Summary: SBF: How The FTX Bankruptcy Unwound Crypto’s Very Bad Good Guy by Brady Dale

Key Takeaways

• If you are fascinated by the crypto industry, or by the story of Sam Bankman-Fried, one of its most influential and controversial figures, then you will want to read this book. SBF: How The FTX Bankruptcy Unwound Crypto’s Very Bad Good Guy by Brady Dale is a captivating account of the rise and fall of SBF and his companies, FTX and Alameda Research, from their inception to their downfall.
• To find out more about the book, read on. You will not regret reading this book, as it will give you a deeper and richer understanding of the crypto industry, and of the phenomenon of SBF and his companies.

Recommendation

The saga of Sam Bankman-Fried, known as “SBF,” is a cautionary tale centered in either the still-emerging or the now-collapsing universe of cryptocurrency. SBF and his team’s secret machinations drove their crypto exchange, FTX, into bankruptcy – but it failed only after their dealings came to light. Friedman also co-founded the trading firm Alameda Research, which lost money investing FTX customers’ funds without their knowledge. Alameda also accumulated more FTX exchange tokens than it could sell without deflating their value. Axios journalist Bill Daley details the events that led to SBF’s indictment, incarceration and trial, although his engrossing book ends before Friedman’s conviction, handed down on Nov. 2, 2023.

Take-Aways

• Despite the claims of Sam Bankman-Fried (“SBF”) to the contrary, his companies – the cryptocurrency exchange FTX and the crypto trader Alameda – were not separate entities.
• FTX customers deposited funds in a bank account that Alameda allegedly controlled; Alameda reportedly used those funds without its depositors’ consent.
• SBF made a significant investment in SushiSwap.
• In 2021, FTX raised more than $1 billion from investors.
• In 2022, the cryptocurrency community faced its first fundamental global economic shift, and SBF turned his attention toward crypto regulation.
• Nine days after a Coindesk article exposed SBF’s larceny, FTX filed for bankruptcy.

Summary

Despite the claims of Sam Bankman-Fried (”SBF”) to the contrary, his companies – the cryptocurrency exchange FTX and the crypto trader Alameda – were not separate entities.

Sam Bankman-Fried, nicknamed “SBF,” co-founded Alameda Research, a crypto trading firm in 2017. He founded the FTX cryptocurrency exchange in 2018. Publicly, FTX and Alameda appeared to be separate businesses. However, a 2022 article on CoinDesk, a crypto industry news website, revealed constant – and possibly illegal – fund swapping between the two entities. That article marked the beginning of the end of SBF’s empire.

CoinDesk reported that a quarter of Alameda’s $14.6 billion in assets consisted of FTX “exchange tokens,” called “ftt.” Owning ftt entitled FTX customers to buy services from the exchange and collect a share of its profits.

“Crypto people are always looking for someone who is going to make big promises and then steal their money.”

According to a complaint the Commodity Futures Trading Commission (CFTC) filed in December 2022, Alameda secretly borrowed funds from FTX, contrary to FTX’s terms of service with its clients.

Billionaire Changpeng “CZ” Zhao, who founded the cryptocurrency trading company Binance, responded to the CoinDesk article by selling all of Binance’s FTX exchange tokens. The day after CZ dumped FTX tokens, FTX reportedly halted customer withdrawals from its platform.

FTX customers deposited funds in a bank account that Alameda allegedly controlled; Alameda reportedly used those funds without its depositors’ consent.

Crypto coins, like bitcoin, ether and others, are the “fundamental economic unit” of a unique blockchain designed for each coin. A blockchain – comparable to a spreadsheet – is a transparent record of all a blockchain’s accounts, which hold bitcoins and other assets. It shows the blockchain’s lifetime of transactions. Some coin-based blockchains create other assets known as tokens. People commonly use the terms “token” and “coin” interchangeably, but while coins are a prerequisite for the existence of a token, a token is not a prerequisite for a coin.

