The criminal trial of Sam Bankman-Fried, founder of failed cryptocurrency FTX, opens and it could determine the fate of crypto
In what is likely to become a referendum on the cryptocurrency industry, Sam Bankman-Fried’s criminal trial got underway in federal court in New York City. Bankman-Fried, the founder of FTX, the cryptocurrency that collapsed spectacularly last year, is charged by the Department of Justice with 13 felonies including using $10 billion in FTX’s customers’ funds for his personal use – investments, political donations and luxury real estate purchases.
At its height, Bankman-Fried’s company was valued at $32 billion. He was seen as an industry leader who would shepherd crypto into the mainstream of global finance. He rubbed shoulders with celebrities and politicians. His picture was in magazines, newspapers and on billboards.
The speed at which all this happened is incredible. Bankman-Fried opened his crypto hedge fund Alameda Research in November 2017, and established FTX just about 4 years ago, in May 2019. By early 2022, it was a multibillion-dollar operation and Bankman-Fried soared to the top of the heap of crypto executives, not to mention political donors.
It was all part of the frenzy over digital currencies like Bitcoin and Ether and millions of regular investors got swept up in the excitement.
But Bankman-Fried’s crypto empire practically vaporised overnight, not to mention his purported $12 billion personal fortune. And his reputation as a crypto genius.
How did that happen? A leaked company balance sheet exposed a shaky financial foundation, and the rival exchange, Binance, said that it was selling its hoard of FTT, which is the token associated with the FTX crypto exchange. That ignited the crypto equivalent of a bank run. FTX couldn’t cover the outflows, and the $32-billion crypto empire kind of disappeared overnight.
But there was always a dark side to crypto. Precisely because of its unregulated nature, it was an easy target for financial crime. In fact, according to Chainalysis, a blockchain analytics platform, the amount of crypto sent to wallet addresses associated with illicit behaviour hit an all-time high last year: Just over $20bn worth of cryptocurrency was sent to addresses linked to criminal activity, including ransomware, human trafficking and terrorism financing.
The speed at which FTX crashed and burned also speaks volumes about crypto and its potential for financial abuse.
Bankman-Fried pleaded not guilty to all charges, including a charge that he authorised bribes of $40 million in crypto to be paid to Chinese officials to unlock $1 billion in funds frozen on a Chinese crypto exchange.
Many of the government’s key witnesses against Bankman-Fried are his former colleagues, who agreed to testify against him. Among them is his former girlfriend Caroline Ellison, who testified in court that Bankman-Fried told her to use FTX customer deposits to finance venture investments and loan repayments by Alameda Research, the crypto hedge fund that Ellison ran.
Other former colleagues have also agreed to testify against Bankman-Fried in exchange for reduced sentences. It’s still too early to tell whether this means Bankman-Fried will be convicted but it is clear that the crypto industry has not yet recovered – and might never recover – from the string of failures that the FTX meltdown incited. These include Genesis Global, Core Scientific, BlockFi, Celsius Network, Voyager Digital and Three Arrows Capital
FTX’s implosion also incited a regulatory crackdown.
The EU started addressing crypto currencies with the 5th Money Laundering Directive which brought cryptocurrency exchanges and wallets within EU money laundering legislation. This was a major step forward for the regulation of crypto-assets. Then the 6th Money Laundering Directive brought along tougher requirements for cryptocurrency exchanges and wallets.
Last year, the US Treasury imposed sanctions on two crypto-mixing services for allegedly facilitating money laundering on behalf of North Korea-backed actors. Mixers can be used to obscure the trail of transfers that would typically be publicly accessible on digital ledgers. International transactions in the digital assets space have become a US priority.
Just recently, New York’s attorney general announced a bill that, if it passes, could be one of the toughest measures yet on crypto fraud. Basically, crypto exchanges would be required to be completely transparent by having to publish all their information including financial statements and they would be required to reimburse victims of fraud.
Has all this finally soured the public on cryptocurrencies? That too is unclear. Many people were swayed by celebrities who eagerly ran to promote cryptocurrencies. But many of those celebrities are now paying a price for their eagerness to jump on the crypto bandwagon. That could end up being crypto’s downfall.
