Did drugs, fake money and office ‘sleepovers’ cause crypto’s $32bn blow-up?

Archbishop Jerome Lloyd OSJVPosted by

The spectacular fall of FTX exposes the bizarre world of an empire built on sand

Did drugs, fake money and office ‘sleepovers’ cause crypto’s $32bn blow-up?
FTX Sam Bankman-Fried
Sam Bankman-Fried’s FTX was one of the five biggest cryptocurrency exchanges in the world until earlier this month CREDIT: FTX/Handout via REUTERS

As the sun beat down on the Baha Mar resort in the Bahamas, Sam Bankman-Fried was living his very best life. 

On stage and before an invited audience, Sam was in his usual work attire of trainers, shorts and a T-shirt, but Tony Blair tried to put the founder at ease. “I’m feeling a little overdressed here,” Blair assured him. Between them, the former US president Bill Clinton chuckled. 

It was late April, and the world had come to see the unkempt, mop-haired 29-year-old who had become the breakout business star of the year, his face adorning billboards across the United States.

Sam Bankman-Fried (right) with Tony Blair and Bill Clinton at the Crypto Bahamas invitation-only conference in April
Sam Bankman-Fried (right) with Tony Blair and Bill Clinton at the Crypto Bahamas invitation-only conference in April CREDIT: Trustnodes

This was the first Crypto Bahamas event, hosted by Bankman-Fried’s company FTX, where delegates could enjoy sunrise yoga, and end the day partying on the Jasmine Lawn. Later in the week, former One Direction star Liam Payne was originally booked to discuss whether we could “elevate consciousness” using psychedelics with a billionaire called Christian Angermayer, though Payne later pulled out. The German says on his website he is proud to be “one of the driving forces behind the psychedelics renaissance,” which advocates the use of such drugs as treatments for mental health conditions.

FTX acted as a gateway between the world of traditional finance – your credit card or bank account – and the mysterious and booming world of crypto money, where fortunes could apparently be made. It was one of very few roads down which money could travel in both directions, a portal between the two worlds. If you wanted to dabble in crypto, then FTX offered a friendly, easy way to do so. 

Its sister company, Alameda Trading, offered to make money for you, acting as a kind of hedge fund. Investing is a risky business that has acquired regulations, but these didn’t trouble the Bahamas-based FTX crypto operation. FTX promised to remove the complexity from trading crypto, and elite opinion assured us that Bankman-Fried was one of the good guys.

Sam Bankman-Freid's penthouse in Nassau, Bahamas, is listed for sale
Bankman-Freid’s penthouse in Nassau, Bahamas, is listed for sale CREDIT: PLANET PHOTOS

Yet as he made the half-hour journey back to his luxury private apartment complex at the very exclusive Albany private community, the CEO must have been troubled. For a sequence of events was about to unravel which today makes Bankman-Fried the most notorious name in finance since Bernie Madoff. 

It was at Albany, in a five-room apartment with the best views of the island’s south bay, that the core team of FTX ate, played and slept – sometimes together.

Bankman-Fried paid $30 million for the 12,000 square foot apartment. Inside, reportedly, was a “polycule”, with the members engaged in various informal non-exclusive relationships. Caroline Ellison, the CEO of FTX’s partner business Alameda Trading, lived there too. An owl-faced ingénue who looked half her age and professed a love of Harry Potter,

Ellison was sometimes Bankman-Fried’s girlfriend, but sometimes not. The team’s refuelling habits included stimulants and sedatives. “Nothing like regular amphetamine use to make you appreciate how dumb a lot of normal, non-medicated human experience is,” Ellison posted on Twitter, a couple of weeks before Blair and Clinton flew in.

What troubled the young crypto superstar was this: FTX’s wealth, and its $32 billion valuation by investors, owed much to a bear market that had seen many crypto finance operations rise in value. But now interest rates were rising, the wild west of crypto didn’t seem quite so attractive any more. Investors wanted out, taking their money to safer havens.

FTX was valued at $32 billion by investors
FTX was valued at $32 billion by investors CREDIT: OLIVIER DOULIERY / AFP

Two weeks after Crypto Bahamas, a project called Luna crashed, triggering a minor cascade of failures, and a crisis of confidence. Some of the biggest boosters of crypto finance, such as Marc Andreessen, of the VC firm Andreessen Horowitz, which backed FTX rival Coinbase, disappeared from social media for weeks as they digested the fallout.

By May, pundits declared a “crypto winter” – a long bear market with shocks for punters.

