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The full episode, in writing.
On November 2, 2022, the crypto news site CoinDesk published a story about a balance sheet. Not a hack, not a regulatory action, not a market crash. A balance sheet. The balance sheet belonged to Alameda Research, a trading firm run by Sam Bankman-Fried. Of its roughly fourteen billion dollars in assets, about five billion were FTT — the in-house token of FTX, the cryptocurrency exchange Bankman-Fried also ran. FTX had created FTT out of nothing in May 2019. Alameda was using it as collateral. Within nine days, FTX, Alameda, and more than a hundred affiliated companies filed for bankruptcy in Delaware, and roughly eight billion dollars of customer money was gone.
Bankman-Fried co-founded Alameda in 2017 as a crypto trading firm. In 2019 he founded FTX, ostensibly to bring in revenue to fund Alameda's trading. He was CEO of both companies until October 2021, when he formally stepped down from Alameda and promoted two traders, Caroline Ellison and Sam Trabucco, to co-CEOs. Ellison was reported to be romantically involved with him. As of August 2021 Bankman-Fried still owned ninety percent of Alameda. The two firms shared an office, shared software, shared founders. According to John J. Ray III, who later took over FTX, Alameda had a "secret exemption" from the auto-liquidation system that protected FTX from losses on every other trader on the exchange. Ellison's firm could go as deeply underwater as it wanted.
In May and June of 2022, the broader crypto market collapsed. Terra-Luna failed in May. The hedge fund Three Arrows Capital filed bankruptcy in July. Alameda was hammered. According to anonymous sources cited by the Wall Street Journal, FTX responded by lending Alameda more than half of its customer funds — money users had deposited on the exchange to trade. Ellison later said that she, Bankman-Fried, FTX co-founder Gary Wang, and FTX engineering director Nishad Singh were aware of this. The transfers were forbidden by FTX's own terms of service. Software was used to conceal the misuse.
Then came the CoinDesk article. The story revealed how thoroughly Alameda's solvency depended on FTT, a token whose price could only be propped up by FTX itself. Four days later, on November 6, Changpeng Zhao — known as CZ, the CEO of the rival exchange Binance — announced that Binance would sell its holdings in FTT. Binance had received the tokens in 2021, when FTX bought back an equity stake Binance had held in the company; the position was worth about five hundred and twenty-nine million dollars at the start of November 2022. Zhao cited "recent revelations" as his reason for selling. Bankman-Fried and Zhao started feuding on Twitter. The price of FTT began to fall. Customers began to withdraw.
Six billion dollars left FTX in seventy-two hours. On November 8, FTT lost eighty percent of its value, wiping out more than two billion dollars in market cap in a single day. FTX could no longer process withdrawals. That same day, Bankman-Fried and Zhao jointly announced that Binance had signed a non-binding letter of intent to acquire FTX. The deal excluded FTX US. Bankman-Fried framed it as customer protection. Bloomberg reported by November 9 that Binance considered the acquisition "unlikely" given the state of FTX's books, and the U.S. Securities and Exchange Commission and Commodity Futures Trading Commission had begun investigating FTX's handling of client funds. By the end of that day, Binance had walked. Bankman-Fried said in a Slack message that FTX had learned through the press.
On November 10, Bankman-Fried publicly said he was trying to raise ten billion dollars in emergency financing. He told staff Alameda would wind down trading. FTX approached Kraken about a rescue. Anonymous sources told the Wall Street Journal that Alameda owed FTX roughly ten billion dollars, money that had been customer deposits. Most of FTX's in-house legal and compliance team had resigned. Ryne Miller, a member of FTX US's legal team, told other executives there was a zero percent chance of further investment. Bankman-Fried refused to cede control. The Securities Commission of the Bahamas froze the assets of FTX Digital Markets Ltd. Japan's Financial Services Agency ordered FTX Japan to suspend operations. FTX Australia was placed under administration.
On November 11, FTX, FTX US, Alameda Research, and more than a hundred affiliates filed for Chapter 11 in Delaware. The New York Times reported the exchange owed as much as eight billion dollars. Bankman-Fried resigned as CEO. He was replaced by John J. Ray III, the corporate restructuring specialist who had overseen the liquidation of Enron. Within a week Ray would file a court declaration calling FTX a "complete failure of corporate controls" — worse, he wrote, than anything he had seen in his career, including Enron.
Late on the night of the bankruptcy, roughly four hundred and seventy-three million dollars in cryptocurrency moved out of FTX wallets in what Miller publicly called "unauthorized transactions." A person speaking for FTX in a Telegram chat called it a hack and told users to delete the app. The funds were mostly stablecoins, quickly swapped into Ether — a standard laundering pattern. Kraken's chief security officer said two days later that the firm knew the identity of the user whose Kraken account had paid the gas fees. In an interview with Kelsey Piper of Vox on November 16, Bankman-Fried blamed an ex-employee or malware. In January 2024, the U.S. Department of Justice indicted three men in a SIM-swap operation that had stolen "over $400 million in virtual currency" from an unspecified company between November 11 and 12, 2022. Bloomberg sources confirmed the company was FTX.
