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Sam Bankman-Fried’s fall sends shockwaves through crypto




NEW YORK (AP) — Sam Bankman-Fried received a lot of praise when he quickly rose to superstardom as head of cryptocurrency exchange FTX: the savior of crypto, the newest force in democratic politics and potentially the world’s first trillionaire.

Now comments about 30-year-old Bankman-Fried range from confused to hostile after FTX files for bankruptcy protection on Friday, leaving his investors and customers fooled and many others in the crypto world fearing the consequences. Bankman-Fried himself may face civil or criminal charges.

“I̵[ads1]7;ve known him for several years and what just happened is just shocking,” said Jeremy Allaire, co-founder and CEO of cryptocurrency company Circle.

Under Bankman-Fried, FTX quickly grew to be the third largest exchange measured by volume. The stunning collapse of this nascent empire has sent tsunami-like waves through the cryptocurrency industry, which has seen its fair share of volatility and turmoil this year, including a steep price decline for bitcoin and other digital assets. For some, the events are reminiscent of the domino-like failures of Wall Street firms during the 2008 financial crisis, especially now that supposedly healthy firms like FTX are failing.

One venture capital fund wrote down investments in FTX worth over 200 million dollars. Cryptocurrency lender BlockFi halted customer withdrawals on Friday after FTX filed for bankruptcy protection. Singapore-based exchange Crypto.com saw withdrawals spike this weekend for internal reasons, but some of the action can be attributed to raw nerves from FTX.

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

Bankman-Fried and his company are under investigation by the Ministry of Justice and the Securities and Exchange Commission. The investigations are likely to center on the possibility that the firm may have used customer deposits to finance bets at Bankman-Fried’s hedge fund, Alameda Research, a violation of US securities law.

“This is the direct result of a rogue actor breaking every single basic rule of fiscal responsibility,” said Patrick Hillman, chief strategy officer at Binance, FTX’s biggest competitor. Early last week, Binance seemed poised to pounce to bail out FTX, but pulled away after a review of FTX’s books.

The ultimate impact of FTX’s bankruptcy is uncertain, but its failure is likely to lead to the destruction of billions of dollars in wealth and even more skepticism toward cryptocurrencies at a time when the industry could use a vote of confidence.

“I care because it’s retail investors who suffer the most, and because too many people still mistakenly associate bitcoin with the fraudulent ‘crypto’ space,” said Cory Klippsten, CEO of Swan Bitcoin, who for months raised concerns about FTX’s business model . Klippsten is publicly enthusiastic about bitcoin, but has long been deeply 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. The son of Stanford University professors, who was known for playing the video game “League of Legends” during meetings, Bankman-Fried attracted investment from the highest echelons of Silicon Valley.

Sequoia Capital, which over the decades invested in Apple, Cisco, Google, Airbnb and YouTube, described their meeting with Bankman-Fried as likely “talking to the world’s first trillionaire”. Several of Sequoia’s partners became enthusiastic about Bankman-Fried after a Zoom meeting in 2021. After several meetings, Sequoia decided to invest in the company.

“I don’t know how I know, I just know. SBF is a winner,” wrote Adam Fisher, a business journalist who wrote a profile of Bankman-Fried for the firm, referring to Bankman-Fried by his popular online name. The article, published in late September, was removed from Sequoia’s website.

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

In a terse statement, the Ontario Teachers’ Pension Fund said: “Of course, not all investments in this early-stage asset class live up to expectations.”

But until last week, Bankman-Fried was seen as a white knight for the industry. Whenever the crypto industry had one of its crises, Bankman-Fried was the person who was likely to fly in with a rescue plan. When online trading platform Robinhood was in financial trouble 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 up the assets of bankrupt crypto firm Voyager Digital for $1.4 billion this summer, it brought a sense of relief to Voyager account holders, whose assets have been frozen since its own failure. That rescue is now in doubt.

FTX’s failure started after cryptocurrency news CoinDesk published a story based on a leaked balance sheet from Alameda Research. The story found that the relationship between FTX and Alameda Research was deeper and more intertwined than previously known, including FTX lending large amounts of its own token FTT to Alameda to help build up cash. That triggered mass withdrawals from FTX, which led the crypto firm to experience a very old financial problem: a bank run.

“FTX created a worthless token out of thin air and used it to make the balance seem more robust than it really was,” Klippsten said.

As the king of crypto, Bankman-Fried’s influence began to flow into political and popular culture. FTX acquired prominent sports sponsorships with Formula One Racing and bought the naming rights to an arena in Miami, and ran Super Bowl commercials with “Seinfeld” creator Larry David. He pledged to donate $1 billion to Democrats this election cycle—his actual donations were in the tens of millions—and prominent politicians like Bill Clinton were invited to speak at FTX conferences. Football star Tom Brady invested in FTX, as did his supermodel soon-to-be ex-wife Gisele Bündchen.

Bankman-Fried also began throwing its financial weight around in the media as well. He was an initial investor in Semafor, the news startup run by former BuzzFeed editor-in-chief and New York Times columnist Ben Smith. He also donated $5 million to the investigative news agency ProPublica.

Bankman-Fried had been the subject of some criticism before FTX collapsed. While he largely operated FTX out of US jurisdiction from his headquarters in the Bahamas, Bankman-Fried was increasingly vocal about the need for more regulation of the cryptocurrency industry. Many proponents of crypto oppose government oversight. Now FTX’s collapse may have helped to argue for stricter regulation.

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

“What (star) (star) doesn’t show … and it’s going to be crypto’s fault (rather than a boy’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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For more AP cryptocurrency coverage, visit: https://apnews.com/hub/cryptocurrency

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This story has been corrected to say Adam Fisher is a business journalist who freelances for Sequoia Capital. An earlier version of the story identified Fisher as an employee of Sequoia.



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