Sam Bankman-Fried’s Demise Sends Shockwaves Across Crypto

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Sam Bankman-Fried received much acclaim when he quickly achieved 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 30-year-old Bankman-Fried are not so friendly after FTX filed for bankruptcy protection on Friday, leaving his investors and customers feeling cheated and many others in the crypto world fearing the consequences. Bankman-Fried himself may face civil or criminal charges.

“Sam, what have you done?” tweeted Sean Ryan Evans, host of the cryptocurrency podcast Bankless, after the bankruptcy filing.

Under Bankman-Fried, FTX quickly grew to become the third largest exchange by volume. The stunning collapse of this burgeoning empire has sent tsunami-like waves through the cryptocurrency industry, which has seen its fair share of volatility and turmoil this year, including a sharp drop in price for bitcoin and other digital assets. For some, the events are reminiscent of the domino-style failures of Wall Street companies during the 2008 financial crisis, especially as supposedly healthy companies like FTX go bankrupt.

A venture capital fund has written off investments in FTX worth more than $200 million. Cryptocurrency lender BlockFi suspended customer withdrawals Friday after FTX filed for bankruptcy protection. Singapore-based exchange Crypto.com saw admissions surge this weekend for internal reasons, but some of the action can be attributed to raw nerves from FTX.

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Bankman-Fried and his company are under investigation by the Department of Justice and the Securities and Exchange Commission. The investigation likely focuses on the possibility that the company used customers’ deposits to fund bets at Bankman-Fried’s hedge fund, Alameda Research, in violation of US securities laws.

“This is the direct result of a rogue actor violating every basic rule of tax responsibility,” said Patrick Hillman, chief strategy officer at Binance, FTX’s largest competitor. Early last week, Binance appeared poised to step in to save FTX, but pulled back after a review of FTX’s books.

The ultimate impact of FTX’s bankruptcy is uncertain, but its failure is likely to 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 it’s the retail investors who suffer the most, and because too many people still mistakenly associate bitcoin with the scammy ‘crypto’ space,” said Swan Bitcoin CEO Cory Klippsten, who has expressed concerns for months. FTX’s business model. Klippsten is publicly enthusiastic about bitcoin, but has long been skeptical of other parts of the crypto universe.

Bankman-Fried founded FTX in 2019 and it grew rapidly – it was recently valued at $32 billion. Bankman-Fried was the son of professors at Stanford University, who were known to play the “League of Legends” video game in meetings. Bankman-Fried attracted investment from the highest echelons of Silicon Valley.

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Sequoia Capital, which invested in Apple, Cisco, Google, Airbnb and YouTube, described their meeting with Bankman-Fried as likely “talking to the world’s first billionaire.” Sequoia enthusiastically invested in FTX after one Zoom meeting in 2021.

“I don’t know how I know, I just know. SBF is a winner,” wrote Sequoia Capital’s Adam Fisher in a Bankman-Fried profile for the company, referring to Bankman-Fried under its popular online name. The article, which was published in late September, has been removed from Sequoia’s website.

Sequoia has written off its $213 million investments to zero. A pension fund in Ontario, Canada also wrote off its investment to zero.

In a succinct statement, the Ontario Teachers’ Pension Fund said, “Of course, not all early-stage investments in this asset class perform as expected.”

But until last week, Bankman-Fried was seen as a white knight to the industry. Whenever the crypto industry had one of its crises, Bankman-Fried was the person most likely to come up with a rescue plan. When online trading platform Robinhood ran into financial difficulties earlier this year — collateral damage from the decline in stock and crypto prices — Bankman-Fried jumped in to buy a stake in the company as a sign of support.

When Bankman-Fried bought the assets of bankrupt crypto firm Voyager Digital for $1.4 billion this summer, it brought a sense of relief to Voyager’s account holders, whose assets have been frozen since its bankruptcy. That rescue is now up for debate.

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As the king of crypto, his influence began to spill over into political and popular culture. FTX bought prominent sports sponsorship from Formula Racing and bought the naming rights to an arena in Miami. He pledged to donate $1 billion to Democrats this election cycle — his actual donations ran into the tens of millions — and prominent politicians like Bill Clinton were invited to speak at FTX conferences. Football star Tom Brady invested in FTX.

Bankman-Fried had been the subject of some criticism before FTX collapsed. While operating FTX largely outside of US jurisdiction from its headquarters in the Bahamas, Bankman-Fried increasingly spoke of the need for greater regulation of the cryptocurrency industry. Many crypto proponents are against government oversight. Now the collapse of FTX may have contributed to the call for stricter regulation.

One of those critics was Binance founder and CEO Changpeng Zhao. The feud between the two billionaires spilled out onto Twitter, where Zhao and Bankman-Fried together had millions of followers. Zhao helped spark the withdrawals that doomed FTX when he said Binance would sell its holdings in FTX’s crypto token FTT.

“What if (asterisk) (asterisk) shows… and it will be crypto’s fault (instead of one man’s fault,” Zhao wrote on Twitter on Saturday.

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

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