In hindsight, Sam Bankman-Fried’s April interview with Bloomberg’s Odd Lots podcast was a harbinger of his epic collapse last week. He described a “box” that has value only because other people put money in it, and, when confronted with the idea that he described a Ponzi scheme, admitted there was a “depressing amount of validity” to that.
(Bloomberg) — In hindsight, Sam Bankman-Fried’s April interview with Bloomberg’s Odd Lots podcast was a harbinger of his epic collapse last week. He described a “box” that has value only because other people put money in it, and, when confronted with the idea that he described a Ponzi scheme, admitted there was a “depressing amount of validity” to that.
But what’s only now becoming clear is just how much of his cash, which ascribed value to countless crypto projects out of thin air, was coming from his complex web of 130-plus now-bankrupt entities.
A prominent example is Serum, one of the largest assets on FTX’s balance sheet. The exchange had $2.2 billion of the near-worthless token on its books before Bankman-Fried’s empire went bust last week, according to people with knowledge of the firm’s balance sheet. It also held similarly insignificant coins called Maps.me and Oxygen, said the people, who added that the document may not provide a full granular picture.
The most striking thing of all: It’s not clear who, if anyone, at the highest levels of FTX or Alameda Research, Bankman-Fried’s trading house, seemed aware of or involved in how much money they were giving to Serum projects, where it came from, or what it’d be funding.
Some specifics are emerging about the “magic impact” that Bankman-Fried described months ago. Interviews with people familiar with Serum and documents reviewed by Bloomberg News provide a glimpse of the missing accountability that played a central role in both Bankman-Fried’s rise and how he could tear an $8 billion hole in FTX’s balance sheet.
“At the time we did them, we thought those investments were positive expected value investments on their own merits,” Bankman-Fried said Monday in an emailed statement.
In the fallout, thousands of customers, employees, investors and brand ambassadors are processing why they put so much faith in one man, in a system meant to be trustless and transparent.
“Everyone thinks accounting and auditing is boring — until something like this happens,” said Gabriella Kusz, chief executive officer of Global Digital Asset & Cryptocurrency Association, an industry consortium.
Within weeks of Bankman-Fried’s appearance on Odd Lots, the $60 billion TerraUSD and Luna crypto ecosystem collapsed. The aftershock contributed to the bankruptcies of hedge fund Three Arrows Capital, lender Celsius Network and broker Voyager Digital, among others, and rattled even digital-asset diehards. Bankman-Fried went on a bailout bender, configuring deals worth $1 billion.
If there was ever a full-blown crisis of confidence across the crypto industry, judging by the $200 billion of losses in the digital-asset market over the past week, that time is now.
Too Easy
For one founder building a project using Serum, getting tens of thousands of dollars from Bankman-Fried’s orbit was almost too easy.
The harder part was figuring exactly where the money was coming from.
The person, who spoke on the condition of anonymity for fear of retaliation, describes an increasingly unsettling process unfolding after securing an online introduction to Alameda Ventures, the firm’s VC arm, through an acquaintance.
A team of faceless Telegram correspondents associated with FTX-linked entities appeared in a group chat. One of them, identified only by the initials “JHL,” approved a grant without anything more than a slide deck, asking no questions about what the money would fund, according to messages reviewed by Bloomberg News.
No compliance review. No handshakes. No strings attached. The only condition: To receive the grant, they had to open an FTX.com account first.
A separate slug of money also raised alarm bells.
The official investment contract was signed by someone the founder had never met, nor interacted with, who had a listed address on the 21st floor of a business plaza in Panama, according to the document viewed by Bloomberg News.
Stranger still, when six figures’ worth of USDC stablecoin arrived, it became clear it originated from a crypto wallet belonging to FTX.com.
The person said they wondered privately whether the money could have been drawn down from customers’ assets on the platform.
They didn’t probe further.
Investigations Underway
FTX’s lax oversight, ad hoc spending and potential mishandling of customer funds are at the heart of what regulators in the US and Bahamas are now investigating. Even after filing for bankruptcy on Nov. 11, analysts say about $662 million in tokens mysteriously flowed out of both FTX’s international and US exchanges.
The collapse is already drawing comparisons to Lehman Brothers, Enron and Bernie Madoff’s Ponzi scheme — another “vast explosion of wealth that nobody quite understands where it comes from,” as former Treasury Secretary Larry Summers put it.
Bankman-Fried could yet be in a league of his own.
FTX.com, a Bahamas-based exchange that took in customer money directly, ran up a $32 billion valuation since its founding in 2019, drawing in the biggest names in venture capital including Sequoia Capital, Tiger Global Management and SoftBank Group Corp. and using endorsements from Gisele Bundchen and Tom Brady to tout its services.
It lured more than 1 million traders from all around the world by allowing them to borrow large sums for highly speculative wagers on the price movements of more than 300 virtual currencies.
Even though Bankman-Fried assured customers that they were protected, the reality is they were at the mercy of oftentimes violent swings in the crypto markets. The day before its bankruptcy filing, FTX held $900 million in liquid assets against $9 billion of liabilities, according to the people familiar with its balance sheet.
