I’m something of a “crypto skeptic”. I don’t necessarily accept as valid the idea that cryptocurrency is a natural replacement for state controlled fiat currencies, or that Blockchain and its associated constructs such as crypto “wallets” are in fact as inviolable as claimed.
When FTX collapsed so spectacularly in 2022, my initial reaction was basically “well, what did you expect? - the crypto markets have been crumbling for months”. I was peripherally aware of FTX, Binance and a few other exchanges, but it wasn’t central to my world, so I more or less ignored it except when it made headlines. A few of these operations collapsing on themselves wasn’t particularly surprising to me.
What makes the trial of Sam Bankman-Fried (SBF) so interesting is the scale of the fraud, the youthfulness of the accused, and the seeming cluelessness they all exhibited.
After listening to summaries of the testimony from Caroline Ellison, Gary Wang, Nishad Singh, and Sam Bankman-Fried for the last few weeks, my thinking on this has evolved considerably.
My first comment is that Alameda Research and FTX did not start out with the intent to commit fraud. However, as things grew, none of the “inner circle” players had the experience or wisdom to recognize the risks they were facing and put in place the kinds of financial and business practice controls needed to effectively manage risks.
They needed to consult more deeply with people experienced in the commodities/futures trading world, legal experts, and accountants before making some of the decisions they ultimately made.
Just from the timeline of events, it was painfully clear that Alameda was already in deep trouble when the “allow negative”, and unlimited “line of credit” constructs were put in place. Both of those should have been a giant red flag to the executives that something was becoming very precarious.
However, the kinds of profitability and growth that FTX had experienced in a few very short years is one hell of a drug for people who aren’t experienced in the rise and fall of boom/bust markets. That, combined with a naive belief that somehow technology would solve all the problems, led FTX’s leadership to make some very poor decisions.
Criminality in this case starts to creep into the story when FTX started to allow Alameda to draw funds which ultimately had to be coming from FTX customers. The minute that FTX allowed that, they not only violated their own terms of service, but in fact took down one of the few “guardrails” that would have served to keep FTX above board.
Once they started feeling that it was necessary to “fiddle the balance sheets” in order to access loans, that is clearly fraudulent (you’re deceiving the prospective lenders). That act alone serves as solid evidence of mens rea (guilty mind - or intent).
But, by the time summer 2022 had rolled around, the holes in FTX were going to sink it primarily because the company was not hedged adequately outside of the crypto world, so when crypto tanked, there was no way that the company could meet its liquidity requirements (and that's ignoring the hole that Alameda blew in the balance sheets). Like the "unsinkable" Titanic, once the holes are below the waterline ... the ship is going down.
This, of course, doesn't absolve the accused of the criminality of their actions.
I don’t think FTX and Alameda Research were set up as scam companies in the first place. But, I do think that a lack of regulatory guardrails, inadequate legal advice, and youthful poor judgement combined to make them into a scam. The sequestration of customer funds from FTX resources was allowed to collapse - if it had existed at all. That, combined with the glass house of doing most in-house business using an internal token with a floating value, created an environment where it was far too easy for greed to rule the day.
The legal advice was faulty in part because SBF had become very skilled … at giving people part, but not all, of the story. That guaranteed that any advice he did receive was built on the information that he gave the lawyers - which was probably incomplete at best. It didn’t help that counsel included a man who was involved in an online betting fraud a decade or so back.
To be clear, I’m not defending SBF or his inner circle in the least here. None of them stood up and said “wait a second, this looks really questionable” until after the collapse. I don’t think any of them realized that they were engaging in fraud until the collapse was imminent. That said, the line was crossed when Alameda was allowed special privileges on the FTX platform.
After hearing about SBF’s performance in testimony (especially on cross-examination), I think he’s going to prison for a very long time indeed. At the end of the day, he was the person with the full picture and the stake in both companies that meant he had motive to engineer fraud. Keeping parts of the picture from various members of the executive team is enough to demonstrate an effort to wilfully maintain control.
As for those who “turned state’s evidence”, they still deserve prison time too. At the end of the day, their willingness to compromise ethics and honesty in participating in this fraud warrants sanction as well. Whether that’s for as long as SBF goes to prison, or a lesser period remains to be seen. At this point in time, SBF seems to be heading for a nice 30+ year stretch in a Federal Penitentiary.
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