Alameda was a cryptocurrency market-maker, buying and selling crypto coins and other assets. When such companies make a market in a particular token, they stop working for fees and, instead, accept compensation in the form of a loan of the token, plus an option to buy the token in the future at a set price.

Alameda initially served as FTX’s market-maker. A deal memo dated July 19, 2019, written during the first round of FTX’s fundraising noted, “other quantitative hedge funds are hesitant to trade on FTX” due to its connection with Alameda. Yet FTX could not function without Alameda’s bank account.

“Nobody knows yet how bad SBF’s mistakes are going to be for the blockchain business.”

FTX told its customers to deposit their funds into the Alameda bank account, and – although FTX credited their accounts with the deposit – the money remained in Alameda’s custody, according to a United States Securities and Exchange Commission (SEC) complaint against Alameda. Alameda listed FTX clients’ funds as “loans” on its balance sheets, but it failed to disclose that FTX was the lender.

SBF’s secret practice of putting FTX customer funds at Alameda’s disposal continued until 2021. FTX and Alameda eventually proved vulnerable to the fortunes of FTX’s exchange token ftt – known in the markets by its ticker symbol FTT. Cryptocurrency exchanges distribute so-called “exchange tokens” to enable customers to share in the exchange’s profits and to qualify for discounted cryptocurrency trading fees.

FTX created 350 million ftt tokens, distributed half and kept the other half. This token was not strictly a profit-sharing vehicle. Every week, FTX would allocate a third of its trading fees to open-market purchases of ftt, then destroy the acquired tokens to reduce the total supply and bolster FTX’s per-token value.

In March 2020, the COVID-19 pandemic shattered the public perception that cryptocurrency markets did not correlate with other markets. From March 11 to March 12, bitcoin prices plummeted from about $7,900 to $4,700. The price of the ether cryptocurrency fell from $198 to $102.

However, Alameda appeared unthreatened by the economic wrecking ball. March 12, 2020, the crypto world’s “Black Thursday,” proved to be “just another day” of profitable cryptocurrency trading at Alameda.

SBF made a significant investment in SushiSwap.

Uniswap was the industry leader among decentralized cryptocurrency exchanges. Even if every human who built Uniswap vanished, it could continue to operate on the Ethereum blockchain, in effect, “a robot on the internet.”

The software code that drives Uniswap is freely available to the public. An unnamed developer who used the pseudonym “Chef Nomi” created a copy of Uniswap called SushiSwap. Nomi drew depositors from Uniswap by offering a governance token, called “sushi,” which entitled them to a thin slice of the trading fees from the SushiSwap exchange. By issuing these tokens early and often, Chef Nomi signaled his intent to turn SushiSwap into a decentralized autonomous organization (DAO).

“To be clear, these depositors wouldn’t be giving Chef Nomi their money. They would only be giving him the right to move it to a different exchange. It would still be theirs. Plus they’d get this free token. In other words, Chef Nomi had created a way to suck funds out of Uniswap. Nomi had invented a new kind of mining: vampire mining. This was chaos magic on the blockchain…The crowd went wild.”

Other DAOs, or token projects, typically have development funds. SushiSwap’s fund was composed mainly of sushi tokens. After Nomi announced that his DAO used $13 million to buy another cryptocurrency, ether, the market value of sushi plunged along with Chef Nomi’s credibility.

In late 2020, Bankman-Fried saw SushiSwap as a promising investment opportunity. On September 9, 2020, he oversaw a transfer of $830 million in crypto assets to SushiSwap, a transaction that portrayed him as “competent and generous.” However, rescuing SushiSwap did not make SBF a hero in the eyes of the decentralized finance (DeFi) community. DeFi proponents derided the creation of the FTX exchange token as a cynical ploy by a rich guy trying to get richer.

The FTX exchange offered a popular feature called “cross-collateralization.” It allowed traders to use their entire token portfolios to make margin trades by borrowing from FTX to buy and sell crypto assets. Other exchanges were more restrictive, requiring a trader with $500 of bitcoin and $500 of ether to conduct two margin trades of $500 each instead of a single $1,000 margin trade.

