In Days, FTX Chief Went From Golden Boy to Villain --- Sam Bankman-Fried's downfall casts shadow on broader use of crypto

"In a matter of days, Sam Bankman-Fried has gone from crypto hero to villain.

His billion-dollar fortune has collapsed. He is facing Justice Department and Securities and Exchange Commission investigations. His firm, FTX, is bankrupt, and with it many hopes for the future of crypto itself.

An outwardly genial 30-year-old commonly referred to as SBF, Mr. Bankman-Fried was until this week the industry's leading champion. His firm's finances were opaque, but he seemed to be an open book on Twitter and in scores of media interviews.

Bill Clinton, Tom Brady, Katy Perry and other boldfaced names trekked to FTX's Bahamas base to appear with him at a conference he organized to promote his vision of a sophisticated financial system built around digital assets. He spoke recently of becoming the world's first trillionaire. He gave liberally to political candidates and causes, and he became an advocate of effective altruism, a trendy philosophical movement that encourages young people to make big bucks so they can donate fortunes to charity.

Another side to Mr. Bankman-Fried emerged as his firm grew. He was brusque and insulting with overseas regulators and others, said people involved in the meetings. He demonstrated a cocksure style in negotiations to buy struggling crypto companies. He courted U.S. politicians and regulators, and seemed to egg on their scrutiny of his rivals.

And behind the scenes, FTX was using billions of dollars of customer money to fund risky trades by Alameda Research, a digital-currency firm he also founded. Revelations of the practice this week shocked Mr. Bankman-Fried's admirers, as well as many of his own employees. The undisclosed loans tore a hole in FTX's finances that set the stage for the exchange's swift implosion earlier this week.

In the end, one of Mr. Bankman-Fried's fatal mistakes might have been antagonizing members of the crypto world by advocating for crypto regulation. In particular, he made an enemy of Changpeng Zhao, the billionaire founder of Binance, the world's biggest crypto exchange by trading volume. Mr. Zhao, who goes by CZ, was an early financial backer of FTX.

Last weekend, he helped pull it apart -- tweeting that Binance was dumping its stash of more than $500 million worth of FTT, a token created by FTX.

The Binance founder said the move was for "risk management" purposes, citing a recent report on crypto website CoinDesk revealing that billions of dollars worth of the illiquid token were sitting on the balance sheet of FTX's sister firm, Alameda.

That was a problem because it showed Alameda was dangerously dependent on FTT, a token with uncertain value, and Alameda's finances might collapse if selling caused the token's price to crash. It was unclear at the time whether Alameda's troubles would extend to FTX, but fears quickly mounted in the market about FTX's stability, given the intertwined nature of the two firms.

Later that day Mr. Zhao added a dig: Binance couldn't support those who lobby against other players behind their backs, he tweeted. It was a clear reference to Mr. Bankman-Fried's activities in Washington, where the FTX chief had emerged as one of the largest political donors.

Almost immediately, hedge funds and other firms yanked money from FTX, causing a crisis that jeopardized the exchange's future. On Sunday alone, customers slammed FTX with $5 billion worth of withdrawals, according to a tweet posted later by Mr. Bankman-Fried.

Seeking a rescuer, FTX turned to the same rival who had sparked the crisis: Mr. Zhao. Binance agreed to buy FTX, only to withdraw its bid a day later. Adding salt to the wound was that Mr. Bankman-Fried only learned about the deal falling apart after it was reported in the media, he told employees in a Slack message seen by The Wall Street Journal.

"I'm deeply sorry that we got into this place, and for my role in it," he wrote in the Slack message. "That's on me, and me alone, and it sucks, and I'm sorry, not that that makes it any better."

As recently as last month, Mr. Bankman-Fried was boasting about his plans for expansion. He was in talks with investors for fresh cash to pursue "efficient acquisitions," he said at the Journal's Tech Live conference. He said FTX was already well known among crypto pros; he was interested in buying something that would get more mom-and-pop traders on board, he said.

On Friday, Mr. Bankman-Fried resigned as chief executive. The bankruptcy filing put an end to his frantic efforts to find suitors to save FTX -- an ironic twist given that FTX itself bailed out ailing crypto firms earlier this year.

And after previously criticizing bad actors in crypto, Mr. Bankman-Fried is himself facing federal probes. He has described the decision to use customer funds as a poor judgment call, according to someone close to the matter.

In traditional finance, regulators require brokerages to segregate customer funds from any capital they use for trading. But in the Wild West of crypto, the rules are murkier. It wasn't immediately clear what legal consequences Mr. Bankman-Fried or FTX might face for the loss of customer funds.

Alameda and FTX haven't yet detailed what happened to the missing money, though Mr. Bankman-Fried has promised to share more information. Alameda was known to engage in risky trading strategies and was more vulnerable to volatility in the crypto markets than FTX.

On Thursday, Bahamas regulators froze the assets of a key FTX subsidiary and appointed a provisional liquidator. On Friday morning, FTX and its U.S. unit filed for bankruptcy.

"What's shocking is the fall from grace, it was so rapid," said crypto analyst Dan Dolev of Mizuho Securities. "We're learning that value can evaporate within minutes in crypto, that's the most shocking thing."

