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FTX founder Sam Bankman-Fried faces eight criminal charges, ranging from fraud to conspiracy to commit money laundering, in connection with the collapse of his once-dominant exchange. Earlier this week, he pleaded not guilty on all charges and got a trial date of October 2—but if that’s all you know about this saga so far, you might be wondering why it matters.
The collapse of FTX has become the single largest event to rock crypto markets. Before it ceased operations and filed for bankruptcy, FTX was the second largest exchange and saw nearly $30 billion in daily volume—a fact memorialized by Bankman-Fried in a November 2021 tweet.
It was to cryptocurrencies, like Bitcoin and Ethereum, what the New York Stock Exchange and Nasdaq are to stocks. Now, with $8 billion missing, allegations of commingled funds with trading firm Alameda Research, and its founder out on bail, the team overseeing FTX’s restructuring says it’s spent months trying to locate all the company’s funds—and customers still have no idea if they’ll ever see their money again.
Here’s how we got here:
In May 2019, Bankman-Fried, also known as SBF, co-founded FTX with ex-Google employee Gary Wang and initially headquartered the company in Hong Kong. Bankman-Fried had been running Alameda Research, his trading desk, since 2017.
Making a name for himself as a talented trader at Alameda made it easy for Bankman-Fried to raise money for his new venture.
He had a lot of eminent early stage investors on his cap table: Pantera Capital, Sequoia Capital, Digital Currency Group, competitor Binance along with its venture arm, Binance Labs, and Consensus Labs. By August that year, Bankman-Fried had closed an $8 million seed round.
By September 2020, Bankman-Fried had become the supposed savior of decentralized finance exchange SushiSwap—though the details of how this played out have since been put into question, given what we all now know about SBF.
Nevertheless, Bankman-Fried rode the wave of newfound popularity, but by fall of 2020 FTX needed more than a good reputation to compete with other centralized crypto exchanges. At the time, FTX’s daily volume had occasionally crept above the $1 billion mark, but not very consistently.
In October 2020, the company launched “fractionalized stock trading” for Tesla, Apple, and Amazon derivatives. Then in December, the exchange launched “tokenized stocks” for five cannabis-focused companies. “To be blunt, this is one the dopest joint listings we’ve done,” Bankman-Fried wrote in a pun-filled tweet at the time.
In a seemingly endless string of deals, FTX spent 2021 getting its name and logo in front of sports fans.
That included the Formula 1’s Mercedes-AMG Petronas team, NBA’s Miami Heat and Golden State Warriors, esports teams Furia and Team SoloMid, a 10-year naming agreement for University of California-Berkeley’s stadium, Major League Baseball umpire jerseys, Monumental Sports and Entertainment’s Washington-based pro teams, League of Legends creator Riot Games.
The marketing deals didn’t stop there. FTX also inked agreements with a handful of spokespeople: Tampa Bay Buccaneers quarterback Tom Brady and his then-wife, supermodel Gisele Bundchen; Golden State Warriors point guard Steph Curry; top women’s tennis player Naomi Osaka; and Los Angeles Angels star Shohei Ohtani.
“Everyone we talk to who knows us a little bit, or a lot, or barely, or intimately, this is top of mind for them," he would later say during the first episode of Decrypt's gm podcast. "Clearly this has penetrated more than everything else we've done combined, in terms of people's perception of us.”
All those deals have since been called off.
In a move that would prove pivotal in FTX’s undoing, the company bought out Binance’s equity shares in the company.
“We recently repurchased shares from Binance to buy them out of our cap table,” Bankman-Fried told Decrypt at the time. “I think it just makes sense given the role that our businesses are playing in the space. It can also give us more flexibility going forward.” It’s worth noting that Binance disputes this narrative, and CEO Changpeng Zhao, recently commenting on the deal publicly for the first time, now says it was Binance that chose to divest from FTX because of the company’s all-too-close relationship with sister firm Alameda.
FTX used $2.1 billion worth of Binance USD and—critically—FTX Token (FTT) to buy out Binance’s equity in the company. That meant that by the time things started to fall apart at FTX, Binance was still sitting on hundreds of millions worth of FTT.
The dust had just started to settle after TerraUSD, an algorithmic stablecoin, wiped out $40 billion from the crypto market. The collapse sent a stablecoin meant to hold a one-to-one peg with the U.S. dollar all the way to zero.
The resulting market turmoil left crypto hedge fund Three Arrows Capital, or 3AC, insolvent. And as everyone quickly realized, 3AC had maintained a large Terra position and been borrowing heavily from all the major crypto lenders to fuel its high stakes investment strategies.
Bankman-Fried dusted off his cape and started saying in interviews that the industry should be helping companies that were struggling in the wake of all the bankruptcies.
“I do feel like we have a responsibility to seriously consider stepping in, even if it is at a loss to ourselves, to stem contagion.” he said during an NPR interview. "Even if we weren't the ones who caused it, or weren't involved in it. I think that's what's healthy for the ecosystem, and I want to do what can help it grow and thrive."
Things started to publicly fall apart for FTX in November 2022, when damning reports about Bankman-Fried’s trading desk, Alameda Research, showed that it had billions in FTT on its balance sheet against billions in liabilities.
Investors quickly realized that Alameda had no good options: If it redeemed its FTT to pay its creditors, it would tank the token’s price. If it didn’t, it would be hit with default notices for failing to repay its lenders.
To avoid the fallout, Binance CEO CZ announced that his company would sell its $580 million stash of FTT. The company didn’t actually manage to sell many of its tokens, but the resulting panic led to billions being pulled off FTX’s exchange.
FTX was forced to halt withdrawals. For a short time, it entered a non-binding agreement to be acquired by Binance. But that deal fell apart within a day of being announced. Finally, Bankman-Fried resigned and FTX filed for bankruptcy on November 11. In its filing, the company disclosed that it owes between $10 billion and $50 billion to creditors.
After a frenetic media tour, during which Bankman-Fried repeatedly said he didn’t knowingly do anything wrong and did not intentionally commingle client and company funds, he was charged with eight crimes, including wire fraud and conspiracy to commit money laundering, and arrested in the Bahamas on December 12.
After spending more than a week in Bahamas’ Fox Hill prison, he was extradited and arrived in the U.S. on December 21. The Southern District of New York revealed that two of Bankman-Fried’s closest allies, co-founder Wang and ex-Alameda Research CEO Caroline Ellison, had pleaded guilty to their own charges and were cooperating with authorities as they built their case against Bankman-Fried.
Bankman-Fried pleaded not guilty on all charges on January 3. His trial is now scheduled for October 2 of this year.
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