In 2021, FTX raised more than $1 billion from investors.

FTX raised more than $1 billion from investors between July and October 2021. The lead investors were Sequoia Capital, a venture capital firm, and the Ontario Teachers’ Pension Plan Board. FTX spent some of this fresh capital to acquire Binance’s former equity stake in FTX.

Bankman-Fried used sporting events and celebrities to market FTX. In a 19-year, $135-million deal disclosed in March 2021, SBF put the FTX name on the basketball arena that hosts the NBA’s Miami Heat.

“A former [anonymous] FTX insider…told me the Heat deal marked a shift. ‘It was the beginning of this unstoppable celebrity spending spree,’ the person said. ‘It was the beginning of a focus on things that weren’t the core business’.”

FTX recruited football quarterback Tom Brady and his then-wife model Giselle Bündchen as “brand ambassadors.” The couple appeared in a television commercial promoting FTX by saying, “I’m in” on the cryptocurrency exchange. FTX’s name appeared on patches worn by Major League Baseball umpires. FTX staged major events. The final one, Crypto Bahamas, featured Brady and Bündchen, Tony Blair and Bill Clinton.

In 2022, the cryptocurrency community faced its first fundamental global economic shift, and SBF turned his attention toward crypto regulation.

By early 2022, the US Federal Reserve signaled it was ready to raise interest rates, ending a period of low rates that had begun 14 years earlier, during the 2008 Great Recession.

In the 2022 election cycle, SBF gave at least $40 million in political and charitable donations, most likely substantially more. He sought plainly stated regulation of cryptocurrency companies and especially wanted the CFTC to become FTX’s primary regulator.

“SBF spent about $40 million that was reported in the 2022 election cycle…The goal he said…was pandemic prevention…much of it went to Protect Our Future, a political action committee that focused on candidates who prioritized heading off another COVID-19…There was something else he wanted very much. He wanted clear regulations for the cryptocurrency industry in the US.”

Bankman-Fried contended that the government should regulate FTX differently than other exchanges. He said FTX deserved a unique level of trust because of its built-in “risk engine.” Every 30 seconds, the risk engine analyzed the collateral position of every FTX customer who had borrowed from the exchange. However, Alameda did not use the risk engine to assess its exposure to possible losses. This failure became the basis of a civil suit the CFTC filed against FTX.

Nine days after a Coindesk article appeared, FTX filed for bankruptcy.

Three executives – Sam Trabucco, Alameda’s co-CEO; Brett Harrison, CEO of FTX US; and Jonathan Cheesman, FTX chief of over-the-counter trading – left Bankman-Fried’s empire between August and October 2022.

CoinDesk published Ian Allison’s article, entitled, “Divisions in Sam Bankman-Fried’s Crypto Empire Blur on His Trading Titan Alameda’s Balance Sheet,” on Wednesday, November 2, 2022. Allison reported that 25% of Alameda Research’s holdings – it’s single largest asset – was a pile of ftt, the FTX token, valued at $3.66 billion. Alameda’s account of FTX tokens was so large that selling all of it would crush the value of ftt.

After Coindesk published its article, FTX began processing an above-normal volume of withdrawals from customers’ accounts. On the Sunday after publication, CZ Zhao, the CEO of Binance, announced his decision to sell any ftt remaining on Binance’s books. Over the next two days, ftt’s market price dropped from a range of $22 to $24 to about $15.

“In the end, SBF had succeeded in having high impact… just not the kind he hoped for.”

Bankman-Fried and FTX and Alameda staff members claim to have learned just then that funds FTX held for its customers were lost and apparently irretrievable. Until FTX obtained its own bank account in August 2020, customers had deposited non-crypto cash in an Alameda bank account. The CFTC claimed that Alameda used FTX customer funds because the company never transferred funds to the FTX bank account.

