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FTX: How Sam Bankman-Fried Built a House of Cards

Lawyers for fallen crypto exchange FTX argued during the firm’s bankruptcy hearing on Tuesday that the company acted as founder Sam Bankman-Fried’s personal “fiefdom,” reaching $40 billion in market capitalization in January before crashing in recent weeks to its current value of about $422 million. .

Those who have looked under the hood in the wake of the crash, including new FTX CEO John J. Ray III, have expressed dismay at the company̵[ads1]7;s lack of basic bookkeeping and compliance protocols, raising questions about how Bankman-Fried was able to build such. a huge, uncontrolled operation that bought him incredible influence and political power.

FTX: How Sam Bankman-Fried Built a House of Cards

Sam Bankman-Fried, founder and CEO of FTX, speaks during an interview on “Bloomberg Wealth with David Rubenstein” in New York on August 17, 2022. (Jeenah Moon/Bloomberg via Getty Images/Getty Images)

So how did Bankman-Fried do it? Ben McMillan, co-founder of IDX Digital Assets, spells it out with a simple analogy:

In a hypothetical scenario, imagine that someone owns every house in a neighborhood of 100 homes and forces the sale of one home for $1 million, then uses that sale to show that they have $100 million in “equity.” But then the owner is forced to sell all of the remaining 99 homes, and the homes sell for only $100,000 each—meaning $90 million of their so-called equity disappears.


But that equity never existed in the first place.

McMillan told FOX Business that’s exactly what Bankman-Fried did with his FTT tokens, since he controlled the flow.

FTX logo seen in Miami

The FTX logo is seen at the entrance to the FTX Arena in Miami on November 12, 2022. (Reuters/Marco Bello/File/Reuters images)

FTX, according to McMillan, would provide and trade a small portion of FTT and other coins such as Serum at a favorable enough dollar price to create the “equity” reflected on the balance sheet. Then Bankman-Fried would lend a lot of money against what was essentially a very large – and very fake – asset number.

That in turn allowed FTX and its hedge fund, Alameda Research, to artificially inflate assets.


“This is not new or unique to crypto, by the way,” McMillan explained. “It was done by more than a few hedge funds during the 2008 crash — especially in the distressed debt space.”

FTX and Alameda accelerated the scenario by using the inflated asset number to take out very real liabilities, according to McMillan. It also appears that Bankman-Fried bought up companies and forced them into “custody” with FTX so he could allegedly continue the cycle using client funds.

Alameda Research CEO Caroline Ellison

Alameda Research CEO Caroline Ellison via Twitter (Twitter @carolinecapital)

McMillan says a key message was when Changpeng Zhao, founder and CEO of major crypto exchange Binance, announced on Nov. 6 that his firm was selling a large amount of FTT on the open market, and Alameda CEO Caroline Ellison quickly responded by offering to buy everything. tokens for $22 each.


This amount, many now speculate, was the decisive figure above which FTT had to trade in order for FTX and Alameda to remain solvent.

“When FTT traded down sharply on November 8,” notes McMillan, “the house of cards collapsed.”

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