The Rise and Fall of the Crypto King
Sam Bankman-Fried is an ‘intellectually exceptional and emotionally atypical’ man[1], who has unruly hair, wears cargo shorts, and sleeps on a beanbag next to his desk. Though, these past few weeks, the world has seen a different side of him – a fraud.
Bankman-Fried founded FTX, a cryptocurrency exchange and hedge fund, just before the coronavirus pandemic in 2019. It quickly became a roaring success, and Bankman-Fried became the face for ‘crypto’s push into the mainstream’[2], with top investors such as Sequoia and BlackRock showing their support. However, his triumph fell as quickly as it rose. After the company was declared bankrupt last November, investigations into the company and Bankman-Fried were initiated. It was discovered that a collapse in the crypto exchange caused investors to put in withdrawal requests, which the company was not able to follow through on. This eventually led to the discovery that FTX’s balance sheet had a $8bn hole that was unaccounted for – Bankman-Fried had been using the investors’ money to fund his own private trading firm, Alameda Research, without their knowledge and consent.
Over the course of 4 weeks, Bankman-Fried’s friends and ex-girlfriend, former CEO of Alameda Research, took the stand to testify against him, giving ‘a damning account of his stunning rise and fall’.[3] While prosecutors ‘wrote him into this movie as a villain’[4], Bankman-Fried maintained his plea of innocence. The jury took just under 5 hours to deliver their decision, and Bankman-Fried was convicted with 7 charges of fraud and money laundering, with a maximum penalty of 110 years behind bars. This is by far the most significant and high-profile crypto-related trial, setting the precedent for fraud cases relating to the rising cryptocurrency bubble as a landmark decision.
Since the founding of Bitcoin in 2009, the realm of cryptocurrency has gained popularity, and along with it, crypto fraud has become an issue. We have seen what happened to FTX happen with Celsius Network and Luna – this is clearly a ‘funding model [that] has become all too normal in the cryptocurrency world’.[5] Being defrauded is just one of the many risks in investing in these digital tokens, with others being the volatility in its value and the lack of its backing by a government or central bank. So why do people still indulge in hype that is cryptocurrency?
For many people, the most appealing reason to invest in cryptocurrency is the idea of investing in an ‘innovative digital asset’.[6] With its digital nature comes convenience – crypto money can be transferred easily, across the world, and with lower fees than conventional money transfer costs. It also appears to generate massive amounts of profits. Take Bitcoin for example - when it first started in 2009 it was valued at zero. In 2021, it hit an all-time high of US$68,789.
However, as we have seen in the FTX fraud case, as well as other similar crypto fraud cases, is the money worth all this drama? In an unregulated world where it is common to ‘[pump] up the price of a token with no real value behind it and [use] that inflated valuation to lay the foundation of a business’s balance sheet or to borrow dollars’[7], more needs to be done to make it safe for people to invest.
[1] https://www.newyorker.com/magazine/2023/10/02/inside-sam-bankman-frieds-family-bubble
[2] https://www.ft.com/content/c38d2f8a-5707-41ae-815e-7a9e79d9027d
[3] Ibid
[4] Ibid.
[5] https://www.nytimes.com/2023/11/08/opinion/fraud-crypto-ftx-trial.html
[6] https://www.fca.org.uk/investsmart/investing-crypto#:~:text=For%20many%20buyers%2C%20the%20main,like%20shares%2C%20bonds%20or%20property.
[7] https://www.nytimes.com/2023/11/08/opinion/fraud-crypto-ftx-trial.html