FTX's collapse is the most serious setback yet for crypto's wider goal -- to build an alternative financial architecture that could supplant the system of banks and brokers that dominates the world of money today. A brutal decline in the price of bitcoin and other digital currencies this year led to a string of crypto-firm bankruptcies that revealed loose lending practices and rampant risk-taking.

FTX, which advertised sophisticated risk-management capabilities and gained a rapid following, was viewed as a stabilizing force, while Mr. Bankman-Fried was seen as a visionary capable of leading the digital-currency world to a bright future. "The question now is can you trust any crypto investment," Mr. Dolev said. "Will it expire worthless in a matter of seconds?"

The broader investment and financial worlds have long held their collective breath as the crypto universe evolved and expanded. Financial players worried a collapse might take down more entrenched firms or investors, creating potential problems for the broader system.

For now, there have been few signs of broader impact, reassuring professionals and others.

Still, the financial world remains on edge because FTX had hundreds of mainstream investors and lenders, including some of the leading venture-capital firms and others. They likely have suffered enormous losses from FTX's downfall and the resulting tumbles for bitcoin and other crypto investments. FTX, Alameda and other affiliates estimated in their bankruptcy filings that they have more than 100,000 creditors and face liabilities of between $10 billion and $50 billion.

FTX's collapse also comes as the Fed moves to raise interest rates to fight inflation and end the era of easy money, putting a damper on risky assets like crypto. That suggests there may be more pain and shock to the financial system to come.

In 2017, Mr. Bankman-Fried started Alameda Research in a rented house in Berkeley, Calif. It launched a crypto exchange in May 2019, under the name FTX, shorthand for "Futures Exchange." Binance became one of FTX's first investors.

The exchange grew explosively, surpassing rivals that suffered from technology stumbles and poor user interfaces, though it still trailed Binance.

Starting in 2021, FTX made a huge funding push, raising nearly $2 billion within seven months -- including from Sequoia Capital. FTX's last funding round, in January 2022, put it at a valuation of $32 billion.

Mr. Bankman-Fried leaned into his brand as a chilled-out quant trader, showing up at crypto conferences in his FTX T-shirt and baggy shorts. He usually was treated as a rock star. Soon, stalwarts of finance, such as Ontario Teachers' Pension Plan and Singapore state investment company Temasek Holdings, joined FTX as investors.

But FTX still had fewer customers than its primary competitors -- around one million users last year, it has said. Mr. Bankman-Fried sought to attract crypto newbies through sports sponsorships and advertising, paying $135 million for the naming rights to the Miami Heat's basketball arena and buying a Super Bowl commercial featuring comedian Larry David.

The Binance-FTX rivalry grew deeper. Last year, Binance sold its roughly 20% equity stake in FTX, swapping it for a mix of cash-like stablecoins and FTT tokens. In June, Mr. Zhao tweaked Mr. Bankman-Fried's drive for publicity: "It was not easy saying no to Super Bowl ads, stadium naming rights, large sponsor deals a few months ago, but we did."

Binance didn't respond to a request for comment.

Regulation was a point of contrast between the two firms. Last year, governments around the world including the U.K., Italy and Japan warned Binance for offering unregistered crypto products, forcing it to pull back from some markets. The firm faced mounting scrutiny from the financial press for refusing to say where its headquarters were -- an approach that critics said helped Binance evade regulation and dodge liability for mishaps.

FTX moved its own headquarters to the Bahamas for its crypto-friendly regulatory environment.

Alameda also partly operated from the Bahamas. Mr. Bankman-Fried and Alameda's CEO, Caroline Ellison, a fellow former employee of quantitative trading giant Jane Street, once dated, according to people familiar with the matter.

Mr. Bankman-Fried embarked on a campaign to amass regulatory licenses. He surprised many of his fans when he came to a December 2021 Capitol Hill hearing on cryptocurrencies, wearing a suit and tie. Soon, he was a frequent visitor to Washington, meeting with regulators and others.

There were signs for months that Mr. Bankman-Fried wasn't quite what he seemed to outsiders. In a meeting with a half-dozen top regulatory, banking and other officials in the Bahamas in January, Mr. Bankman-Fried surprised some in the room by frequently using the "F" word, while boasting about FTX's capabilities. He promised his company would dominate new markets, including stocks, according to a participant in the meeting.

This summer, when Mr. Bankman-Fried sought to prop up several struggling crypto companies, including broker Voyager Digital Ltd. and lender BlockFi Inc., some were struck by his aggressive style.

Some FTX employees privately worried that the firm was growing too fast and expanding into areas too far from its core business, current and former employees said. Mr. Bankman-Fried relied on himself and a small core group of FTX executives to negotiate deals, didn't use outside advisers to help judge their risks and sped through due diligence, according to people familiar with his deal-making style." [1]

1. In Days, FTX Chief Went From Golden Boy to Villain --- Sam Bankman-Fried's downfall casts shadow on broader use of crypto
Zuckerman, Gregory; Osipovich, Alexander. 
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 12 Nov 2022: A.1.