Back at his Albany penthouse, Bankman-Fried hunkered down. Not only did he have the star power and cash to attract statesmen like Clinton and Blair, but he was lionised by America’s intellectual elites as a very new and different kind of chief executive. A devout vegan who slept on a beanbag at work, he created a new foundation and filled it with $180 million to dispense.

He also espoused a trendy new fad of “Effective Altruism”, which its earnest, nerdy devotees explain is devoted to maximising doing good. He pledged millions to fight climate change and declared he would prevent the next pandemic. Bankman-Fried was most certainly “one of us”, the liberal-Left intelligentsia assured itself: in 2022, Bankman-Fried became the second largest donor to the Democrat Party and Biden, and promised to pledge a cool $1 billion to influence the 2024 Presidential election, enough to fund the entire campaign single-handedly.

Politicians not only loved his money, but they also liked his promise to regulate the sector, although of course, on terms that Bankman-Fried set.

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Over the next few months, friends noticed the shambling founder was different. He began to put on weight, and look even more distracted. Bankman-Fried had burnished his hero credentials by taking on the companies that had burned out in the crypto crash of May. He’d “saved crypto” and restored confidence in the market. But that meant more trouble, on top of a bull market that was turning into a bear market.

In an interview with NBC’s Meet the Press, after eight minutes, he began to vibrate and rocked violently. Photos from around this time suggest Bankman-Fried may have been experimenting with a powerful drug called Emsam, an anti-depressant originally used to treat Parkinson’s disease. With celebrity endorsements, and the political world at his fingertips, Bankman-Fried was at the peak of his fame. But on a farm in Northern California, one man wasn’t buying the story.

The short-seller

Described by The New York Times as the most storied short-seller on Wall Street, Marc Cohodes is one of the most outspoken and controversial characters in finance. Short-sellers perform an essential function as the bad news bears who counter overhyped and overvalued equities.

Since 2009, the working class Chicagoan had retired to a farm to tend his chickens, save for the occasional lecture on the Ivy League business school circuit.

Now 61, he was established and wealthy enough not to care who he picked fights with. Something didn’t seem right about FTX to Cohodes, and the clues were everywhere he looked.

The inexperienced crew behind FTX and its sister company Alameda Trading had almost no experience of trading, he noted, let alone running an exchange. As their regulatory officer, FTX had appointed a lawyer called Dan Friedberg who had been implicated in online poker scandals between 2003 and 2007.

It came to light that company insiders at Ultimate Bet, where he was a senior lawyer, had used “god mode” software to peek at the hands of other players during online games of high-stakes Texas hold’em poker. Friedberg did not comment on the matter last week.

A mysterious friend and school friend of Bankman-Fried, Gary Wang, listed as co-founder of FTX, was particularly elusive, Cohodes discovered. No picture or background information existed on Wang, save for one photo over at the site of FTX investor Sequoia Capital.

After Sequoia invested in FTX, the crypto company reciprocated, and there, Wang was described as a “partner”. With Wang’s back to the camera, the mysterious billionaire’s face is not visible.

Sam Bankman-Fried
Bankman-Fried was a ‘red flag’, says Marc Cohodes CREDIT: Sipa US / Alamy Stock Photo

But so far as Cohodes was concerned, the biggest red flag was Bankman-Fried himself. While he looked like a neurotypical tech savant, with careless, slovenly dress and a distracted manner, he seemed an unlikely CEO.

“When anyone tries to pin Bankman-Fried down on where he made his money, you can’t get a cogent answer. You just get fish-eyed looks,” Cohodes told a podcast in August. “Nothing here fits. Everything reads like it’s a complete scam.” The spectacular fall of FTX has vindicated the former short-seller.

The rival 

Today, it is clearer what FTX was doing, and in its simplest terms was an age-old con trick. FTX created some funny money. It generated a digital asset called the FTX Token which it could then control, on command.

“This token, FTT, wasn’t backed by anything,” explains Eddie Donmez, global markets analyst at Finimize. “Printing unlimited amounts of money was fine as long as the FTT was stable.”

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Donmez notes that FTX could buy its tokens before releasing them on the exchange, a practice known as “front running”.

“Bankman-Fried could mint his own token and borrow against it: in other words, borrow real money against fake money,” one experienced crypto trader explains.

The unravelling came about because of a rivalry between two of the crypto exchanges, the on-ramps that crypto speculators must pass over to convert digital money to real or fiat money.

Chinese entrepreneur Changpeng Zhao, better known as “CZ”, had established Binance to do just this in 2017. From a nominal base in the Cayman Islands, Binance quickly grew, and, like FTX, operated many dozens of subsidiaries or shell firms.