The shape of the hole became clearer. Between one and two billion dollars in customer funds could not be accounted for as of November 12. The Financial Times reported FTX's pre-bankruptcy balance sheet showed nine billion dollars in liabilities against nine hundred million in liquid assets, five billion in less-liquid assets, and three point two billion in illiquid private equity stakes. Among the assets FTX was relying on to pay out customers were two tokens, as the columnist Matt Levine put it, "it had just made up" — FTT and Serum. Bankman-Fried's personal net worth, estimated at sixteen billion dollars before the run, went to zero in days.
The contagion was immediate. Tether briefly broke its dollar peg and dropped to ninety-seven cents. Bitcoin sank to its lowest price in two years. Cronos, the token of Crypto.com, lost roughly a billion dollars of market value in November as users feared a similar collapse and CEO Kris Marszalek had to publicly assure customers the exchange was solvent. The crypto lender BlockFi suspended withdrawals on November 10, disclosed "significant exposure" to FTX on the 14th, and filed for Chapter 11 on November 28. Genesis Global Capital, the lending arm of Digital Currency Group, halted withdrawals on November 16. That suspension cascaded into Gemini, the exchange owned by the Winklevoss twins, which had to freeze its Earn program because Genesis was the lending partner. The Grayscale Bitcoin Trust traded at a forty-two percent discount to the value of the bitcoin it held. In March 2023, Silvergate Bank, which had been the primary banking partner for crypto firms, announced it was winding down on March 9. Three days later, on March 12, the New York Department of Financial Services closed Signature Bank, which served Binance and Celsius — at the time, the third-largest bank failure in U.S. history. Anthony Scaramucci's SkyBridge Capital scrambled to buy back the thirty percent stake FTX had taken in his firm. Tom Brady, Gisele Bündchen, Stephen Curry, Shaquille O'Neal, Larry David, Trevor Lawrence, Shohei Ohtani, and Naomi Osaka were named in a class-action lawsuit filed in Miami on November 15 over their FTX endorsements. Sequoia Capital wrote its two hundred and fourteen million dollar FTX investment to zero on November 9 and replaced its glowing thirteen-thousand-word profile of Bankman-Fried with a somber note. The Ontario Teachers' Pension Plan wrote down its stake. So did SoftBank, BlackRock, Tiger Global, Lightspeed, Temasek. Lawrence Summers said the meltdown carried "whiffs" of Enron. Short seller Jim Chanos predicted, correctly, that the U.S. would crack down on the entire crypto sector.
The criminal case moved with unusual speed. On December 12, Bankman-Fried was arrested in the Bahamas at the request of U.S. prosecutors and extradited to New York. On December 21, 2022, Caroline Ellison, the former Alameda CEO, and Gary Wang, FTX's former chief technology officer, pleaded guilty to fraud and agreed to cooperate. Their plea agreements required them to "truthfully and completely disclose all information" about Bankman-Fried's empire. Nishad Singh, FTX's director of engineering, pleaded guilty in February 2023. Bankman-Fried's trial began on October 3, 2023. Ellison, Wang, and Singh all testified that Bankman-Fried directed them to commit fraud. On November 2, 2023, after a roughly four-hour deliberation, the jury convicted him on all seven counts — wire fraud, conspiracy to commit wire fraud, conspiracy to commit securities fraud, conspiracy to commit commodities fraud, and conspiracy to commit money laundering. On March 28, 2024, Judge Lewis Kaplan sentenced Bankman-Fried to twenty-five years in federal prison and ordered him to forfeit eleven billion dollars.
The recovery has been bizarre by bankruptcy standards. Solana, the cryptocurrency Bankman-Fried had championed and which collapsed alongside FTX in November 2022, recovered sharply through 2023. So did the rest of the crypto market. The estate inherited the upside. In May 2024, John Ray estimated that customers and digital-asset loan creditors will recover between one hundred and eighteen and one hundred and forty-two percent of their claim values — measured at the November 2022 petition date. A customer who had a million dollars in bitcoin on the exchange, then worth roughly sixteen thousand dollars per coin, will get back a million dollars. The bitcoin she would have held, had she withdrawn before the run, would now be worth several times that. Anything left after creditors are paid normally goes to stockholders, the largest of whom was Bankman-Fried. The IRS and the SEC have prior claims of their own — Matt Levine called them "somewhat hazy" — that take priority. The FTX Future Fund, the charitable arm Bankman-Fried bankrolled and which had committed one hundred and sixty million dollars in grants by September 1, 2022, dissolved on November 10. The effective altruism movement that had been its largest beneficiary lost its second-biggest funder in a single afternoon — when, as the indictment would later put it, the money had never been Bankman-Fried's to give.