Sam Bankman-Fried’s fall sends shockwaves through cryptocurrencies

NEW YORK (AP) – Sam Bankman-Fried has received extensive acclaim for quickly achieving superstar status as head of cryptocurrency exchange FTX: the savior of cryptocurrencies, the newest force in democratic politics and potentially the world’s first trillionaire.

Comments on 30-year-old Bankman-Fried now range from confusing to hostile after FTX filed for bankruptcy protection Friday, leaving its investors and customers fooled and many others in the cryptocurrency world fearing the repercussions. Bankman-Fried himself may face civil or criminal charges.

“I’ve known him for several years and what just happened is just shocking,” said Jeremy Allaire, co-founder and CEO of the cryptocurrency firm Circle.

Under Bankman-Fried, FTX grew rapidly to become the third largest exchange by volume. The extraordinary collapse of this nascent empire has sent tsunami-like waves across the cryptocurrency sector, which has seen a good deal of volatility and turmoil this year, including a steep drop in the price of bitcoin and other digital assets. For some, the events are reminiscent of the domino-like failures of Wall Street companies during the 2008 financial crisis, particularly now that seemingly healthy companies like FTX are failing.

A venture capital fund has written down investments in FTX to the value of over $ 200 million. Cryptocurrency lender BlockFi suspended customer withdrawals on Friday after FTX sought protection from bankruptcy. Singapore-based exchange Crypto.com saw withdrawals increase this weekend for internal reasons, but some of the action could be attributed to FTX’s raw nerves.

“Sam, what did you do?” Tweeted Sean Ryan Evans, host of the cryptocurrency podcast Bankless, after filing for bankruptcy.

Bankman-Fried and his company are under investigation by the Department of Justice and the Securities and Exchange Commission. The investigation likely centers on whether the company may have used customer deposits to fund bets on Bankman-Fried’s hedge fund, Alameda Research, a violation of US securities law.

“This is the direct result of a rogue actor breaking every single basic rule of tax liability,” said Patrick Hillman, chief strategy officer of Binance, FTX’s biggest competitor. Earlier last week, Binance seemed ready to step in to save FTX, but backed away after a review of the FTX books.

The ultimate impact of FTX’s failure is uncertain, but its failure will likely result in the destruction of billions of dollars of wealth and even more skepticism for cryptocurrencies at a time when the industry could use a vote of confidence.

“I care because retail investors suffer the most and why too many people still mistakenly associate bitcoin with the scam space,” said Cory Klippsten, CEO of Swan Bitcoin, who has been raising concerns about FTX’s business model for months. Klippsten is publicly enthusiastic about bitcoin, but has long harbored a deep skepticism about other parts of the crypto universe.

Bankman-Fried founded FTX in 2019 and has grown rapidly: it was recently valued at $ 32 billion. The son of Stanford University professors, known for playing the “League of Legends” video game at meetings, Bankman-Fried has attracted investment from the highest levels of Silicon Valley.

Sequoia Capital, which over the decades has invested in Apple, Cisco, Google, Airbnb and YouTube, described their meeting with Bankman-Fried as likely “talking to the world’s first trillionaire.” Many of Sequoia’s partners became excited about Bankman-Fried after a meeting on Zoom in 2021. After several 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 reporter who wrote a Bankman-Fried profile for the company, referring to Bankman-Fried with his famous online moniker. The article, published in late September. , has been removed from Sequoia’s website.

Sequoia has reduced its $ 213 million investment to zero. A pension fund in Ontario, Canada also reduced its investment to zero.

In a concise statement, the Ontario Teachers’ Pension Fund said, “Of course, not all investments in this early stage asset class meet expectations.”

But until last week, Bankman-Fried was seen as a white knight for the industry. Whenever the cryptocurrency industry has had one of its crises, Bankman-Fried was the person who would likely come with a bailout. When online trading platform Robinhood was in financial trouble earlier this year – collateral damage from falling stock and cryptocurrency prices – Bankman-Fried stepped in to buy a stake in the company in support.

When Bankman-Fried bought the assets of bankrupt cryptocurrency firm Voyager Digital for $ 1.4 billion this summer, it brought a sense of relief to Voyager account holders, whose assets have been frozen by its own bankruptcy. That bailout is now in question.

FTX’s failure began after cryptocurrency news bulletin CoinDesk ran a story, based on a leaked balance sheet from Alameda Research. History found that the relationship between FTX and Alameda Research was deeper and more intertwined than previously known, including the fact that FTX lent large amounts of FTT tokens to Alameda to help accumulate money. It triggered mass withdrawals from FTX, causing the cryptocurrency firm a very old financial problem: a bank run.

“FTX created a worthless token out of thin air and used it to make its balance sheet seem more solid than it actually was,” said Klippsten.

As the king of cryptocurrencies, Bankman-Fried’s influence was beginning to spill over into political and popular culture. FTX has acquired important sports sponsorships with Formula One Racing and bought the naming rights for an arena in Miami and ran Super Bowl ads with “Seinfeld” creator Larry David. He pledged to donate $ 1 billion to Democrats in this election cycle – his actual donations were in the tens of millions – and prominent politicians like Bill Clinton were invited to speak at FTX conferences. Football star Tom Brady has invested in FTX, as has his future supermodel Gisele Bündchen.

Bankman-Fried had been the subject of some criticism prior to the collapse of FTX. Although he largely operated FTX outside of US jurisdiction from its headquarters in the Bahamas, Bankman-Fried was increasingly outspoken about the need for more regulation of the cryptocurrency industry. Many cryptocurrency advocates oppose government oversight. Now, the collapse of FTX may have helped support tighter regulation.

One such critic was Binance founder and CEO Changpeng Zhao. The feud between the two billionaires spread to Twitter, where Zhao and Bankman-Fried collectively commanded millions of followers. Zhao helped kickstart the withdrawals that condemned FTX when he said Binance would sell his stakes to him in FTX’s FTT crypto token.

“What like (asterisk) (asterisk) t shows … and it will be cryptocurrency’s fault (instead of a guy’s fault),” Zhao wrote on Twitter Saturday.

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Journalists Michael Balsamo in Washington and Cathy Bussewitz in New York contributed.

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For more cryptocurrency AP coverage, visit: https://apnews.com/hub/cryptocurrency

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This story has been correct to say that Adam Fisher is a business reporter who has worked as a freelancer for Sequoia Capital. An earlier version of the story identified Fisher as a Sequoia employee.

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