Sam Bankman-Fried is charged with defrauding investors

IT WAS NOT the sort of relaxing weekend that most people enjoy in the Caribbean. Sam Bankman-Fried, who has become the most hated man in crypto after his exchange imploded last month, spent the past few days in the Bahamas preparing for his public testimony before American lawmakers—scheduled for December 13th. Then on the evening of December 12th Mr Bankman-Fried was arrested at the request of American prosecutors. The next day the Securities and Exchange Commission said he had been charged with defrauding investors. The speed of Mr Bankman-Fried’s rise and fall has been dizzying (see chart 1).

His success was built on three firms: FTX, a Bahamas-based crypto exchange; FTX.US, an American exchange; and Alameda Research, a crypto-trading fund. Of the three, FTX was the crown jewel. It was founded in 2019 and quickly became a crypto-crowd favourite. Mr Bankman-Fried attracted mighty investors, including Sequoia, a Silicon Valley venture-capital firm, and Temasek, a Singaporean sovereign-wealth fund, which boosted his credentials. At its peak in January FTX was worth $32bn, making it the industry’s third-largest exchange.

Its rise tracked the boom of the wider industry. Peak crypto was reached in 2021, when the market capitalisation of all cryptocoins climbed to nearly $3trn. Investors could not get enough of digital assets. NFTs, or non-fungible tokens, leapt from obscure corners of the internet into the mainstream, for instance, when Christies, a British auction house, sold one for $69m in March that year. That September the value of an FTX Token (FTT), a mechanism for sharing the firm’s profits, hit its high of roughly $80.

It has been downhill (or rather down, then up, then down again) for crypto ever since. The market value of all cryptocurrencies now stands at $840bn. That crash can be partly blamed on a wider asset sell-off this year, in which more speculative investments (of which crypto is the flagbearer) have taken the biggest hit.

But the fall of Mr Bankman-Fried has turned what was already going to be a difficult future for crypto into a desperate one. Trouble at FTX became public knowledge on November 2nd, when CoinDesk, a news website, published Alameda’s balance-sheet. It revealed an incestuous relationship with FTX, in theory a separate entity. It later emerged that FTX had lent billions of dollars-worth of customers’ crypto-assets to Alameda, which the trading firm is alleged to have used to make risky bets. Changpeng Zhao, the boss of Binance, now the world’s largest exchange, announced that his firm would liquidate its holdings of FTT, precipitating a run on FTX. An offer by Binance to rescue its rival was withdrawn after it looked at FTX’s books. FTX and Alameda filed for bankruptcy shortly after.

The fallout from FTX’s implosion continues. Other exchanges have since faced enormous withdrawals (see chart 2). Three—AAX, BlockFi and Liquid—have been taken out of action. So has Genesis, a lending platform. The industry is now braced for a mighty crackdown and a flurry of new regulations.■