The Block reported that FTX had stopped allowing customers to withdraw funds, citing blockchain data. The Wall Street Journal reported that in a November 9 video meeting, Alameda CEO Caroline Ellison said she, Bankman-Fried and two other FTX executives were aware of transfers of FTX customer funds to Alameda.

FTX and FTX US prevented their customers from withdrawing funds or trading cryptocurrency. On November 10, 2022, the Securities Commission of the Bahamas froze the assets of FTX-related companies. On November 11, 2022, FTX filed for bankruptcy. The company announced it had replaced SBF with a new CEO, John J. Ray III, who had guided Enron through bankruptcy.

By the end of November 2022, FTT’s market had vanished.

“In terms of facing the future, I think I’m just gonna tell the truth and see what happens. And I certainly don’t agree with the public narrative, but that’s not for me to decide at the end of the day…no matter what happens, there will be too much political and public pressure to find me guilty. And that it won’t matter what really happened.” (Sam Bankman-Fried, author interview)

The market cap of all cryptocurrencies topped $1 trillion on November 2, 2022, the day the CoinDesk story came out. By mid-December, it had fallen to $844 million. More than a million people have funds on the FTX exchange they cannot withdraw.

The US government launched a case against SBF, whom authorities in the Bahamas arrested on December 13, 2022 and charged with wire fraud, commodities fraud, securities fraud, money laundering and violation of campaign finance laws. Caroline Ellison and FTX co-founder Peter Wang also face charges.

About the Author

Axios cryptocurrency reporter Brady Dale is a co-writer of the Axios Crypto newsletter.

Genres

Business, Finance, Technology, Cryptocurrency, Blockchain, Biography, Journalism, Investigation, Nonfiction, Thriller

Review

The book is a captivating account of the rise and fall of one of the most influential and controversial figures in the crypto industry, Sam Bankman-Fried, also known as SBF. The author, Brady Dale, is an experienced crypto reporter who has covered the industry since 2015 and has witnessed the evolution of SBF and his companies, FTX and Alameda Research, from their inception to their downfall.

The book chronicles the history of SBF, a former Wall Street trader who became a crypto billionaire and philanthropist, and his ambitious projects in the crypto space, such as FTX, a leading crypto exchange that offered innovative products and services, such as leveraged tokens, prediction markets, and tokenized stocks; Alameda Research, a quantitative trading firm that dominated the crypto market making and arbitrage; and Solana, a high-performance blockchain platform that aimed to rival Ethereum.

The book also reveals the dark side of SBF and his companies, such as their involvement in questionable practices, such as market manipulation, insider trading, regulatory evasion, and unethical lobbying. The book exposes how SBF and his associates faced criminal charges and lawsuits from various authorities and parties, such as the US Securities and Exchange Commission (SEC), the US Department of Justice (DOJ), the Commodity Futures Trading Commission (CFTC), and several investors and competitors. The book details how the FTX bankruptcy, which occurred in November 2023, triggered a cascade of events that led to the collapse of SBF’s empire and reputation.

The book is a well-researched and well-written piece of investigative journalism that offers a comprehensive and balanced perspective on SBF and his companies. The author draws from various sources, such as interviews, documents, court filings, and media reports, to provide a factual and objective account of the events and issues surrounding SBF and his companies. The author also provides his own insights and analysis, based on his extensive experience and knowledge of the crypto industry, to explain the motivations, strategies, and impacts of SBF and his companies.

The book is not only informative, but also engaging and entertaining, as it narrates the story of SBF and his companies in a captivating and compelling way. The book captures the drama, the intrigue, the excitement, and the scandal of the crypto industry, as well as the personality, the charisma, the genius, and the flaws of SBF. The book also explores the broader themes and implications of the crypto industry, such as innovation, disruption, regulation, governance, and ethics.

The book is a must-read for anyone who is interested in the crypto industry, or in the phenomenon of SBF and his companies. The book provides a rare and valuable glimpse into the inner workings and the behind-the-scenes of the crypto industry, as well as the rise and fall of one of its most prominent and controversial players.