Samuel Bankman-Fried’s poster in downtown San Francisco.
MacKenzie Sigalos | CNBC
Two years ago, Sam Bankman-Fried was a 30-year-old multibillionaire living in a $35 million Bahamas penthouse, partying with his pals while running one of the world’s most valuable crypto companies.
Today, he’s a 32-year-old inmate at the Metropolitan Detention Center in Brooklyn, waiting for a judge to tell him how long he’ll spend behind bars for masterminding “one of the biggest financial frauds in American history,” in the words of U.S. Attorney Damian Williams.
Bankman-Fried, the founder and former CEO of failed crypto exchange FTX, will head on Thursday to a federal court in downtown Manhattan, where U.S. District Judge Lewis Kaplan will deliver his sentencing. Prosecutors have recommended a prison sentence of 40 to 50 years.
It took jurors only about three hours of deliberations in November to find Bankman-Fried guilty of all seven criminal accounts against him. For a high-profile monthlong trial that involved nearly 20 witnesses and hundreds of exhibits, experts said at the time that they’d never seen such a speedy decision. Bankman-Fried plans to appeal his conviction and sentence.
It was a steep and swift fall from grace for Bankman-Fried, who was once hailed as a titan of the industry and had a peak net worth — on paper — of roughly $26 billion.
Indicted FTX founder Sam Bankman-Fried leaves the U.S. Courthouse in New York City, July 26, 2023.
Amr Alfiky | Reuters
Bitcoin arbitrage
It started with the Kimchi Swap.
In 2017, as a quant trader at Jane Street, Bankman-Fried noticed something funny when he looked at bitcoin pricing on CoinMarketCap.com. Instead of a uniform price across exchanges, Bankman-Fried would sometimes see a 60% difference in the value of the digital currency. His immediate instinct, he said, was to get in on the arbitrage trade — buying bitcoin on one exchange and selling it back on another, pocketing the difference.
“That’s the lowest hanging fruit,” Bankman-Fried told CNBC in September 2022.
The arbitrage opportunity was especially compelling in South Korea, where the exchange-listed price of bitcoin was significantly higher than in other countries. It was dubbed the Kimchi Premium, a reference to the traditional Korean side dish of salted and fermented cabbage.
After a month of personally dabbling in the market, Bankman-Fried launched Alameda Research, named after the California county that housed his first office. Bankman-Fried told CNBC that the firm sometimes made as much as a million dollars a day trading bitcoin.
Alameda’s success spurred the launch of FTX. In April 2019, Bankman-Fried co-founded FTX.com, an international cryptocurrency exchange that offered customers innovative trading features, a responsive platform and a reliable experience. FTX’s success led to a $2 billion venture fund that seeded other crypto firms.
The FTX logo soon adorned everything from Formula One race cars to a Miami basketball arena. Bankman-Fried talked about one day buying Goldman Sachs, and he became a fixture in Washington as one of the Democratic Party’s top donors.
Then the market turned.
The so-called crypto winter of 2022 wiped out hedge funds and lenders across the crypto universe. Bankman-Fried boasted that he and his enterprise were immune. Behind the scenes, Alameda was borrowing money to invest in failing digital asset firms to keep the industry afloat.
May of 2022 brought the crash of stablecoin Luna, creating a domino effect that sent crypto prices plunging and devastating other lenders.
Alameda had borrowed from lenders including Voyager Digital and BlockFi, which both ended up going bankrupt. Alameda secured its loans with FTT tokens, minted by FTX. Bankman-Fried’s empire controlled the vast majority of the available currency, with only a small amount of FTT actually circulating at any time.
Alameda marked its entire hoard of FTT at the prevailing market price despite it being a virtually illiquid asset. The fund used the same methodology with other coins as well, including Solana and Serum (a token created and promoted by FTX and Alameda), using them to collateralize billions of dollars in loans. Industry insiders called the tokens “Sam coins.”
Virtual bank run
When faced with margin calls due to falling prices, Bankman-Fried turned to FTX customers’ deposits to the tune of billions of dollars by the middle of 2022. According to the firm’s own bankruptcy filings, it possessed almost nothing in the way of record keeping.
On Nov. 2, 2022, crypto trade site CoinDesk publicized details of Alameda’s balance sheet, which showed $14.6 billion in assets. Over $7 billion of those assets were either FTT tokens or Bankman-Fried-backed coins like Solana or Serum. Another $2 billion worth were locked away in equity investments.
Investors began withdrawing their holdings from FTX, creating the threat of a virtual bank run. Alameda and FTX now both faced a liquidity crunch.
On Nov. 6, four days after the CoinDesk article, Binance founder Changpeng Zhao dropped the hammer. Binance was the first outside investor in FTX in 2019. Two years later, FTX bought back its stake with a combination of FTT and other coins, according to Zhao.
Zhao wrote in tweet that, because of “recent revelations that have came [sic] to light, we have decided to liquidate any remaining FTT on our books.” FTX executives scrambled to contain the damage, and Alameda traders managed to fend off outflows for a couple days.
On Nov. 7, Bankman-Fried tried to show confidence, tweeting, “FTX is fine. Assets are fine.” The post was deleted.
Sam Bankman-Fried, the jailed founder of bankrupt cryptocurrency exchange FTX, is sworn in as he appears in court for the first time since his November fraud conviction, at a courthouse in New York, U.S., February 21, 2024 in this courtroom sketch.
Jane Rosenberg | Reuters
Internal discussions were different. Bankman-Fried and other executives admitted to each other that “FTX customer funds were irrevocably lost because Alameda had appropriated them.” By Nov. 8, the client shortfall had grown to $8 billion. Bankman-Fried was courting outside investors for a rescue package but found no suitors.
FTX issued a pause on all customer withdrawals that day. FTT’s price plummeted by over 75%. Out of options, Bankman-Fried turned to Zhao, who announced that he’d signed a “non-binding” letter of intent to acquire FTX.com.
But a day later, on Nov. 9, Binance said it wouldn’t go through with the acquisition, citing reports of “mishandled customer funds” and federal investigations.
FTX filed for bankruptcy on Nov. 11, and Bankman-Fried resigned as CEO of FTX and associated entities. He immediately lost 94% of his personal wealth.
Sullivan & Cromwell, FTX’s longtime attorneys, approached John J. Ray, who oversaw Enron through its bankruptcy, to assume Bankman-Fried’s former position.
On Dec. 12, Bankman-Fried was arrested by Bahamian authorities and extradited to the U.S., where he was taken into custody. Federal prosecutors and regulators accused Bankman-Fried of perpetrating a fraud “from the start,” according to a filing from the SEC.
Bankman-Fried was released on a $250 million bond and was initially living under house arrest with a court-ordered ankle monitor at his parents’ home in Palo Alto, California, on the Stanford University campus. He was soon taken back into custody for alleged witness tampering.
While Bankman-Fried awaited trial, many of his closest friends and confidantes turned into key witnesses for the prosecution, leaving the former crypto billionaire to defend himself. Less than a year after his arrest, the 12-person jury found Bankman-Fried guilty on all criminal charges against him.
— CNBC’s Rohan Goswami contributed to this report.
WATCH: Prosecutors recommend 40-50 year prison sentence for Bankman-Fried
