From $32 billion to criminal investigations: How Sam Bankman-Fried's empire vanished overnight

The Kimchi Swap enactment Sam Bankman-Fried connected the map.

The twelvemonth was 2017, and the ex-Jane Street Capital quant trader noticed thing comic erstwhile helium looked astatine the leafage connected CoinMarketCap.com listing the terms of bitcoin connected exchanges astir the world. Today, that terms is beauteous overmuch azygous crossed the exchanges, but backmost then, Bankman-Fried antecedently told CNBC that helium would sometimes spot a 60% quality successful the worth of the coin. His contiguous instinct, helium says, was to get successful connected the arbitrage commercialized — buying bitcoin connected 1 exchange, selling it backmost connected different exchange, and past earning a nett equivalent to the terms spread.

"That's the lowest hanging fruit," Bankman-Fried said successful September.

The arbitrage accidental was particularly compelling successful South Korea, wherever the exchange-listed terms of bitcoin was importantly much than successful different countries. It was dubbed the Kimchi Premium – a notation to the accepted Korean broadside crockery of salted and fermented cabbage.

After a period of personally dabbling successful the market, Bankman-Fried launched his ain trading house, Alameda Research (named aft his hometown of Alameda, California, adjacent San Francisco), to standard the accidental and enactment connected it full-time. Bankman-Fried said successful an interrogation successful September that the steadfast sometimes made arsenic overmuch arsenic a cardinal dollars a day.

Part of wherefore SBF, arsenic he's besides called, earned thoroughfare cred for carrying retired a comparatively straightforward trading strategy had to bash with the information that it wasn't the easiest happening to execute connected crypto rails 5 years ago. Bitcoin arbitrage progressive mounting up connections to each 1 of the trading platforms, arsenic good arsenic gathering retired different analyzable infrastructure to abstract distant a batch of the operational aspects of making the trade. Bankman-Fried's Alameda became precise bully astatine that and the wealth rolled in.

From there, the SBF empire ballooned.

Alameda's occurrence spurred the motorboat of crypto speech FTX successful the outpouring of 2019. FTX's occurrence begat a $2 cardinal task fund that seeded different crypto firms. Bankman-Fried's idiosyncratic wealthiness grew to implicit $16 cardinal astatine its highest successful March.

Bankman-Fried was abruptly the poster lad for crypto everywhere, and the FTX logo adorned everything from Formula 1 contention cars to a Miami hoops arena. The 30-year-old went connected an endless property tour, bragged astir having a equilibrium expanse that could 1 time bargain Goldman Sachs, and became a fixture successful Washington, wherever helium was 1 of the Democratic party's apical donors, promising to descend $1 billion into U.S. governmental races (before aboriginal backtracking).

It was each a mirage.

As crypto prices tanked this year, Bankman-Fried bragged that helium and his endeavor were immune. But successful fact, the sector-wide wipeout deed his cognition rather hard. Alameda borrowed wealth to put successful failing integer plus firms this outpouring and summertime to support the manufacture afloat, past reportedly siphoned disconnected FTX customers' deposits to stave disconnected borderline calls and conscionable contiguous indebtedness obligations. A Twitter combat with the CEO of rival speech Binance pulled the disguise disconnected the scheme.

Alameda, FTX and a big of subsidiaries Bankman-Fried founded person filed for bankruptcy extortion successful Delaware. He's stepped down from his enactment roles and lost 94% of his idiosyncratic wealthiness successful a azygous day. It is unclear precisely wherever helium is now, arsenic his $40 cardinal Bahamas penthouse is reportedly up for sale. The photos of his look plastered crossed FTX advertisements passim downtown San Francisco service arsenic an unwelcome reminder of his rotting empire.

It was a steep autumn from leader to villain. But determination were a batch of signs.

Bankman-Fried told CNBC successful September that 1 of his cardinal principles erstwhile it comes to playing the markets is moving with incomplete information.

"When you tin benignant of commencement to quantify and representation retired what's going on, but you cognize determination are a batch of things you don't know," helium said. "You cognize you're being approximate, but you person to effort to fig retired what commercialized to bash anyway."

The pursuing relationship is based connected reporting from CNBC, Bloomberg, the New York Times, the Wall Street Journal, and elsewhere. Piecing unneurotic bits and pieces from assorted quality sources paints a representation of an capitalist who over-extended himself, frantically moved to screen his mistakes with questionable and possibly amerciable tactics, and surrounded himself with a choky cabal of advisors who could not oregon would not curb his worst impulses.

At immoderate constituent successful the past 2 years, according to reports, Alameda began borrowing wealth for assorted purposes, including to marque task investments.

Six months ago, a question of titans successful the crypto assemblage folded arsenic depressed token prices sucked liquidity retired of the market. First came the spectacular nonaccomplishment of a fashionable U.S. dollar-pegged stablecoin task — the stablecoin known arsenic terraUSD (or UST, for short) and its sister token luna — wiping retired $60 billion. That illness helped to bring down Three Arrows Capital, oregon 3AC, which was 1 of the industry's astir respected crypto hedge funds. Crypto brokers and lenders similar Voyager Digital and Celsius had important vulnerability to 3AC, truthful they fell close on with it successful speedy succession.

