By most accounts, Sam Bankman-Fried (SBF), the ex-CEO of what only weeks ago was the third largest crypto exchange in the world, has precipitated a moment in the cryptocurrency industry comparable to 2008’s financial crisis.
Meanwhile, SBF continues to offer varnished insights of the implosion to hand-picked reporters on Twitter, while a projected 1+ million FTX customers and creditors angrily look on as the reality that they may never be “made whole” from their losses starts to sink in.
It is also becoming clear that the fate of the company and its customers could have perhaps been saved, or avoided, by just three letters: CFO.
Read more: Sam Bankman-Fried, FTX and the Demise of the Cool Kids
FTX suffered a “complete failure of corporate controls,” according to the company’s new chief executive John J. Ray III, who was appointed just last week (Nov. 11) as part of the crypto exchange’s bankruptcy process, and who was famously able to recoup certain funds for stakeholders while overseeing the liquidation of Enron.
But he says the situation with FTX is even worse than Enron’s was, with even less money to recover.
‘Sometimes life creeps up on you’
Verified tweets from SBF to a reporter at Vox Media published Wednesday (Nov. 16) show the clear need FTX had for a CFO, or really any accounting-minded executive with a seat at the table.
When asked by reporter Kelsey Piper on whether he thought Alameda Research gambling with customer funds wasn’t such a big deal “because you didn’t realize how much money it was?” SBF replied he thought “Alameda had enough collateral to reasonable (sic) cover it.”
Among the many other jaw-dropping revelations, SBF’s communications, taken as a whole, show a complete lack of expertise in the accounting controls and business processes necessary for running an organization of the size and scale of FTX.
“Messy accounting.. I didn’t realize full size of it until a few weeks ago… each individual decision seemed fine and I didn’t realize how big their sum was until the end,” he wrote, stating that, “sometimes life creeps up on you.”
‘This big dumb game’
With the benefit of hindsight, the latitude SBF received from his investors was both unusual and extreme. With their help, he was able to build FTX into a massively popular exchange and successfully promote himself as one of the most trusted founders in all of crypto.
His nerdy aw-shucks demeanor, charmingly messy afro, vocal support for “Effective Altruism” (EA), and Wall St.-burnished background from his time at Jane Street all combined to make him the perfect millennial bridge between the crypto industry’s code-built, engineer-fueled “to the moon” culture, and the comparatively dressed-up worlds of Silicon Valley and Washington D.C.
In the end, it took mere days for that all to come crashing down. “Man all the dumb stuff I said,” messaged SBF, “[it’s] this big dumb game we woke westerners play where we say all the right shiboleths (sic) and so everyone likes us.”
And SBF was a master of strategically leveraging these “shibboleths,” successfully using them to raise $2 billion from a deep roster of well-known, blue-chip investment firms, while also leaving them “breathless” after his pitches.
These weren’t rinky-dink investors, either. SBF’s rolodex of capital contributors included, among many others, leading funds like Third Point Ventures, Tiger Global, Altimeter Capital Management, Lux Capital, Insight Partners, Sequoia Capital, SoftBank, Lightspeed Venture Partners, Temasek Holdings, BlackRock, and even the Ontario Teachers’ Pension Plan.
One can only imagine what magic words SBF must have whispered in order to get otherwise supposedly sophisticated investors to hand over their case for a rocket ship ride, given the shoddy accounting and poor financials, and lack of traditional metrics FTX had to share.
It wasn’t just the venture capital and financial industries SBF charmed. A professed vegan and diligent follower of the EA movement, he was also able to cast his spell on both Washington power players and the media elite by preaching of giving back to create a better world, and by promising to help regulators craft the right kind of legislation to harness — but not choke — the nascent crypto industry.
He succeeded at creating his crypto-will-save-the-world persona to such a degree that The New York Times and Washington Post are still, this week, publishing fairly flattering interviews about the company he ran into the ground, obliterating the savings of countless customers.
‘It’s what reputations are made of’
So was it all a calculated PR move? Was any of it real?
The U.S. bankruptcy case filed Thursday (Nov. 17) takes strong and scathing aim at the poor internal oversight and record keeping of SBF’s insolvent company and its affiliates. None of it, it appears, was real. Not even the value of the FTT token FTX’s own market value was primarily staked against.
The only real things are the unfortunately very preventable and incredibly widespread ripple effects of FTX’s collapse amongst the cryptocurrency industry at-large, and the gut-punch loss of the personal investments of the exchange’s nearly one million users. The key fact underpinning solvent and capable trading platforms is that when users lose money, it is only (and can only be) from their investments.
In FTX’s case, users lost their entire deposits, wiping out untold wealth and savings from individuals who could’ve never imagined the potential scale of the fraud they were unknowingly caught up in — and even supporting — through the illegal transfer of their deposits to Alameda Research.
“From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented,” John J. Ray III said in a sworn deposition.
Advisers overseeing the ruins of FTX are now struggling to locate the company’s cash and crypto.
Enormous efforts are underway to bring some semblance of order to a chaotic environment.
FTX regularly approved payments, potentially including the exchange’s $6 million super bowl ad, using personalized emojis — a far cry from the type and caliber of disbursement controls generally in place, and considered quite necessary, for businesses enterprises of all sizes.
SBF, one of his related companies, and two other top executives at FTX also received massive loans from Alameda Research, as revealed in Thursday’s bankruptcy court filing. The loans include $1 billion to SBF, $2.3 billion to Paper Bird Inc., an entity controlled by SBF, $543 million to Nishad Singh, head of engineering at FTX, and $55 million to Ryan Salame, head of FTX Digital Markets.
It is unclear whether these loans were approved by a “thumbs up” emoji, or if they were looked at more closely. The financial reports that detail the four transactions were produced while SBF still controlled the businesses and are considered “suspect.”
What is clear is that FTX’s customers are furious and wondering where their money is, and why SBF transferred hundreds upon hundreds of millions to himself and others as it became clear to the innermost circle that cracks within the company were beginning appear and spread.
Was it because, as he messaged the reporter, “people like you when you win” and he thought he could win?
“The world is never so black and white,” he followed up.
While CEO John J. Ray III begins to untangle the grayed-out mess of FTX’s books, things are in fact pretty black and white for FTX’s users: all their money has disappeared, all because SBF surrounded himself with traders and engineers, rather than accountants and compliance officers.