Few trials pick up as much interest as that of FTX’s founder and ex-CEO, Sam Bankman-Fried (“Bankman-Fried”). Once the leader of a cryptocurrency exchange platform valued at its peak at around $32 billion[1], Bankman-Fried has spent the past month in a Manhattan federal courthouse facing charges of fraud, conspiracy, and money laundering. Last week, after less than five hours of deliberations, the jury delivered its verdict: guilty on all charges[2]. We thought it a pertinent time to consider ten things that we learnt about Bankman-Fried and FTX.

1. Who’s Who

To understand Bankman-Fried’s trial, you need only know the names of three companies: FTX, Alameda Research (“Alameda”), and Binance. FTX was a cryptocurrency exchange. Founded in May 2019 by MIT-graduate Bankman-Fried, FTX would go on to host 1 million users and become one of the largest cryptocurrency exchanges on the planet. Binance, an investor in FTX, ranks amongst the largest cryptocurrency exchangers[1]. Alameda was a private cryptocurrency trading firm run by Caroline Ellison, and part-owned by Bankman-Fried. Alameda and FTX, despite what Bankman-Fried may have espoused as his fortunes turned, were inextricably linked.

2. What set off the chain reaction that led to the collapse of FTX?

In November 2022, CoinDesk, a crypto-based news site, posted a report that Alameda Research held a position valued at $5 billion in FTX Token (“FTT”). As it transpired, Alameda’s investment foundation was also in FTT[2]. If the currency failed, both of Bankman-Fried’s firms would pay the price. Over the ten days after CoinDesk published its report, FTX would collapse. This is largely because the report not only highlighted the potential risks posed by tying two companies to the same cryptocurrency, but more importantly, also revealed that Alameda would routinely borrow from FTX. The source of these funds is a key point in Bankman-Fried’s trial.

A leaked FTX balance sheet dated 10 November 2022 also showed that the company had roughly $9 billion in liabilities, with only $900 million in easily saleable assets[3]. This resulted in Binance announcing on 6 November 2022 that it would sell roughly $580 million dollars’ worth of FTT[4]. By 7 November, FTX was experiencing a vast liquidity crisis as customers made a run on the exchange. Soon after, FTT’s value had plummeted by 80%[5], and both FTX and Alameda filed for bankruptcy.

3. What was the problem?

The crux of the matter in Bankman-Fried’s trial was simply whether Bankman-Fried ordered his employees to mishandle FTX customers’ money to fund the loans to Alameda. Prosecutors argued that Bankman-Fried had conspired to move billions of dollars’ worth of customer deposits from FTX to Alameda, which he then used to pay for items unrelated to FTX operations[6]. Bankman-Fried’s former employees and friends took to the stand, largely to vilify him. By his own account, however, he was unaware of the mishandled funds until it was too late.

4. Recollections vary between friends  

Gary Wang, Bankman-Fried’s university friend and right-hand man, and Caroline Ellison, CEO of Alameda and Bankman-Fried’s ex-girlfriend, both pleaded guilty to fraud and cooperated with the prosecution. They both stated that they warned Bankman-Fried that Alameda owed more than $10 billion to FTX. They also testified that they committed financial crimes under his direction. Mr Bankman-Fried responded “I don’t recall giving any direction[7]. In fact, this was a running theme. On the witness stand, as he was being questioned, Bankman-Fried responded with “I do not recall” more than 140 times[8]. The prosecution often countered this with a statement given by him to journalists at the time which featured exactly what he had been asked[9].

5. Money is “fungible anyway”

Bankman-Fried ran Alameda until 2021. When asked about how $8 billion of FTX customer money had been spent, Bankman-Fried claimed that he only discovered this fact months before FTX collapsed. The prosecution alleged, however, that Bankman-Fried had set up special lines of credit between the companies allowing Alameda unlimited borrowing privileges[10]. After being questioned on how he could have been unaware that $8 billion dollars had been spent, Bankman-Fried responded that he was not “interested in doling out blame[11] and that “money is fungible anyway[12]. Unsurprisingly, FTX’s customers did not feel the same way.

6. Tweet with caution

The jury’s attention was often brought to several of Bankman-Fried’s posts on the social media website X, formerly Twitter. Prosecutors showed them a tweet from July 2019, in which Bankman-Fried stated that Alameda’s account on FTX was “just like everyone else’s”. Gary Wang, a close friend of Bankman-Fried, testified that FTX had on the very same day implemented the code that allowed Alameda unlimited rights to borrow from FTX[13]

7. “This kind of fraud is as old as time”

Many of the problems at FTX arose because of the business decisions made by Bankman-Fried himself. As such, the prosecution presented their case as one of fraud rather than a complex crypto currency case. “The crypto industry might be new, the players like Sam Bankman-Fried may be new, but this kind of fraud is as old as time” said Damian Williams, the lead federal prosecutor[14]. The U.S. Justice Department seems keen to use the conviction as a reminder to the crypto industry that they are not immune from the law. Where customer funds are involved, fiduciary duties and AML rules still apply.

8. How has the regulatory landscape changed since FTX’s collapse?

Regulators around the world have also begun to make moves to shore up their crypto frameworks. The UK Treasury last week announced its response to a consultation on the future of crypto regulation. They published their initial plans, which would bring several cryptoassets under regulatory oversight. They specified that this was partly in response to the collapse of FTX[15]. The UK has also, through the Financial Services and Markets Act 2023, now enabled the regulation of cryptoassets and established sandboxes in which market participants can use new technologies such as blockchain in financial markets[16]. The EU has made further advances in its Markets in Crypto-Asset Regulation (MiCA), which entered into force in June of this year. In the US, July saw a bipartisan bill introduced in the Senate to grant the Commodity Futures Trading Commission oversight over most forms of cryptocurrency[17]. We expect to see more regulatory impact in 2024.

9. Is DeFi the future?

The FTX collapse was a failure of business models and practices rather than the blockchain technology, so now the question is whether the conviction last week will finally pave the way to a decentralised finance (“DeFi”) future?

One of the biggest benefits of DeFi frameworks is that they are transparent. Transactions conducted on the blockchain, whilst anonymous, are public, so all activity can be audited and fraudulent activity can be traced. However, DeFi is constantly evolving, so it will be interesting to see how the innovative DeFi community further develops the infrastructure.

10. What’s next for Bankman-Fried?

Following the jury’s guilty verdict, Bankman-Fried will return to court for sentencing on 28 March 2024. He faces a maximum of 115 years in prison for the 7 convictions[18]. His lawyer released a statement following the verdict: “We respect the jury’s decision. But we are disappointed with the result. Mr Bankman Fried maintains his innocence and will continue to vigorously fight the charges against him[19].

[1] https://www.statista.com

[2] https://www.investopedia.com

[3] https://www.ft.com

[4] https://www.theguardian.com

[5] https://www.cnbc.com

[6] https://www.law360.com

[7] https://www.theguardian.com

[8] https://www.nbcnews.com

[9] https://www.theguardian.com

[10] https://www.bbc.co.uk

[11] https://www.bbc.co.uk

[12] https://www.ft.com

[13] https://www.ft.com

[14] https://www.reuters.com

[15] https://www.ft.com

[16] https://www.reuters.com

[17] https://www.ft.com

[18] https://www.cnbc.com

[19] https://cointelegraph.com