In fact, including SBF himself and these three key witnesses, the 10 core employees of FTX were either from SBF's former colleagues at JaneStreet, or were his college classmates and members of the "Effective Altruism" society at his alma mater, MIT, and had various close relationships with each other.
An insider described FTX as, “The whole business is run by a bunch of kids living in the Bahamas", and said that this small group of ten people is too young and inexperienced. There is no standard at work. SBF has the final say on almost all matters. Handling tens of billions of dollars is like child's play.
So how did these seemingly "little hippies" cause so many senior investors around the world, including venture capital giants such as Sequoia Capital, SoftBank Vision, Temasek, and Tiger Global, as well as players in the wild currency circle to be severely "cut off leeks", resulting in heavy losses and rivers of blood?
If we want to give a brief review of FTX’s collapse timeline, we must start with the revelations about Alameda’s asset structure.
It only takes 10 days to fall from the altar
On November 2 last year, CoinDesk, a news website focusing on Bitcoin and digital currencies, published an article revealing that Alameda Research, FTX’s sister quantitative cryptocurrency trading company and SBF’s self-operated trading market maker, has most of its assets in the FTT tokens of the FTX platform, accounting for about 40% of the total assets.
This shows that Alameda’s financial foundation is not based on a relatively stable currency system such as the US dollar or Bitcoin, but depends on the operating conditions of FTX. Not only that, Alameda also used FTT tokens as collateral to borrow large amounts from FTX accounts. To put it bluntly, that isAlameda takes customers' real money from FTX, but only needs to advance the self-produced FTT tokens that they already have., the technique is like "the emperor's new clothes".
On November 5, Changpeng Zhao (CZ), founder of Binance, the world’s largest cryptocurrency exchange, tweeted to warn of risks and stated that he would sell all FTT in his hands.
Picture from X
This triggered strong concern and uneasiness from the outside world. FTT was immediately sold by investors and the market began to run.
According to internal emails from FTX, its funds had a net outflow of nearly US$6 billion within 72 hours, and the price of FTT also plummeted from more than US$20 to US$1.5. At the same time, a large number of users found that their deposits on the FTX platform were frozen and unable to withdraw cash. At this time, the currency circle was in chaos, and the weather was about to change. People began to smell the signs that a heavy rain was coming and the building would collapse.
At the critical moment, on November 8, CZ dramatically announced on Twitter, "We have received requests for help from a severe liquidity crunch in FTX. In order to protect users, Binance intends to fully acquire FTX and conduct a complete investigation into the matter in the next few days."
Picture from X
Binance wants to rescue the market, which finally eases everyone's nervousness. But this breath of relief was not over yet. In less than a day, Binance’s official Twitter posted a message stating that based on the results of due diligence, it had finally decided to abandon the acquisition of FTX.
Pictures from X, copyright belongs to the original author
The roller coaster took another sharp turn and slid to the bottom of the valley, but this time it was indeed at the terminal:
On November 11, 2022, SBF stated on Twitter that it had applied to the US court for bankruptcy protection of FTX and Alameda., and apologized for finally coming to this point.
Picture from X
SBF's own net worth dropped from US$16 billion to less than US$1 billion. He himself resigned as CEO early last month, and ran away to the Bahamas on the 2nd when the news was revealed. From his penthouse apartment with a wide view and beautiful scenery, he watched the human tragedy he had brewed from a distance.
a mess
The person who succeeded SBF as the new CEO and liquidator of FTX was John Ray III. As a professional lawyer with 40 years of experience, he is famous for handling large corporate bankruptcy and restructuring cases and is known as the "Revival Titan" in the industry. This time, his mission is to recover FTX’s assets as much as possible and seek justice for creditors and investors.
John Ray III spoke at a hearing of the House Financial Services Committee in Washington on December 3 last year. Picture from AlDrago/BloombergviaGettyImages
But even though he had handled the Enron bankruptcy liquidation case that shocked the United States and helped the U.S. government recover US$60 billion in funds, this veteran liquidator also exclaimed after seeing the "mess" left by FTX: "See you again soon": "Never in my career have I seen such a complete failure of corporate controls and such untrustworthy financial information. "From compromised system integrity and faulty overseas regulation to the concentration of control in the hands of a tiny number of inexperienced and immature individuals, this situation is unprecedented," he said. "
Judging from the 30-page document Ray filed with the U.S. Federal Bankruptcy Court,FTX’s management can only be summed up in one word: Chaos.
First, RayNo company bank account, cash account or accounts payable records found, the flow of funds is extremely unclear and opaque, making it impossible for him to know exactly how many assets FTX has left. “Without professional financial auditing and monitoring, some subsidiaries also have problems.” Such a huge company worth tens of billions of dollars does not even have a decent financial record. It is more casual than a child playing house.
FTX also has no payment control type suitable for commercial enterprises: Employees usually submit payment requests through an online chat platform, and different supervisory groups approve payments by replying with emojis.
At the same time, as a digital asset exchange,FTX does not keep books or conduct compliant custody of its digital assets. They "used an unsecured group email address as the root user to access the confidential private keys and key sensitive data of the global FTX group." This also led to a bizarre hacker attack on the night of November 11, when FTX declared bankruptcy. More than 330 million US dollars flowed out of the platform and disappeared into the vast sea of chains (although this was later suspected to be "self-monitored theft" by former FTX employees).
In addition, FTX does not keep any investment and decision-making records, norNo board meeting has ever been held. Even SBF himself encouraged executives at FTX and Alameda to use the “burn after reading” Signal application for internal communication. They deliberately chose vague language to write internal documents to evade scrutiny and avoid leaving records that could become incriminating in the future. Caroline Ellison once admitted personally: "The SBF told us not to put matters in writing because it might cause legal problems."
