If you’re like most people, trying to understand cryptocurrencies, blockchains, bitcoins, and the like is likely to give you a headache.
One of the basic tenets of the entire crypto scam is to make the entire thing as opaque as possible, thereby ensuring that you can snare as many marks — excuse me, “investors” — as you can with important and wise-sounding gobbledygook.
This has been the modus operandi of Sam Bankman-Fried (SBF), the self-styled king of crypto who was so good at dishing important-sounding bullshit that he managed to snare “Smartest Guys In The Room” venture capitalists — Ivy League grads, many of them — into investing gladly and knowingly in his scams.
Fortunately, Professor Jennifer Taub, Esq., has one of the best bullet-pointed explanations I’ve seen of what’s happening with SBF, FTX, Alameda Research, etc. — and what will likely happen to SBFin the future:
- A Hedge Fund Is Born: In October 2017, SBF, then a 25-year-old MIT grad, and his friend Gary Wang founded a hedge fund called Alameda Research LLC, with SBF owning 90 percent and Wang the remainder. Organized under Delaware law, it operated in the U.S., the Bahamas, and Hong Kong.
- Hedge Fund Control and Funding: SBF was the CEO of Alameda from its founding until October 2021, when his friends Caroline Ellison and Sam Trabucco became co-CEOs. Then in August 2022, Ellison became Alameda’s sole CEO. Despite the title change, even after October 2021, SBF “remained the ultimate decision maker in Alameda” and “directed investment and operational decisions, frequently communicated with Alameda employees, and had full access to Alameda’s records and databases.”
- Borrowed Money, Volatile Assets at Alameda: Alameda borrowed to invest in crypto assets. Don’t worry about what the hell a crypto asset is. Just pretend it’s some highly volatile asset you’ve read about before, like Dutch tulips in the 1630s or ostrich feathers in the early 20th century, or toxic mortgage-linked securities in the early 21st century.
- A Sibling Corporation Is Born: In May 2019, SBF, Wang, and Nishad Singh started a new business with SBF as the majority owner. This business let customers trade crypto assets with each other. Organized in Antigua and Barbuda as a limited corporation, it did business as FTX.com or FTX.
- FTX Control and Investors: From the time of FTX’s birth until SBF resigned as its head in November of 2022, SBF was the “ultimate decision-maker” at FTX. To fund this trading platform, SBF raised more than $1.8 billion from investors who purchased an equity stake in the corporation.
- Risky Business at FTX: Customers of FTX could trade crypto assets (think tulips, ostrich plumes, and crappy investments) for fiat currency (meaning legal tender, such as dollars). They could also engage in still riskier transactions involving lots of borrowed money.
- Allegations by SEC: The SEC alleges that between 2019 and 2022, SBF defrauded the FTX investors (at the same time, he was defrauding the customers). Specifically, for years, he had been diverting FTX customer funds for his use and to support Alameda. The SEC detailed that SBF used customer assets to purchase luxury real estate, make venture investments, and to fund significant political donations. The SEC said he lied to prospective investors in FTX when he claimed that sophisticated systems protected customer assets and that Alameda was not given any special treatment. The SEC said he “provided Alameda with significant special treatment on the FTX platform, including virtually unlimited ‘line of credit’ funded by the platform’s customers.”
- More Investor Fraud After the Crypto Crash: In May 2022, when crypto assets began to plummet, Alameda faced repayment demands from lenders. So, on top of the money SBF siphoned from FTX customer accounts, he allegedly “directed FTX to divert billions more in customer assets to Alameda to ensure that Alameda maintained its lending relationships and that money could continue to flow in from lenders and other investors.” It was only in November 2022 that this “brazen, multi-year scheme finally came to an end when FTX, Alameda, and their tangled web of affiliated entities filed for bankruptcy.”
It contains explanations for some things I did not know already.
Jennifer Taub is the author of Big Dirty Money: The Shocking Injustice and Unseen Cost of White Collar Crime (Viking), is a professor at the Western New England University School of Law and the host of the new podcast Booked Up With Jen Taub. Follow Jennifer on Twitter @jentaub.