Shortcuts / 24 October 2023

The rise and fall of Sam Bankman-Fried

One of the biggest fraud trials in American history is happening right now in a New York courtroom. It’s the trial of Sam Bankman-Fried – or SBF for short. He was the former golden boy of cryptocurrency before his crypto exchange FTX went bankrupt, leaving investors short US$8 billion. So in this Squiz Shortcut, we take you through who SBF is, his rise and fall in the crypto world, and what happens now.

What’s this guy’s backstory?
He’s 31yo and both of his parents are law professors at Stanford University, which is one of America’s top colleges. What accounts of SBF’s life say is that he was always gifted in maths… But apart from those basic facts, we don’t actually know a lot about his childhood.

Yeah, so journo Michael Lewis has just written a book about him, and he said that he couldn’t find anybody to give a character reference before SBF was 18yo. Lewis came to the conclusion that he was an isolated and lonely kind of figure in childhood.

So when do we start getting to know more about him?
During university. We know that his maths skills got him work as a trader – he worked for a Wall St firm as a young man, and that he was also getting into a movement called effective altruism.

Effective what?
It’s an ethical movement popularised by the Aussie philosopher Peter Singer and Scottish philosopher Will MacAskill. They say it’s about using “evidence and reason to figure out how to benefit others as much as possible, and taking action on that basis”. According to them, one way to do the most good in the world is to make as much money as you can, and then give it away to tackle the biggest problems the world is facing.

So that’s what SBF tried to do?
In his own telling, the movement is what motivated him to make a lot of money. So he started a trading firm called Alameda Research. At the same time, cryptocurrencies were gaining traction, and SBF noticed that there was a loophole in the market.

Which was…
That the price of Bitcoin – the biggest cryptocurrency on the market – was lower in the US than it was in Japan. So he arranged to buy Bitcoin in the US, and then sell it for a higher amount in Japan. He did this for a couple of months before the loophole closed, and made millions of dollars.

Not too shabby…
But he didn’t stop there. His next move was to start a platform that allowed other people to trade currencies like US or Aussie dollars for cryptocurrencies – he called it FTX. And for every exchange made on the platform, SBF took a cut.

So he’s making quite a lot of cash at this point?
Yep – the value of FTX skyrocketed into the billions, and it’s estimated that SBF himself was worth $26 billion.

And did he start giving money away?
He did – he gave money to effective altruism causes. But he also became a big political donor – in the lead up to last year’s US midterms, SBF contributed more than $70 million to election campaigns, mostly giving to the Democrats.

When did it all come crashing down?
So 2022 was a bad year for crypto investments – like other markets, rising interest rates and high inflation took its toll… Even before FTX’s collapse, pretty much everyone who was trading in crypto was losing money. And because SBF used his trading firm Alameda Research to make bets on cryptocurrency prices, the company ended up losing billions of dollars on bad bets.

Where does the fraudulent part come in?
So Alameda – which was at this point being run by SBF’s then-girlfriend Caroline Ellison – was making its trades using FTX customers’ funds. That’s a big no-no in the finance world.

And then Alameda kept losing money?
Yep, and Ellison says SBF directed her to fill that hole with more money from FTX. For his part, SBF says he had little to do with the running of Alameda, and if Ellison took money from FTX then that’s on her.

When was this all made public?
In November last year, an article published on a cryptocurrency news website questioned Alameda’s balance sheets, and then the CEO of one of FTX’s competitors started tweeting about it. And that’s when all hell broke loose….

What happened?
Basically, FTX customers freaked out and started trying to pull their money out of the exchange. The problem was that FTX didn’t have enough money to pay all of its customers back, so the exchange collapsed. And within days, SBF filed for bankruptcy.

So much for his $26 billion net worth…
And it only got worse for him. In December, SBFwas arrested in the Bahamas after being charged in the US with fraud charges. And his colleagues – including his now ex-partner Caroline Ellison – decide to plead guilty to their own criminal charges and agree to cooperate in the criminal case against SBF.

They’re testifying against him?
They are, and for his part, SBF has pleaded not guilty to the charges. If he’s convicted, the maximum sentence he could face is around 110 years in federal prison but regardless, commentators say it’s possible he could spend the rest of his life in jail.

So it’s not looking good for him
Not at all – some have pointed out that the US Government doesn’t bring prosecutions unless it’s very confident that it can win. But we’ll just have to wait and see what the jury decides…

Squiz recommends:

This episode from the Search Engine podcast on SBF and where the missing. $8 billion went

This podcast series from journo Michael Lewis called Judging Sam

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