That shortfall ballooned in large part because many of the tokens, like Serum’s, hold no obvious inherent value — as Bankman-Fried himself explained. The Serum protocol, built on the Solana blockchain, emerged two years ago with a vague promise to offer an order book-based decentralized exchange. In return, investors including Tiger Global showered the project with tens of millions of dollars.
A Tiger Global representative didn’t immediately reply to a request for comment.
Hype Man
But in the brave new world of decentralized finance, or DeFi, it was Bankman-Fried who proved to be the biggest hype man of all for new ideas.
Projects sprouted up all the time with his support — Maps.me and Oxygen among them.
This new world of investing and protocols came with its own lexicon (multi sig wallets, Merkle trees, crosschain interoperability), making it difficult for outsiders to cut through to the underlying meaning, if it existed in the first place.
Oftentimes, it was Bankman-Fried who stepped up to break it all down, whether through professorial-sounding Twitter threads or with his signature banter on any number of podcasts and online videos.
In one interview, proselytizing Serum, he explained why it made sense to use Solana for the project.
“This gets back to, what’s the vision here?” he said. “If the vision here is to support the current power users as much as possible, then I think Ethereum makes a ton of sense. If the vision is to grow out the DeFi ecosystem to 10,000 times as big as it is right now, then I think not only do you have to look at alternatives, but I think there are fewer costs to doing so.”
Serum’s Struggles
Though the Serum protocol was supposed to hold so much promise as recently as January, when it received funds from 18 investors, development nearly ground to a halt just months after it began. Like many promising projects Bankman-Fried imagined, it didn’t fully materialize before FTX unraveled.
Other tokens left hanging on the FTX balance sheet tell a similar tale. Maps.me token, which claimed to be part of an “omnichain infrastructure” and listed on FTX ten months ago, comprised more than $600 million of its “less liquid” holdings. A sister token, Oxygen, was similarly billed as a pivotal piece of the rapidly developing DeFi infrastructure, with prime broker functions.
The tokens collapsed in the wake of FTX’s Chapter 11 filing, and are each worth fractions of a penny.
Just about every coin is feeling the pinch. Crypto altcoin Solana dropped as much as 14% on Sunday, while other altcoins including Polkadot, Avalanche and Tron fell between 1.7% and 5.4%. Dogecoin tumbled as much as 7.5%. Bitcoin remains near a two-year low and Ether is still down more than 70% from its peak.
For much of the past two years, crypto served as an extreme reflection of the mood in financial markets broadly. Not anymore: the S&P 500 posted its best week in more than four months as digital assets buckled and FTX hurtled into bankruptcy.
To blunt the crypto contagion effect, Binance CEO Changpeng “CZ” Zhao — whose dumping of FTX’s FTT coin precipitated Bankman-Fried’s demise — said on Monday that his exchange plans to set up an industry recovery fund. He didn’t specify how big it might be, or what it would take for a project facing a liquidity crisis to qualify.
It’s the kind of position in the crypto world previously assumed by Bankman-Fried.
Money Made
One of the key questions as FTX’s bankruptcy progresses is who got rich from FTX’s money spigot.
It’s an open secret that crypto, with its loose regulations, is fertile ground for pump-and-dumps, often called “rug pulls.”
But more pertinent to FTX is its close ties with Alameda — a relationship it boasted about in its public white paper. Bankman-Fried claimed Alameda booked $1 billion in profit in 2021. Without the kind of guardrails keeping traditional financial institutions in check, the possible avenues of mischief are numerous.
Could Alameda view the levels of FTX customers’ margin, giving it knowledge of where to push prices to force customer positions to unwind? What boundaries existed to prevent the firm from jumping ahead of FTX users’ trades? With two corporate entities rolling up to Bankman-Fried, was the temptation to share information too tantalizing to resist?
Bankman-Fried and Alameda CEO Caroline Ellison, whose Massachusetts Institute of Technology and Stanford University imprimaturs and coveted roles at Jane Street, had an aura of untouchable genius and credibility with even the wonkiest math geeks. As more details come to light, it looks as if what they were doing wasn’t particularly sophisticated at all.
Regulators are scrutinizing whether it was above board.
The Bahamian police are working with the Bahamas Securities Commission to investigate whether there was any criminal misconduct in the collapse of FTX. He was questioned by Bahamian police and regulators Saturday, according to a person familiar with the matter.
Bankman-Fried and Ellison shrugged away concerns over conflicts earlier this year.
“We definitely have a Chinese wall in terms of information sharing” between the two, Ellison said when asked for a Bloomberg News article in September.
Yet four executives at FTX and Alameda are said to have known about a backdoor between the exchange and trading firm, according to a Wall Street Journal report.
As for Serum, it and other crypto projects are a long way removed from the “summer of DeFi” that it declared in a white paper around mid-2020. That was just as digital assets were on the brink of an epic boom that spawned Super Bowl ads, stadium naming rights and crypto bandwagoners who were all-too-eager to tell non-believers to “have fun staying poor.”
The paper also contained a note of caution for anyone willing to listen during those heady times.
“Serum isn’t perfect; nothing is.”
–With assistance from Yueqi Yang.
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