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HomeMarketFour Things To Know About FTX's Blowup As Bankman-Fried Opens Up

Four Things To Know About FTX’s Blowup As Bankman-Fried Opens Up

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Those classic investigative questions are now swirling around Sam Bankman-Fried, the former CEO of FTX and central figure in a legal storm over his bankrupt crypto empire.

Bankman-Fried apologized for his actions in an interview on Wednesday with the New York Times, saying, “I screwed up.”

It wasn’t his first apology. And his comments have only raised more questions about whether he might soon face criminal charges and what happened to billions of dollars in customers’ accounts–now lost or in limbo as bankruptcy proceedings continue in Delaware and the Bahamas, where FTX is based.

Here’s what we know and where things stand:

Was FTX a case of fraud, incompetence, or a mix of both?

It will likely take months before investigators and courts reach conclusions about what happened at FTX and whether any fraud was involved.

What we know so far is that the exchange filed for bankruptcy protection because it couldn’t meet a surge in customer withdrawal demands. The exchange appears to have lent billions of dollars in customer funds to Alameda Research, a crypto trading firm attached to FTX. When Alameda’s positions went awry, the money simply wasn’t there to repay customers who held accounts at FTX.

Bankman-Fried tried to paint the collapse as the result of incompetence, saying in an interview with the Times on Wednesday that he “didn’t ever try to commit fraud” and “wasn’t trying to commingle fund.”

He added that FTX should have had the ability to close down margin positions and cover liabilities before they could bring down the whole enterprise. “Obviously that wasn’t the case here, and that is a massive failure of oversight of risk management and of diffusion of responsibility from myself running FTX,” he said.

Statements like that, if true, go to the heart of a potential criminal case. Proving fraud generally requires the establishment of intent. If Bankman-Fried can claim he was unaware of Alameda’s positions and didn’t know the risks they posed to FTX, he could be laying the foundations for a legal defense based on incompetence or negligence.

Another key question is whether customer funds were used by Alameda in a breach of FTX’s terms of service, which state that customer accounts could not be loamed to FTX Trading and weren’t the property of FTX Trading.

“You control the Digital Assets held in your Account,” the terms state.

Bankman-Fried has been unclear on this point. “There is that piece from the terms of service,” he said Wednesday. “But there were a number of other parts of the terms of service and a number of other parts of the platform on top of that.”

Will U.S.-based customers of FTX.US be able to recoup funds?

Bankman-Fried’s comments gave hope to customers of FTX.US and FTX.US Derivatives, which are the U.S.-regulated entities of his largely offshore crypto empire.

“To my knowledge, [the U.S. platform is] fully solvent; that is fully funded,” he told the Times. “I believe that withdrawals could be opened up today, and everyone could be made whole from that and none of these problems plague the U.S. platform,” he added. “I’m confused why FTX U.S. isn’t processing customer withdrawals right now.”

Yet even if the money is there, it may not be accessible. The U.S. arms of FTX were included with more than 100 other entities’ overseen by Bankman-Fried in the Nov. 11 bankruptcy filing. There is a long line of people and corporate entities trying to recoup funds, including secured creditors who extended loans to Bankman-Fried’s companies.

One key question is whether U.S. customers will be classified as unsecured creditors, putting them well behind secured creditors with priority claims to FTX’s assets. For now it’s unclear how U.S. customers will be classified.

What’s the likelihood of Bankman-Fried facing criminal charges?

There doesn’t appear to be a criminal case against Bankman-Fried yet, though it has been reported that he is under “observation” by authorities in the Bahamas, which is where he lives.

Bankman-Fried, in his Wednesday interview, said he doesn’t believe he has criminal liability.

Still, government investigations are just starting, both in the U.S. and abroad. U.S. wire fraud statutes are written broadly enough that he could be charged, according to legal experts.

Investigators may only need to prove that U.S. financial or communication systems were used to move money or send messages. And both FTX and Alameda sent money through
Silvergate Capital,
a Federal Reserve member bank, potentially opening a conduit for wire fraud charges against Bankman-Fried.

“At worst, Sam Bankman-Fried and his inner circle lied to and stole from over one million customers, some of whom have lost their life savings,” Sen. Debbie Stabenow (D., MI) said Thursday at a Senate Agriculture Committee hearing. “Fraud prosecutions are a critical tool, but far too often they are brought after customers’ money has been lost.”

Remaining in the Bahamas may not shield him either. The Bahamas has had an extradition treaty with the U.S. since 1990.

What does all this mean for crypto investors?

In the short term, FTX’s meltdown has slammed crypto prices and caused spillover effects. BlockFi filed for bankruptcy this week in what may be the first of multiple FTX-linked failures that could further weigh on prices.

Bitcoin and other tokens have risen a bit lately as part of a broad rally in asset prices–stocks and bonds have also got a lift on hopes that the Fed will ease off interest rate increases a bit sooner than previously expected.

But investors still appear to be pulling funds from crypto-linked investment products, and there are signs that some crypto traders are quitting the space altogether.

The bigger question is what FTX’s collapse means for institutional interest in blockchain technology and digital assets. Crypto has been waiting for banks and other institutional investors to dive into crypto for years. The situation at FTX has likely delayed that trend, at best. At worst, it could mean a slow death spiral for crypto as institutional investors conclude it’s simply not worth the risk.

Write to Jack Denton at jack.denton@barrons.com

Credit: marketwatch.com

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