NEW YORK (AP) — Sam Bankman-Fried has received massive applause as he quickly rose to superstar status as head of cryptocurrency exchange FTX.: The savior of crypto, the newest force in democratic politics, and possibly the world’s first trillionaire.
Now, comments about Bankman-Fried, 30, range from bemused to hostile after FTX filed for bankruptcy protection. On Friday, its investors and clients feel cheated, and many others in the crypto world fear the repercussions. Bankman-Fried himself can be brought to administrative or criminal liability.
“I’ve known him for several years now and what just happened is shocking,” said Jeremy Aller, co-founder and CEO of cryptocurrency firm Circle.
Under Bankman-Fried, FTX quickly became the third largest exchange by volume. The stunning collapse of this nascent empire set off a tsunami-like wave in the cryptocurrency industry, which has seen its fair share of volatility and turmoil this year, including a sharp drop in the price of bitcoin and other digital assets. To some, these events are reminiscent of the dominoes of the failure of Wall Street firms during the financial crisis of 2008, especially now that supposedly healthy firms like FTX are failing.
One venture capital fund wrote off over $200 million in FTX investments. Cryptocurrency lender BlockFi suspended customer withdrawals on Friday after FTX filed for bankruptcy protection. Singapore-based exchange Crypto.com saw an increase in internal withdrawals this weekend, but some of the activity may be related to FTX’s nervousness.
“Sam, what have you done?” Sean Ryan Evans, host of the cryptocurrency podcast Bankless, tweeted after filing for bankruptcy.
Bankman-Fried and his company are under investigation Department of Justice and the Securities and Exchange Commission. The investigation likely focuses on the possibility that the firm may have used customer deposits to fund bets at Bankman-Fried’s hedge fund, Alameda Research, in violation of U.S. securities law.
“This is a direct result of the scammer violating every major financial responsibility rule,” said Patrick Hillman, director of strategy at Binance, FTX’s biggest competitor. At the beginning of last week, Binance seemed to be ready to intervene to bail out FTX but retreated after reviewing FTX books.
The ultimate impact of FTX’s bankruptcy is unclear, but its failure will likely result in the destruction of billions of dollars of wealth and more skepticism about cryptocurrencies at a time when the industry could use a vote of confidence.
“This worries me because it is retail investors who suffer the most, and because too many people still mistakenly associate bitcoin with the fraudulent ‘cryptospace’,” said Corey Clippsten, CEO of Swan Bitcoin, who has been voicing concerns for months about FTX business models. Klippsten is publicly enthusiastic about bitcoin, but has long been deeply skeptical about other parts of the crypto universe.
Bankman-Fried founded FTX in 2019 and it has grown rapidly, recently valued at $32 billion. The son of Stanford professors who was known to play the video game “League of Legends” during meetings, Bankman-Freed attracted investments from the upper echelons of Silicon Valley.
Sequoia Capital, which has invested in Apple, Cisco, Google, Airbnb and YouTube for decades, described its meeting with Bankman-Fried as “a conversation with the world’s first trillionaire.” Several Sequoia partners were enthusiastic about Bankman-Fried after meeting at Zoom in 2021. After a few more meetings, Sequoia decided to invest in the company.
“I don’t know how I know, I just know. SBF is a winner,” wrote Adam Fisher, a business journalist who has written about Bankman-Fried for the firm, referring to Bankman-Fried by his popular online moniker. The article, published at the end of September, was removed from the Sequoia website..
Sequoia has written off its $213 million investment to zero. A pension fund in Ontario, Canada, also wrote down its investments to zero.
A brief statement from the Ontario Teachers’ Pension Fund said: “Naturally, not all early-stage investments in this asset class will meet expectations.”
But until last week, Bankman-Freed was considered the white knight of the industry. Whenever there was one of the crises in the crypto industry, Bankman-Fried was the person who could fly in with a rescue plan. When online trading platform Robinhood found itself in financial trouble earlier this year due to collateral damage from falling stock and crypto prices, Bankman-Fried jumped in to buy a stake in the company in a show of support.
When Bankman-Fried bought up the assets of bankrupt cryptocurrency company Voyager Digital this summer for $1.4 billion, it brought a sense of relief to Voyager account holders whose assets had been frozen following his own bankruptcy. This salvation is now in question.
The failure of FTX began after cryptocurrency news portal CoinDesk published an article based on a leaked balance from Alameda Research. History has shown that the relationship between FTX and Alameda Research was deeper and more intertwined than previously known, including that FTX provided Alameda with a large number of native FTT tokens to help raise cash. This triggered a massive withdrawal of funds from FTX, leaving the crypto firm facing a very old financial problem: a bank run.
“FTX created a worthless token out of thin air and used it to make its balance look more reliable than it really was,” Clippsten said.
Bankman-Fried’s influence as the king of cryptography began to seep into political and popular culture. FTX has acquired prominent sports sponsorship from Formula One Racing. and bought the rights to the name of the arena in Miami and ran a Super Bowl ad featuring Seinfeld creator Larry David. He pledged to donate $1 billion to Democrats this election cycle — his actual donations were in the tens of millions — and prominent politicians such as Bill Clinton have been invited to speak at FTX conferences. Football star Tom Brady has invested in FTX, as has his supermodel and soon-to-be ex-wife, Gisele Bündchen.
Bankman-Fried was subject to some criticism before FTX collapsed. While he mostly ran FTX outside of US jurisdiction from his headquarters in the Bahamas, Bankman-Fried has increasingly spoken out about the need for increased regulation of the cryptocurrency industry. Many crypto advocates oppose government oversight. Now the collapse of FTX may have contributed to stricter regulation.
One such critic was Changpeng Zhao, founder and CEO of Binance. The feud between the two billionaires spilled over onto Twitter, where Zhao and Bankman-Freed collectively commanded millions of followers. Zhao helped initiate the withdrawal that doomed FTX when he said Binance would sell its holdings in the FTX FTT cryptocurrency token.
“Which how (asterisk) (asterisk) does not show… and it will be the fault of the cryptocurrency (and not the fault of one guy),” Zhao tweeted on Saturday.
Reporters Michael Balsamo of Washington and Kathy Bassevitz of New York contributed.
To learn more about cryptocurrencies, visit the website: https://apnews.com/hub/cryptocurrency.
This story has been corrected to say that Adam Fisher is a freelance business journalist at Sequoia Capital. In a previous version of this story, Fisher identified himself as a Sequoia employee.