Fri Nov 3

Sam Bankman-Fried convicted for massive FTX fraud, in stark reminder of risks of crypto trading

Written by: John Hawkins, Senior Lecturer, Canberra School of Politics, Economics and Society, University of Canberra

It is not just crypto tokens that have spectacular downfalls. So can crypto personalities.

Sam Bankman-Fried founded FTX, one of the world’s largest exchanges for so-called cryptocurrencies, which collapsed last year owing billions of dollars. Now he has gone from being hailed as potentially the world’s first trillionaire ^[1] to a lengthy term in prison.

After a month-long trial, a New York jury took less than five hours to find him guilty ^[2] on seven counts of fraud and money laundering.

Bankman-Fried’s conviction highlights the risks of crypto markets, where people trade tokens with no fundamental value via hugely complex and poorly regulated financial machinery.

The Australian government is currently considering how to protect consumers in such markets. Treasury has commenced a consultation process ^[3]. But it will not be an easy task when so much of the activity occurs overseas or in cyberspace.

FTX was not fine

Bankman-Fried chose to testify in his own defence. But he failed to convince the jury he was merely a maths nerd ^[4] with a poor memory who was unaware of what his friends and colleagues were doing with the companies in which he was the largest stakeholder.

In FTX’s final days, as concerned customers started withdrawing their deposits, Bankman-Fried tweeted “FTX is fine. Assets are fine ^[5]”. It appears the jury did not accept he truly believed this at the time.

A dishevelled man is escorted through a doorway.

Sam Bankman-Fried was extradited from the Bahamas to face trial in the United States. Rebecca Blackwell / AP ^[6]

The verdict is a salutary warning about the dangers of unregulated financial markets such as crypto. As the former chair of the United Kingdom’s Financial Conduct Authority put it, fraud is “a feature, not a bug ^[7]” for much of the industry.

Crypto tokens such as Bitcoin have no underlying assets to give them some fundamental value. They only generate a return if the owner can sell at a higher price, to someone who expects the price to go even higher. This makes them one of the purest examples of a speculative bubble.

No government

One of the ironies of the crypto market is that cryptocurrency is sold as a way to avoid having to trust governments or banks, as one does with traditional currency. But in practice, crypto trading often relies on trusting individuals – some of them charlatans such as Bankman-Fried.

Punters thought they could trust FTX to mind their funds for them while they switched between speculative crypto tokens such as Bitcoin and Dogecoin. They were not investing in FTX, or even lending their money to it.

But instead of letting customers’ funds sit around waiting to be withdrawn, FTX transferred a lot of them to another company, Alameda Research. This was an investment fund, poorly run by Bankman-Fried and his cronies.

It is still not clear what happened to all the missing billions. Some of the money was frittered away on extravagant living. Some went to pay celebrities for advertisements and endorsements, such as the famous Super Bowl clip starring comedian Larry David. At least David can say he was warning people against “getting into crypto”.

Some of the missing cash went on large political donations. Much was lost on poor bets by Alameda which failed to hedge against the risk that the price of crypto tokens could quickly plummet.

FTX was essentially a casino. But Bankman-Fried both owned the casino and was gambling in it – and gambling with other people’s chips.

Prison looms

Bankman-Fried is still proclaiming his innocence ^[10]. But he looks likely to be in prison for decades.

He will find out how long on March 28 2024. It could be more than a century ^[11] if he receives the maximum penalty on all the counts on which he has been convicted. And he may yet face further charges.