A “genius” fraud: the story of Sam Bankman-Fried

Sam Bankman-Fried’s life began promisingly. He graduated from the prestigious MIT in 2014 with a bachelor’s degree in physics to join the Center of Effective Altruism. This organization consists of the following idea: the first part of life is about making as much money as possible, and in the second is this money should be donated to good causes. Bankman-Fried promised that when he will make a lot of money, he will later donate these funds aggressively. At the Center of Effective Altruism, Bankman-Fried meets Tara Hedley, with whom he founded Alamada Research in 2017.  With this hedge fund, he earns a lot of money through arbitrage in a short period with which he could eventually fund FTX.

What is FTX?

In 2018, the platform FTX became a reality. FTX functioned as a crypto exchange. Here it was possible to trade in the best-known cryptocurrencies (including its own token FTT), NFTs and futures. In addition, it was possible to trade with a high leverage position. The platform was already growing rapidly; for example in 2020, $385 billion in cryptocurrencies was already being traded. “Built by traders, for traders” was the motto. Thanks to its user-friendly website, many said it was the best platform to trade cryptocurrencie

s. That same year, FTX acquired a majority stake in Blockfolio, an app that allows you to track the value of your crypto portfolio. It later turned out that 94 percent of this deal was paid for with FTT.  Brand awareness also grew as a result of the many commercials on television and during the Super Bowl, which featured several celebrities. Bankman-Fried himself got regular publicity and was even on the front page of Forbes. This gave people more confidence in the platform. However, this trust soon came to an end.

“Sam Bankman-Fried is one of the most sensational stories in the history of capitalism.” Michael Lewis

The collapse

While on paper Alamada Research and FTX are two different companies, in practice it turns out differently. In fact, Alamada Research’s balance sheet shows that the company owns a lot of FTT. While this is not illegal, it does show that Alamada Research relies heavily on FTX.  This shows that the token is not decentralized, which is what it is supposed to be. As mentioned earlier, FTT is the token of the exchange FTX; owners of this token pay fewer transaction fees. Sam Bankman-Fried regularly signaled his confidence in FTT by often indicating via Twitter that he was buying the token at a later date. Because Alamada Research did not indicate how much FTT they had, price manipulation was possible. Sam Bankman-Fried allegedly directed Alamada to purchase large numbers of FTT when the price fell in order to prevent a further decline. The company also even used FTT as collateral when raising new loans.

“I thought he was the Mark Zuckerberg of crypto, but is he now the Bernie Madoff of crypto?” Anthony Scaramucci

In 2022, Alamada’s main lenders went bankrupt. To make up for this shortfall, Bankman-Fried decides to allocate customer deposits on FTX to Alamada. To make matters worse, Binance CEO Changpeng Zhao (better known as CZ) decides to liquidate all FTT on Binance. When the price of FTT falls by more than 75% in 2022, there is great cause for panic. What follows is a bank run, with customers of FTX trying to withdraw their positions from the exchange. However, these positions are not on the exchange, as it has thus used to cover deficits on Alamada.

The collapse is complete on November 11^th, 2022, Alamada Research and FTX are both bankrupt. A week later, Bankman-Fried indicates in an interview with CNBC that it was “not his intention to scam others” and that he would “handle some things differently now.” Sam Bankman-Fried is subsequently arrested and faces a 25-year prison sentence. In total, former FTX customers are missing more than $8.9 billion.

What started as a fascinating story involving charitable donations, ends up being one of the biggest scams of all time.