Cryptocurrency has a lot of heels. Sam “SBF” Bankman-Fried was a face — until last week.
Before last week, Bankman-Fried ran FTX, crypto’s third-largest exchange by volume. The No. 1 largest exchange was (and is) Binance, run by Changpeng “CZ” Zhao. In recent months, Binance has lived with a cloud over its head — it’s being investigated by multiple federal agencies over its BNB token, insider trading, and money laundering.
“Uh, he is still allowed to go to DC, right?”
Bankman-Fried’s reputation, in contrast, was squeaky-clean. He was the kind of guy who could get meetings with Gary Gensler, the head of the Securities and Exchange Commission. He was a major Democratic donor; his parents run in elite circles that overlap heavily with Washington, DC.
You may notice I keep saying things like “was” and “until last week.” It now seems that Bankman-Fried may have lent his FTX customers’ money to his trading firm, Alameda Research. FTX, FTX US, and Alameda Research are in bankruptcy proceedings now. (There is some good news: Chapter 11 means the tokens held by all these entities will be hodling for the next several years and cannot push the prices down further.)
All this seems to have started because Bankman-Fried couldn’t resist taking a potshot at Binance’s Zhao on Twitter. In October, Bankman-Fried tagged Zhao and tweeted that he was “excited to see him repping the industry in DC going forward! uh, he is still allowed to go to DC, right?” The tweet, which Bankman-Fried later deleted, seems to be an oblique reference to Binance’s legal troubles.
A week after Bankman-Fried’s taunt, Zhao tweeted that Binance would sell its holdings of FTX’s token, FTT. Binance had a lot of it, partly because Binance had been an early investor in FTX. In that tweet, he nodded to a CoinDesk article that showed Alameda Research’s biggest asset was the FTT token — and that there was $8 billion in liabilities. (The article alone had sparked questions about Alameda’s solvency.) Zhao also said, “We won’t support people who lobby against other industry players behind their backs.”
I doubt Zhao foresaw the degree of destruction he’d unleash, though he probably meant to kneecap his competitor. He’s denied this, but come on. Publicly posting a trade like that is meant to push the price down.
It was nasty, but when Zhao signed a letter of intent to buy FTX, I thought that would be the end of it. However, hours later, Binance backed out of the deal, revealing a hole in FTX’s balance sheet. Initial reports put it at $6 billion, then $8 billion, then $10 billion in the bankruptcy filing. Bankman-Fried stepped down.
So what happens to the friends Bankman-Fried was making in DC, the legislation he was backing, and all the people who took his campaign donations?
Sam Bankman-Fried really loved risk
One thing that appears true throughout Bankman-Fried’s short, steep climb to power was that he had an unusual appetite for risk. He interned at Jane Street, a high-frequency trading firm, in 2013, before getting a full-time gig there after graduating from MIT. There, he met Caroline Ellison, who would later be the CEO of Alameda Research.
Bankman-Fried says he left Jane Street and built Alameda Research in 2017 because he thought he should make riskier decisions so he could amass dynastic wealth, according to a glowing profile of Bankman-Fried commissioned by the VC firm Sequoia Capital and later deleted from the VC firm’s website when it became too embarrassing. (From the article: “In his mind, SBF needed extreme risk to maximize the expected value of his lifetime earnings.” Emphasis mine.)
“They have colossal risk appetite.”
At Alameda, he made a “daring feat of arbitrage” by trading to deflate a difference in the price of Bitcoin between Asian exchanges and the rest of the world. Bankman-Fried describes the difficulty of the trade on an episode of the podcast Odd Lots, describing it as “literally the sketchiest thing you can possibly do.” He claims he got 10 percent returns per day on the trade.
Bankman-Fried doubled down on the risk of creating a company by making a second: FTX. The purpose of FTX was “an advanced risk engine,” according to the Sequoia profile. FTX was located “offshore precisely because it aspired to build an advanced risk engine that would support all sorts of hedging strategies.” When Bankman-Fried chose to raise money from VCs for FTX, it was because “Alameda had some unexpected losses due to counterparty risk.”
The Sequoia profile dwells on Bankman-Fried’s famous devotion to effective altruism, a sillier than usual form of utilitarianism, but it’s window dressing. It’s the justification for the thing he consistently sought: risk.
Even his friends noted how much Bankman-Fried liked risk, though they don’t seem to have seen it as a problem. Here’s Dan Matuszewski, an investor in FTX who also traded on the exchange: “They have colossal risk appetite.” And here’s Ellison, in a podcast recorded before she was Alameda’s CEO, talking about the degree of autonomy she had in trading in an FTX podcast two years ago: “If you have to go through some sort of review process or check with your supervisor or something, before you do anything, that’s just going to add another layer of delays.” So she and the other Alameda traders, apparently, didn’t do that. Later in the podcast, she adds, “Young people tend to be too risk averse.”
“And the person that worked there — I am not kidding you — said, ‘Go fuck yourself.’”
