The founder of bankrupt cryptocurrency exchange FTX has written to his former employees apologizing for his role in its collapse and continuing to insist its downfall can only be explained by $8bn (£6.7bn) misplaced.
In the letter, first published by industry news site CoinDesk, Sam Bankman-Fried wrote: “I deeply regret the failure of my oversight. In retrospect, I wish we had done a lot of things differently… I will do what I can to make up for you guys – and the customers – even if it takes the rest of my life.
Despite the mea culpa, however, Bankman-Fried said the company was salvageable and that if he hadn’t been forced into bankruptcy in mid-November he could have bailed it out.
“We probably could have raised significant funds,” he wrote. “The potential interest on billions of dollars of funding came about eight minutes after I signed the Chapter 11 filings. Between those funds, the billions of dollars of collateral the company still held and the interest we had received from elsewhere, I think we probably could have returned great value to customers and saved the business.
“An extreme amount of coordinated pressure came, out of desperation, to file for bankruptcy for all of FTX – even entities that were solvent – and despite claims from other jurisdictions… I reluctantly caved in to that pressure, even though I would should have known better ; I wish I had listened to those of you who have seen and still see value in the platform, which was and is my belief as well.
In the letter, Bankman-Fried reiterated that FTX was a fundamentally sound business, presenting a narrative of its downfall that showed it with $60 billion in assets, against just $2 billion in liabilities, as of this spring.
Since then, he says, two crashes in the cryptocurrency markets have led to a decline in the value of his assets, even as more customers have fled to the platform. By November, his net worth had dropped to $17 billion, before a “bank run” resulted in $8 billion in withdrawals in just days.
The coup de grace, he said, was uncovering another $8 billion in liabilities due to old cash deposits from “before FTX had bank accounts.” Bankman-Fried previously explained in messages to Vox reporter Kelsey Piper that those debts had been forgotten for years.
They existed because the company used to ask users to wire funds to the Alameda Research Group hedge fund bank account, where entrenched mismanagement has resulted in billions of dollars in cash.
Bankman-Fried did not directly address Alameda’s involvement in his memo to employees, glossing over the source of the confusion, and also failing to mention the inciting November bank run incident: the finding that Alameda’s creditworthiness was based on billions of dollars worth of a token, FTT, which FTX printed itself and which had no deeper value beyond FTX’s promise to actually pay dividends to holders.
“I never intended this to happen,” wrote Bankman-Fried. “I didn’t realize the full extent of the margin position, nor did I realize the magnitude of the risk posed by a hypercorrelated incident.”
However, the exculpatory narrative presented by the former CEO – who was replaced in mid-November by John J Ray III, the bankruptcy specialist who oversaw Enron’s liquidation 20 years ago and said FTX is the worst case he has seen – criticized by observers.
Bankman-Fried presents the company’s finances by “marking everything to market, regardless of liquidity,” assuming the massive cryptocurrency deposits held by FTX can be sold for anything approaching market prices.
For large markets like bitcoin or ethereum, this assumption could be true. However, FTX has denominated billions of dollars of its assets in tokens, such as FTT and serum, which it controls. According to a balance sheet prepared by Bankman-Fried shortly before FTX’s bankruptcy, $2.5 billion of the company’s assets were in tokens created by FTX, which had a total market capitalization of a fraction of that amount.
The Delaware bankruptcy court heard on Tuesday how the former CEO had been running FTX as his “personal fiefdom.” The company’s lawyers told the court that 8% of FTX Group’s clients were based in the UK, representing around 80,000 unsecured creditors.
The majority of these clients are believed to be corporate clients and investment professionals, who use the lightly regulated exchange FTX International to place risky leveraged bets on cryptocurrency values.
Following the FTX crash, online bank Starling announced a seven-month suspension of all customer deposits on cryptocurrency exchanges, citing the risk to consumers. The suspension will be reviewed in June 2023, the bank said.