Cryptocurrency prodigy Sam Bankman-Fried was hailed as a child. What’s going on? | David Gerard

Last Tuesday, FTX, the world’s second-largest cryptocurrency exchange, shut down withdrawals, blaming “severe liquidity issues.” On Friday, FTX filed for bankruptcy.

After an incredibly profitable asset bubble in 2021, the cryptocurrency industry has undergone drastic changes in 2022. A series of high-profile collapses—Terra-Luna, Three Arrows Capital, Celsius Network, Voyager Digital—lost investors fortunes, depressed prices and disrupted the market. trust. But the sudden collapse of FTX surprised almost everyone.

FTX was founded in 2019 by Sam Bankman-Fried, the son of two Stanford academics. Until 2017, he worked on his own with the crypto hedge fund Alameda Research at the quantitative trading firm Jane Street Teunt. As an Alameda market maker, FTX has quickly become one of the most popular cryptocurrency exchanges. Traders loved his sophisticated futures and options products. A more restricted branch for US customers, FTX US, opened in 2020.

In 2021, when bitcoin and crypto-assets hit the headlines, Bankman-Fried established himself as a billionaire public intellectual. Bankman-Fried was photographed wearing only shorts, a shirt or hoodie, and untied shoes. He sold himself to venture capitalists as a genius eccentric they couldn’t understand. How did this 29-year-old hit the top so quickly? What was his secret?

FTX is heavily marketed to the US public: Super Bowl advertising, sports sponsorships, even advertisements on fortune cookies. Bankman-Fried spent tens of millions on candidates for the US midterm elections. He even went to Washington and promoted his views on cryptocurrency regulation, creating an environment where he could sell FTX to large institutional investors — though this rankled others in the crypto industry who felt FTX was trying to freeze them out.

FTX worked hard to promote itself as a reliable financial institution led by a dynamic genius like Steve Jobs or Elon Musk. In fact, the institution was operating outside of all effective regulation and was a complete empty shell after the crypto market crash. For Bankman-Fried, the entry in the Forbes list of billionaires warned that the bulk of his wealth was “half of FTX and a share of FTT tokens.”

FTT was an internal token created for traders at FTX – very similar to supermarket loyalty card points. But FTT was also a crypto-asset traded outside of FTX. It had a market value, and people traded against it – like Bankman-Fried’s other company, Alameda. On November 2nd, Alameda’s balance sheet was leaked, revealing that its alleged assets consist mostly of FTT tokens. Alameda used this stack of FTX-Alameda loyalty card points to borrow from other crypto companies. He owned FTT because FTX had to bail out Alameda after the collapse of Terra-Luna and sent his own FTT tokens claiming they were valuable assets.

Crypto markets believed that trouble in Alameda meant trouble in FTX, and customers got their crypto out as fast as they could. FTX closed the retreat on Tuesday. FTX’s rival Binance announced a bailout a few hours later, but the offer was withdrawn the next day: Binance looked at FTX’s books and found that at least $6 billion was missing. The Bahamas, where FTX is incorporated, froze FTX’s assets on Thursday; the next day, FTX filed for Chapter 11 bankruptcy in the United States.

The famous billionaire is a perennial favorite in the United States. The archetype is Jobs: eccentric, acerbic, prickly, and spent 10 years firmly delivering in the late 1990s and into the 2000s. Musk has similarly positioned himself, promoting electric cars and the energy transition.

When the ultra-rich want to be in the limelight, it’s a stage-managed production for publicity purposes. Sometimes it’s Steve Jobs. Sometimes it is Elizabeth Holmes who dazzles the business world with her charm while promoting fraud.

Bankman-Fried established himself as an eccentric genius with uncanny financial acumen and the policy sense to drive this new asset class into the future. In fact, its image was a distraction from what was happening inside FTX: an ever-widening balance sheet hole as FTX and Alameda worked together as a shadow bank to plug the hole with client funds. Bankman-Fried’s secret turned out to be a financial shell game.

The broader issue is that cryptocurrency is unregulated. Legislators can pass many detailed rules for US entities, but all cryptocurrency trading takes place in opaque and unregulated offshore casinos – such as FTX.

Further frauds will reveal themselves. When cryptocurrency goes out of style, new financial tricks will take off – brought up by an eccentric genius that no one understands but thinks they’re as good as they say they are.

Stories of billionaire prodigies always seem too good to be true. Because they are.

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