By 2021, FTX made $350 million in profit and Alameda made $1 billion — at least, that’s what Bankman-Fried told Bloomberg. His ambitions were limitless: “Ideally, I would want FTX to become the biggest source of financial transactions in the world.” Last year, he publicly floated the idea of buying Goldman Sachs to the Financial Times.
Bankman-Fried is not a reliable narrator, so I wonder if those numbers he gave to Bloomberg are correct. That’s because of the balance sheet he sent to investors before going bankrupt, which Bloomberg’s Matt Levine has described, accurately, as “an Excel file full of the howling of ghosts and the shrieking of tortured souls.” Here’s a fun entry: “hidden, poorly internally labled ‘[email protected]’ account.” There are no Bitcoin assets, but there is something called TRUMPLOSE. Okay!
Look, at this point, I’m not even sure Bankman-Fried correctly executed the arbitrage trade he is supposedly famous for. That’s because when he made FTX, he took outside investment — not exactly what you’d expect from someone who’s printing money on arbitrage plays. According to the glowing Sequoia story, FTX took on money because Alameda had some losses: “FTX did need money, after all. And it needed that money from credible sources so it could continue to distinguish itself from the bottom-feeders who came to crypto to fleece the suckers.” Emphasis, again, mine.
Beyond the appetite for risk, Bankman-Fried apparently took a dim view of basic professionalism. Speaking on his podcast, All-In, VC Chamath Palihapitiya says he was approached by Bankman-Fried when FTX was raising. “I’m like, this doesn’t make much sense, but I’ll have my team do some work.” His team at Social Capital sent Bankman-Fried a memo with recommendations: forming a board, creating dual-class stock, and some agreements around related-party transactions. (Related-party transactions with Alameda Research would later be the reason FTX blew up.) “And the person that worked there — I am not kidding you — said, ‘Go fuck yourself.’”
Anyway, Bankman-Fried played League of Legends during his call with Sequoia. Sequoia invested anyway. So did SoftBank, Tiger Global, Lux Capital, Thoma Bravo, and BlackRock. Sequoia has now marked its $213 million investment down to zero.
Maybe Bankman-Fried should have played fewer video games. He told The New York Times after the blowup that FTX had loaned Alameda a lot of money. “It was substantially larger than I had thought it was,” he said. “And in fact the downside risk was very significant.”
The importance of being seen lobbying
Bankman-Fried wasn’t just a finance guy, though. He’s known as a politics guy, too. That’s where most of his showboating about effective altruism came into play. Basically, effective altruism is a philosophical system that suggests it is possible to buy goodness — by making a lot of money and donating to the right causes. Think indulgences for Protestants, a clown philosophy for clowns. But if the clown is a major political donor, well, that’s a three-ring circus.
Donating on both sides of the aisle ensured that FTX had friends in power, no matter which party actually won
In 2021, Bankman-Fried made his first major political donation: $500,000 to the Senate Majority PAC, an organization devoted to getting Democrats control of the Senate. He wasn’t the only one. Ryan Salame, who helped Bankman-Fried found FTX, also started donating: $1 million in 2021 to GMI PAC, a group that supports the crypto industry.
Though Bankman-Fried is no longer involved with FTX, Salame has stayed on. In the 2022 election cycle, Bankman-Fried spent $38 million, mostly on Democrats, according to data from Open Secrets. Salame, on the other hand, spent $20 million, mostly to bolster Republicans.
This flies in the face of Bankman-Fried’s “effective altruism” shtick, but it makes business sense: donating on both sides of the aisle ensured that FTX had friends in power, no matter which party actually won.
But money doesn’t always mean social capital. Bankman-Fried had that, too, however. Bankman-Fried’s mother is Barbara Fried, who leads a secretive fundraising group called Mind the Gap that mostly backs Democrats. His father, Joseph Bankman, teaches economics at Stanford — Elizabeth Warren has touted his favorable opinion of her legislation in press releases.
“The bill he was forwarding was criticized as being too FTX-friendly.”
He may have had easier inroads in Washington because of those kinds of connections. But Bankman-Fried’s interests in DC seem to have been fairly narrow. He was particularly interested in the Digital Commodities Consumer Protection Act (DCCPA) and lobbying to make the Commodity Futures Trading Commission (CFTC) the main regulator for crypto exchanges. Another interest of his — no surprise given FTX’s market in crypto derivatives — was clearing his customers’ derivatives without an intermediary, as commonly used in traditional finance.
The DCCPA has come under scrutiny from some parts of the crypto world as being a “DeFi killer.” Though the bill doesn’t speak to decentralized finance directly, its definition of “digital commodity trading facility” means that DeFi exchanges would be required to register with the CFTC, among other compliance measures. DeFi advocates say this doesn’t make sense for software — and that attempting to comply with the law could introduce policies that create new risks.
Though Zhao owns Binance, an exchange, he is heavily involved in DeFi, and many of the tokens that trade on Binance are DeFi tokens. The people I spoke to for this story story all agreed that regulation was important but pointed out that there was a split in the crypto community. Some — Bankman-Fried was one of them — wanted the DCCPA to go forward, however imperfect it might be, because it was better than no bill at all and could probably be fixed. Others viewed a bill that’s bad for DeFi as being bad for the entire crypto industry.