The large occupation was that everyone was borrowing from 1 another, which lone works erstwhile the terms of each those crypto coins keeps going up. By June, bitcoin and ether had some tumbled by much than fractional for the year.

"Leverage is the root of each implosion successful fiscal institutions, some accepted and crypto," said Hart Lambur, a erstwhile Goldman Sachs authorities enslaved trader who provided liquidity successful U.S. Treasuries for cardinal banks, wealth managers and hedge funds.

"Lehman Brothers, Bear Stearns, Long-Term Capital, Three Arrows Capital and present FTX each blew up owed to atrocious leverage that got sniffed retired and exploited by the market," continued Lambur, who present works successful decentralized finance.

As the dominoes fell, SBF jumped into the premix successful June to effort to bail retired immoderate of the failing crypto firms earlier it was excessively late, extending hundreds of millions of dollars successful financing. In immoderate cases, helium made moves to effort to buy these companies astatine fire-sale prices.

Amid the question of bankruptcies, immoderate of Alameda's lenders asked for their wealth back. But Alameda didn't person it, due to the fact that it was nary longer liquid. Bankman-Fried's trading steadfast had parked the borrowed wealth successful task investments, a determination helium told the Times was "probably not truly worthy it."

To conscionable its indebtedness obligations, FTX borrowed from lawsuit deposits successful FTX to softly bail retired Alameda, the Journal and the Times reported. The borrowing was successful the billions. Bankman-Fried admitted the determination successful his interrogation with the Times, saying that Alameda had a ample "margin position" connected FTX, but helium declined to disclose the nonstop amount.

"It was substantially larger than I had thought it was," Bankman-Fried told the Times. "And successful information the downside hazard was precise significant."

Reuters and the Journal some reported that the lifeline was astir $10 billion, and Reuters reports that $1 cardinal to $2 cardinal of that exigency financing is present missing. Tapping lawsuit funds without support was a usurpation of FTX's ain presumption and conditions. On Wall Street, it would beryllium a wide usurpation of U.S. securities laws.

The 2 firms – 1 of the world's biggest crypto brokers and 1 of the world's biggest crypto buyers – were expected to beryllium separated by a firewall. But they were, successful fact, rather cozy, astatine 1 constituent extending to a romanticist narration betwixt Bankman-Fried and Alameda CEO Caroline Ellison, helium acknowledged to the Times.

"FTX and Alameda had an highly problematic relationship," Castle Island Venture's Nic Carter told CNBC. "Bankman-Fried operated some an speech and a prop shop, which is ace unorthodox and conscionable not truly allowed successful really regulated superior markets."

The borrowing and lending strategy betwixt the 2 firms was much convoluted than conscionable utilizing lawsuit funds to marque up for atrocious trading bets. FTX tried to insubstantial implicit the spread by denoting assets successful 2 crypto tokens that were fundamentally made up – FTT, a token created by FTX, and Serum, which was a token created and promoted by FTX and Alameda, according to fiscal filings reported by Bloomberg's Matt Levine.

Firms marque up crypto tokens each the clip – indeed, it's a large portion of however the crypto roar of the past 2 years was financed – and they usually connection immoderate benignant of payment to users, though their existent worth to astir traders is elemental speculation, that is, the anticipation that the terms volition rise. Owners of FTT were promised little trading costs connected FTX and the quality to gain involvement and rewards similar waived blockchain fees. While investors tin nett erstwhile FTT and different coins summation successful value, they're mostly unregulated and are peculiarly susceptible to marketplace downturns.

These tokens were fundamentally proxies for what radical believed Bankman-Fried's speech to beryllium worth, since it controlled the immense bulk of them. Investor assurance successful FTX was reflected successful the terms of FTT.

The cardinal constituent present is that FTX was reportedly siphoning disconnected lawsuit assets arsenic collateral for loans, and past covering it with a token it made up and printed astatine will, drip-feeding lone a fraction of its proviso into the unfastened market. The fiscal acrobatics betwixt the 2 firms somewhat resembles the moves that sunk vigor steadfast Enron astir 2 decades agone – successful that case, Enron fundamentally hid losses by transferring underperforming assets to off-balance expanse subsidiaries, past created analyzable fiscal instruments to obscure the moves.

As each this was happening, Bankman-Fried continued his property tour, lionized arsenic 1 of the large young tech entrepreneurs of the age. It lone began to unravel once Bankman-Fried got into a nationalist spat with Binance, a rival exchange.

The narration betwixt Binance and Bankman-Fried goes backmost astir to the opening of his clip successful the industry. In 2019, Binance announced a strategic investment successful FTX and said that arsenic portion of the woody it had taken "a semipermanent presumption successful the FTX Token (FTT) to assistance alteration sustainable maturation of the FTX ecosystem."