Turning to the personnel aspect,FTX failed to provide a complete employee roster, lacked terms of employment, and had no accounting department, not to mention standardized workflows. Regardless of the possibility of "empty pay", the management of an exchange that claims to have 300 employees and is "top of the currency circle" is so chaotic. Dozens of first-class investment institutions such as SoftBank and Sequoia also rushed to invest more than US$2 billion. I wonder if it is due to excessive trust in the cryptocurrency utopia described by SBF?
Scammers disguised as "effective altruism"
If there is just chaos in management, it will not be enough for SBF to commit heinous crimes. What really drove him into the abyss was his almost crazy greed.
Under the leadership of SBF,FTX transferred nearly $10 billion, more than half of the platform’s client assets, to the account of its affiliate Alameda Research, providing the latter with risk betting funds and filling financial gaps, and using customized software to forge account books to cover up this illegal abuse of customer funds.
When the cryptocurrency market spiraled downward in June last year, in order to prevent the truth about Alameda’s assets from being exposed, SBF also asked his ex-girlfriend Ellison to prepare seven different balance sheets to hide from the outside world the fact that he owed nearly ten billion U.S. dollars to FTX customers.
And Alameda is not idle either:It lent billions of dollars to FTX executives personally, including US$1 billion to SBF personally, US$543 million to engineering director Nishad Singh, US$200-300 million to co-founder Gary Wang, etc. - Seeing this, do you feel that you no longer recognize the word "100 million".
So what did SBF do with this customer’s hard-earned money?
Answer: Buy luxury homes for key employees.
Ray, the new CEO and liquidator, said: "In the Bahamas, it is my understanding that FTX Group's corporate funds were used to purchase properties and other personal items for employees and consultants. There appear to be no loan documents for some transactions, and in Bahamian records, those properties were registered in the personal names of employees and consultants."
Reuters searched the property records of FTX, SBF and his parents, as well as other company executives at the Bahamas Registrar's Office and found that FTX's Real Estate Holdings Ltd. purchased a total of 15 properties in 2021 and 2022, worth nearly $100 million.
SBF’s Albany Resort penthouse location in the Bahamas, picture from TheTelegraph
In addition, FTX also bought the Super Bowl advertising space in February last year, became the official sponsor of Major League Baseball, and bought the 19-year naming rights of the Miami Heat basketball stadium, naming it FTXArena.
Miami Heat home basketball court, photo from HeatNation
SBF is also keen on socializing with political, business and entertainment celebrities. Last year, FTX entered into long-term partnerships with seven-time Super Bowl champion Tom Brady and Brazilian supermodel Gisele Bündchen. In addition to an equity stake in the company, the pair served as FTX’s brand ambassadors and appeared in commercials, receiving cryptocurrency payments in return.
The couple (still at that time) filmed a promotional video for FTX called "Tom Brady has joined, won't you come?" In the video, Tom Brady confidently said to the phone: "This has got me in!" When people from all walks of life received the call, they put down their work and said, "Tom, I'm in too!"
Screenshot of FTX advertisement, picture from YouTube
The San Francisco Golden State Warriors have also announced FTX as their officially recognized cryptocurrency and NFT platform. Basketball superstar Stephen Curry has become a brand ambassador and shareholder, and has supported FTX many times.
Screenshot of FTX advertisement, picture from YouTube
Now, these celebrities who once promoted FTX not only lost money on the platform, but were also sued in court for false propaganda by some investors who suffered heavy losses.
SBF has always claimed to be a loyal follower of "Effective Altruism", a movement very popular in Silicon Valley. It originally called on people to use analytical reasoning to maximize the good things they do and have a long-term positive impact on the world.
And SBF has indeed done a lot of good things. When he was in college, he became a vegetarian because he felt that factory farming was too cruel. After his successful career, he donated US$50 million to India for epidemic relief and climate change response. He established the FTX Future Fund to fund innovations in areas such as artificial intelligence, vaccines, and big data. He also provided resources and financial support for DeFi (decentralized finance) projects.
However, in his value system, SBF believes that anything that can maximize utility, even lying and cheating, is acceptable. So when he misappropriated tens of billions of dollars at will and engaged in fraud, he finally "played it big": the unhealthy asset structures of FTX and Alameda were unable to cope with market runs and currency price drops at the same time, and the cryptocurrency empire that he and his good friends carefully marketed collapsed. And he was also denied by the movement of his supporters: "If you use other people's money to do good things, it is not called effective altruism." It is just a money game where people indulge in money.
The end of the story
According to documents filed by the U.S. Federal Bankruptcy Court, FTX disclosed liabilities of US$10 billion to US$50 billion in its bankruptcy filing, and the new management only found a small portion of its assets, including US$740 million in cryptocurrency and approximately US$560 million in cash stored in offline cold wallets. The case involves more than 1 million creditors in total. The top 50 creditors hold a total of US$3.1 billion in debt, and the debt of the largest single creditor exceeds US$226 million. It is said that the money will most likely not be recovered.
The trial is expected to last about six weeks, and the verdict will be pronounced before Thanksgiving this year. The U.S. judicial department has charged SBF with seven counts including financial fraud, money laundering, wire fraud, and conspiracy. If convicted on all charges, he will face up to 115 years in prison.
From the "Afro-headed guy" sleeping on the lazy sofa in the office, to the top rich man known as "Warren Buffett" in the currency world, to the prisoner whose wealth was wiped out overnight, I believe the ending of the story will be there soon.
In August 2020, SBF’s “out-of-group photo” of sleeping in the office, picture from FTXTwitter
Finally, let’s take a look at the CoinDesk reporter, who is the currency media who broke the news about Alameda and caused the FTX domino effect. The profiling he did during the SBF trial hearing was a bit too casual.
This world is really a grassroots team.