Sam Bankman-Fried: FTX crypto mogul's from rise to fall

Sam Bankman-Fried, the ex-billionaire cryptocurrency prodigy, has at last received his sentence following his guilty verdict for embezzling $8 billion from clients of the defunct FTX exchange that he established.

On Thursday (March 28, 2024), authorities handed Sam Bankman-Fried, once lauded as a paragon of responsibility in the cryptocurrency industry, a 25-year prison sentence. This follows his conviction in November for what prosecutors labeled one of history’s most significant financial fraud cases.

Originally, US prosecutors had pushed for a sentence ranging from 40 to 50 years, following a jury’s verdict of guilt on seven counts of fraud and conspiracy that led to the collapse of his once-prominent FTX company, a major player in the crypto exchange realm.

Sam Bankman-Fried, known as “S.B.F.” in the crypto community, founded the now-defunct FTX exchange in 2019 after launching the crypto hedge fund Alameda Research in 2017. Before venturing into the cryptocurrency domain, he had a background as a trader on Wall Street. At the height of his success, Bankman-Fried amassed a wealth of $26 billion (€24 billion).

Sam Bankman-Fried: FTX crypto mogul's from rise to fall

Bitcoin and digital assets experienced an extraordinary surge in value throughout 2020 and 2021. Amidst this period, Bankman-Fried, recognized for his curly hair and unkempt appearance, emerged as a symbol of trustworthiness within the cryptocurrency industry. This reputation significantly contributed to the triumph and resilience of FTX when market circumstances eventually turned unfavorable.

Under Bankman-Fried’s leadership, FTX benefited from notable branding initiatives, endorsements from celebrities, and philanthropic endeavors, all of which played a crucial role in establishing a reputable image for both FTX and cryptocurrencies in general. The collapse of his exchange in 2022 tarnished this positive perception.

A Fallen Patron

The fallen ‘benefactor’ refers to the 32-year-old American who was charged with seven counts of fraud and conspiracy. These charges included allegations of embezzling money from FTX depositors. Throughout the trial, prosecutors argued that Bankman-Fried’s actions, along with those of his close colleagues, jeopardized the availability of funds for users, ultimately leading to the collapse of FTX as cryptocurrency prices declined.

Despite the cryptocurrency market’s yearslong rally coming to an end in 2022, Bankman-Fried insisted that his business remained in good health. However, the reality was that his enterprise had also suffered greatly from the decline in cryptocurrency prices.

In an attempt to support the struggling industry, Alameda borrowed money to invest in failing digital-asset firms. Reports indicate that they resorted to skimming from FTX customers’ deposits to fulfill their own immediate financial obligations.

Sam Bankman-Fried allegedly instructed former FTX technology chief Gary Wang to modify the exchange’s computer code, enabling Alameda to borrow large amounts of money without restrictions imposed on other users. Consequently, Alameda was able to secure substantial funds from FTX.

Prosecutors claimed that Bankman-Fried used FTX deposits to cover losses at Alameda, engage in personal real estate deals, and fund political campaigns.

What led to the collapse of FTX?

The downfall of FTX was mainly attributed to a blend of various factors. Firstly, the increasing regulatory scrutiny and higher interest rates in 2021 prompted many traders to shift their focus from cryptocurrencies to more conventional investments. This shift in market sentiment resulted in a decline in trading activity and reduced demand for FTX’s services.

Furthermore, in November 2022, an exposé published by CoinDesk revealed that Alameda, a prominent player in the cryptocurrency industry, had significant exposure to FTT, a crypto token issued by FTX itself. This disclosure eroded customer confidence in FTX, leading to a substantial outflow of funds from the exchange. Despite efforts to recover, FTX was unable to regain the trust of its customers and stabilize its financial situation.

As a consequence of the collapse, the majority of Bankman-Fried’s wealth vanished almost overnight. In December 2022, he was apprehended in the Bahamas and subsequently extradited to the United States to face legal proceedings.

What Unfolded in the Trial?

During the trial, Bankman-Fried admitted to insufficient risk management practices, however, he refuted the allegations of embezzlement. His legal team contended that Bankman-Fried genuinely believed that his handling of customer funds adhered to FTX’s terms of service and legal requirements, emphasizing his “good faith” intentions.

The prosecution presented former associates of Sam Bankman-Fried who had already pleaded guilty and agreed to provide cooperation. In contrast, Bankman-Fried’s defense sought to illustrate that the collapse of FTX was a result of business errors rather than a deliberate fraudulent scheme.

The proceedings were overseen by US District Judge Lewis A. Kaplan, who had previously presided over defamation cases involving former US President Donald Trump and a sexual abuse lawsuit against Britain’s Prince Andrew.

What’s Next for the Cryptocurrency Market Amid Recent Developments?

The collapse of FTX and the trial involving Sam Bankman-Fried initially led to increased uncertainties within the cryptocurrency market.

James Royal, a principal reporter at Bankrate, expressed concerns that the downfall of FTX could trigger a broader decline or even the demise of the cryptocurrency industry during the time of the collapse.

Despite these fears, the value of Bitcoin, a leading cryptocurrency, has surged by more than 300% in recent months, rebounding from its dip below $20,000 in November 2022.

On March 11, Bitcoin reached a new all-time high above $71,000 as demand for the digital asset grows, driven by optimism surrounding potential interest rate cuts by the US Federal Reserve.

The total market capitalization of the cryptocurrency market also reached a record high of nearly $1.35 trillion, with the combined value of all cryptocurrencies now standing at around $2.5 trillion — the highest level since the time when FTX was still operational under Bankman-Fried.