Bankman-Fried was already receiving blowback from parts of the crypto industry about his advocacy for DCCPA, says Yesha Yadav, an expert in financial and securities regulation at Vanderbilt Law School. “The bill he was forwarding was criticized as being too FTX-friendly,” she says. Some in the crypto industry say this characterization of the DCCPA was unfair — but that the fallout from FTX created a lot of uncertainty around the bill. After all, no one wants to be seen shilling for one industry player, particularly one who’s now disgraced.
Getting photos with lawmakers, testifying in federal hearings, and so on was good business — it made him look respectable
Still, Bankman-Fried had been working with a number of people on the Hill and, until the collapse of FTX, was the poster child for compliance in the industry, Yadav says. Regulators who’ve been working closely with him have “suffered a black eye and potential reputational fallout from this.”
“I don’t think anybody with an agenda is going to let a good crisis go to waste, and anyone with a solution is going to use this as a way to promote their solution as being the right one,” says Marco Santori, the chief legal officer at the Kraken exchange. Some of the ideas out there are smart and effective, he told me. He’s hoping they get the most play.
A person affiliated with a large crypto exchange described the senior-most levels of the Securities and Exchange Commission as being difficult to approach and expressed frustration that Bankman-Fried was able to get meetings with SEC head Gensler. “Reports to my office allege [Gensler] was helping SBF and FTX work on legal loopholes to obtain a regulatory monopoly,” Rep. Tom Emmer wrote on Twitter. Emmer says his office is “looking into this.”
“It should be embarrassing to regulators that were going along with anti-DeFi regulation when the only thing you need to regulate is this centralized stuff,” says Tegan Kline, the co-founder of Edge & Node, a team that creates decentralized systems for Web3 developers. DeFi is more transparent than centralized finance, she says. “You should focus on what’s opaque.”
But despite Bankman-Fried’s high profile, he wasn’t the most important lobbyist in Washington, says Dante Disparte, head of global policy at stablecoin provider Circle. “Let me make a philosophical point: money talks, wealth whispers, and power is silent,” Disparte says. He dismissed the notion that Bankman-Fried was crypto’s main representative in Washington.
I believe this. Bankman-Fried was good at photo ops. Getting photos with lawmakers, testifying in federal hearings, and so on was good business — it made him look respectable. It got FTX’s brand out in front of consumers who might be leery of the Wild West of crypto, just like the FTX Arena put him in front of sports bettors.
“The piece I find a little ironic is that the Presidential Working Group issued an urgent call months ago calling on Congress to act with urgency, and now has been vindicated twice,” Disparte says, by the fall of FTX and the blowup earlier this year of Terra / Luna. “Hopefully the demise of FTX creates sufficient urgency.”
It’s hard to know what the fallout will be from the end of FTX, partly because it will take weeks or months to see the full extent of the damage. FTX’s $8 billion shortfall, along with its $10 billion loan to Alameda of customer funds, hasn’t worked its way entirely through the crypto ecosystem. When Three Arrows Capital failed earlier this year, going from $10 billion to bankruptcy, that was bad enough. But because FTX was an exchange, it’s now significantly harder to turn crypto into cash and vice versa.
FTX is the earthquake. But in the 1906 San Francisco earthquake, the majority of the damage wasn’t from the temblor itself; it was the fires afterward that leveled the financial district. With FTX, now, while many people smell smoke, no one yet knows the extent of the blaze.
So far, we know that Coinbase had $15 million in deposits on FTX. Crypto.com, an exchange that commissioned a bizarre Super Bowl ad starring Matt Damon, said it recovered most of the $1 billion it had on FTX. Galaxy Digital said it had $76.8 million in exposure. Genesis Trading claimed its $175 million in locked funds won’t affect its business. The Solana Foundation said it had more than $30 million in tokens frozen on FTX as well as more than 3 million shares in FTX. However, less than $1 million of cash was on that exchange.
As for Binance, it is hard not to feel that Zhao has painted a target on the exchange
BlockFi, which was bailed out by FTX earlier this year, halted withdrawals. Solana’s Serum DeFi exchange is scrambling — FTX held its update keys.
On the smaller scale, when FTX led a round of investment using its venture capital arm, it sometimes required that the projects it invested in put their treasuries on FTX, according to a source familiar with the documentation. Those treasuries are now inaccessible.
As for Binance, it is hard not to feel that Zhao has painted a target on the exchange. I sincerely doubt he knew what he was unleashing when he decided to punish Bankman-Fried for lobbying against him — the collapse of FTX has destabilized an awful lot in the crypto industry. To some degree, it’s a very public own goal.
The future of cryptocurrency legislation is more uncertain than it was two weeks ago, not least because some ambitious lawmaker might try to make their career on the FTX explosion. The still-open question to me is how many hedge funds and family offices might be on the hook — because if FTX fires spread to the rest of the financial sector, things are going to get a lot more dire for crypto in the US.