Sam Bankman-Fried (SBF) has been charged by the US SEC with orchestrating a scheme to defraud equity investors in FTX.
The FTX scandal started to unravel around a month ago, with the revelation that major cryptocurrency exchange FTX was collapsing, along with billions of dollars of investment and deposits. This caught the eye of the US Securities and Exchange Commission SEC), which immediately commenced an investigation. It now clearly reckons it has enough evidence to prosecute.
“We allege that Sam Bankman-Fried built a house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto,” said SEC Chair Gary Gensler. “The alleged fraud committed by Mr. Bankman-Fried is a clarion call to crypto platforms that they need to come into compliance with our laws… To those platforms that don’t comply with our securities laws, the SEC’s Enforcement Division is ready to take action.”
“FTX operated behind a veneer of legitimacy Mr. Bankman-Fried created by, among other things, touting its best-in-class controls, including a proprietary ‘risk engine,’ and FTX’s adherence to specific investor protection principles and detailed terms of service,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “But as we allege in our complaint, that veneer wasn’t just thin, it was fraudulent.”
“FTX’s collapse highlights the very real risks that unregistered crypto asset trading platforms can pose for investors and customers alike. While we continue to investigate FTX and other entities and individuals for potential violations of the federal securities laws, as alleged in our complaint, today we are holding Mr. Bankman-Fried responsible for fraudulently raising billions of dollars from investors in FTX and misusing funds belonging to FTX’s trading customers.”
SBF has been arrested in the Bahamas, where FTX is based, and seems to be in very deep trouble. The SEC says FTX raised more than $1.8 billion from investors but doesn’t reveal the amount of depositor money at stake. Much of the alleged fraud concerns the relationship between FTX and SBF’s hedge fund, Alameda Research, especially the former’s exposure to the latter’s investments. Among the allegedly fraudulent use of funds by SBF was massive political donations.
USA Damian Williams: Earlier this evening, Bahamian authorities arrested Samuel Bankman-Fried at the request of the U.S. Government, based on a sealed indictment filed by the SDNY. We expect to move to unseal the indictment in the morning and will have more to say at that time.
— US Attorney SDNY (@SDNYnews) December 12, 2022
The broader repercussion of this scandal has been to apply a significant brake to the speculative exuberance around cryptocurrency in general. The price of Bitcoin peaked at almost $70k in November 2021 and is now just above £17k. While investors in FTX have lost their shirt, a lot more people are now learning hard lessons about betting on new, insubstantial, unregulated currencies. Eventually cryptocurrency will probably be stronger as a result of this, but for the time being it seems riskier than ever.
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