Sam Bankman-Fried built FTX into the second-largest crypto exchange in the world by 2022, with a $32 billion valuation. He cultivated a public image as the effective altruist of crypto — donating hundreds of millions to causes, testifying to Congress, funding political campaigns. He was celebrated on magazine covers and called the most trustworthy figure in crypto.
On November 2, CoinDesk published a report showing that a large portion of Alameda Research’s balance sheet consisted of FTT — FTX’s own token. Binance CEO Changpeng Zhao announced he would sell Binance’s FTT holdings. The resulting collapse in FTT value triggered a bank run on FTX. In 4 days, customers tried to withdraw $6 billion. FTX could not meet the withdrawals.
The reason: FTX had been lending customer deposits to Alameda Research for trading, political donations, and luxury real estate in the Bahamas. When Alameda’s trading losses mounted, the hole grew to $8 billion. SBF was arrested in December, extradited to the US, and convicted on all 7 counts of fraud and conspiracy in November 2023.
The prevailing view before the reckoning
SBF was the most credible actor in crypto. FTX was the safest exchange because SBF was regulatory-friendly and transparent. His effective altruism philosophy and political connections gave him credibility that made basic due diligence feel unnecessary. Sequoia wrote a 13,000-word profile comparing him to Steve Jobs.
Custodians must be audited
The fundamental promise of a custodian is to keep your assets separate from their own. Without audited proof-of-reserves, this promise is unverifiable. Trust is not due diligence.
Public persona is not evidence of integrity
SBF was described as a philosopher-king by the media he cultivated. His entire public persona was constructed to provide cover for fraud. The character endorsements from institutions that should have known better were catastrophic for their credibility.
Self-regulation cannot work in crypto
The industry argued for years that crypto could self-regulate. FTX was the result. Basic securities law — customer asset segregation, audited financials, regulatory oversight — exists for good reasons.
Contagion is real
Genesis, BlockFi, Celsius, and Voyager all failed following FTX. The interconnections in crypto were not disclosed. When FTX fell, the contagion was swift and total.