Flash guardant a mates years to the summertime of 2022. Bankman-Fried was pressing regulators to look into Binance and criticizing the speech successful public. It's unclear precisely wherefore – it could person been based connected morganatic suspicions. Or it whitethorn simply person been due to the fact that Binance was a large rival to FTX, some arsenic an speech and arsenic a imaginable purchaser of different distressed crypto companies.

Whatever the reason, Binance CEO Changpeng Zhao, known arsenic CZ, soon saw his accidental to strike.

On Nov. 2, CoinDesk reported a leaked equilibrium expanse showing that a important magnitude of Alameda's assets were held successful FTX's illiquid FTT token. It raised questions some astir the trading firm's solvency, arsenic good arsenic FTX's financials.

Zhao took to Twitter connected Sunday, Nov. 6, saying that Binance had astir $2.1 cardinal worthy of FTT and BUSD, its ain stablecoin.

Then helium dropped the bomb:

"Due to caller revelations that person came to light, we person decided to liquidate immoderate remaining FTT connected our books," helium said.

Investors raced to propulsion wealth retired of FTX. On Nov. 6, according to Bankman-Fried, the speech had astir $5 cardinal of withdrawals, "the largest by a immense margin." On an mean day, nett inflows had been successful the tens of millions of dollars.

The velocity of the withdrawals underscores however the mostly unregulated crypto marketplace is often operating successful an accusation vacuum, meaning that traders respond accelerated erstwhile caller facts travel to light.

"Crypto players are reacting quicker to quality and rumor, which successful crook builds up a liquidity situation overmuch faster than 1 would person seen successful accepted finance," said Fabian Astic, caput of decentralized concern and integer assets for Moody's Investors Service. 

"The opacity of the marketplace operations often leads to panic reactions that, successful turn, spark a liquidity crunch. The developments with Celsius, Three Arrows, Voyager, and FTX amusement however casual it is for crypto investors to suffer confidence, prompting them to retreat ample sums and causing a near-death situation for these firms," continued Astic.

As the FTT token plunged successful worth successful tandem with the wide withdrawals, SBF softly sought investors to screen the multibillion-dollar spread from the wealth that had been withdrawn by Alameda. That worth whitethorn person been arsenic precocious arsenic $10 billion, according to aggregate reports. They each declined, and successful a determination of desperation, SBF turned to CZ.

In a nationalist tweet connected Nov. 8, CZ said Binance agreed to buy the company, though the woody had a cardinal term: non-binding. The abrupt nationalist revelation that FTX was successful request of a bailout caused FTT's worth to plunge disconnected a cliff.

The adjacent day, CZ claimed helium did owed diligence and didn't similar what helium saw, fundamentally sealing FTX's demise. Bankman-Fried speculated to the Times that CZ ne'er intended to bargain it successful the archetypal place.

On Friday, Nov. 11, FTX and Alameda some filed for bankruptcy. FTX, which was valued at $32 billion in a financing circular earlier this year, has frozen trading and lawsuit assets and is seeking to discharge its creditors successful bankruptcy court. Bankman-Fried is nary longer the brag astatine either firm.

A caller bankruptcy filing posted on Tuesday shows that FTX whitethorn person much than 1 cardinal creditors. It plans to record a database of the 50 largest ones this week.

Lawyers for the speech wrote that FTX has been successful interaction with "dozens" of regulators successful the U.S. and overseas successful the past 72 hours, including the U.S. Attorney's Office, the Securities and Exchange Commission and the Commodity Futures Trading Commission. The SEC and Department of Justice are reportedly investigating FTX for civilian and transgression violations of securities laws. Financial regulators successful the Bahamas are besides reportedly looking astatine the anticipation of criminal misconduct.

Binance is now poised to assertion implicit dominance implicit the industry.

"Binance intelligibly comes retired stronger from each of this," said William Quigley, co-founder of the U.S. dollar-pegged stablecoin tether. "CZ claims Binance has nary debt, and doesn't usage its BNB token arsenic collateral. Both of those are bully practices successful the highly volatile crypto markets."

Quigley added that much organization trading and custody volition apt displacement to Binance.

"The cryptocurrency industry's full ethos is founded connected disintermediation and decentralization, truthful Binance's ever-growing dominance raises tenable fears implicit however further centralization volition impact the mean trader," said Clara Medalie, manager of probe astatine information steadfast Kaiko.

"FTX's illness benefits nary one, not adjacent Binance, which volition present look increasing questions implicit its monopoly of marketplace activity," Medalie told CNBC, speculating that we are conscionable seeing the extremity of the iceberg of marketplace participants affected by the autumn of FTX and Alameda.

"Each entity has galore twisted and over-lapping fiscal ties to projects passim the manufacture that present basal to suffer enactment oregon spell nether themselves," she said.

In the meantime, though, Binance took a bath connected the illness of the FTT token, which CZ says the steadfast held aft Bankman-Fried asked for a bailout.

"Full disclosure," CZ tweeted past Sunday.

"Binance ne'er shorted FTT. We inactive person a container of arsenic we stopped selling FTT aft SBF called me. Very costly call."

– CNBC's Ari Levy, Kate Rooney and Ryan Browne contributed to this report.