Zhao took a 20pc stake in FTX, then a fresh start-up, in 2019. Binance has been pursued by regulators including in the UK, and Zhou doesn’t set foot in the United States.

Perhaps he calculated that FTX would offer a legal way into the US market. But two years later the pair had fallen out, and Bankman-Fried bought out Zhou’s stake in his firm for $2 billion. However, much of that payment was in the FTT token.

Then at the start of this month, Zhao decided to cash in his chips. A leaked report published at crypto news site CoinDesk in November indicated that much of Alameda Trading’s holdings were not other digital assets, as everyone assumed, but consisted of FTX’s own token.

Zhao announced an intent to sell his own FTT holding, and the FTX house rapidly came tumbling down. For a firm valued by VCs at $32 billion, it was clear that FTX was having trouble raising $580 million of cash to pay Zhao. FTX couldn’t call on its trading partner Alameda, as it was stuffed full of the funny money, the FTTs, that FTX had created. Within a few days it had declared bankruptcy. Zhao announced a rescue by Binance, but took one look at the books and changed his mind.

The downfall

Sam Bankman-Fried
Bankman-Fried blamed the FTX meltdown on ‘poor labeling’ of bank accounts CREDIT: SAUL LOEB/AFP

A desperate last minute Excel spreadsheet touted to investors before filing for bankruptcy is certainly consistent with drug-induced indifference.

The balance sheet contained an $8 billion entry merely described as “hidden, poorly internally labelled ‘fiat’ account”. Fiat refers to traditional money.

Just how shambolic the operation was clear last week when John Ray, the insolvency lawyer who handled Enron’s bankruptcy, and now CEO of FTX, released his initial findings.

“The FTX Group did not keep appropriate books and records, or security controls, with respect to its digital assets”, Ray wrote. There was a “complete failure of corporate controls and such a complete absence of trustworthy financial information.”

FTX held no board meetings. There was no employee register, either. Investor deposits were not recorded separately from any other income. Corporate funds were used to purchase homes. Bankman-Fried received a $1 billion “loan”. FTX didn’t list the bank accounts it used, or vet its banks, or list authorised signatories. It didn’t do due diligence on the banks it banked with. Any financial statements or audits published by FTX, Ray declared, were unreliable. Which begs the question, how did Bankman-Fried, a shambolic, pill-popping CEO, get so far?

The truth

To explain the adulation for a new company led by “fakes or imbeciles”, in Cohodes’ scathing opinion, perhaps an answer lies in the political clout of the Bankman-Fried and Ellison families. Bankman-Fried’s mother, a law professor at Harvard, co-founded the political fundraising organisation Mind the Gap, which reportedly raised $140 million, as well as the Center for Voter Information.

Sam’s brother Gabe Bankman-Fried worked for Civis Analytics, the firm founded by former Google chairman and billionaire Eric Schmidt. The sibling boasted of improving the technical infrastructure “that advised Democratic Political Action Committees and large donors giving hundreds of millions of dollars in the 2018 midterm elections”.

Ellison’s father was head of economics at MIT, and knew the chair of the watchdog, Gary Gensler, well. After George Soros, Bankman-Fried became the largest donor to Biden and the Democrats in 2022. However, the donations to the NGO sector far exceed that, distributed through vehicles such as FTX’s Foundation.

“It was a culture of impunity – they thought they had bought the political protection that they needed through political connections. And they thought they were safe,” one experienced crypto trader told us.

Bankman-Fried also very publicly backed a culty philosophy called Effective Altruism, described as a “do-gooder” movement that its devotees claim is concerned with rationally maximising the amount of good one does. Others espouse a “growth mindset”.

Professor Kathleen Stock OBE has described how Effective Altruism is “beloved of robotic tech bros everywhere with spare millions and allegedly twinging consciences” and has called it “the new woke”.

The former CEO had pledged to give away most of his $28bn fortune, and tapped this network to good effect: an early $50m investment came from another devotee, Skype founder Janus Friis. The majority of his midterm political spending was on candidates who echoed these views.

But in an extraordinary confessional interview last week, conducted over direct messages with another Effective Altruism devotee and journalist, Kelsey Piper, Bankman-Fried had a very different answer. He suggested Stock was right: it had simply been good public relations. Bankman-Fried wrote: “man all the dumb shit I said – it’s not true really”. He explained that promoting ethics was “this dumb game we woke westerners play to say all the right shiboleths [sic] and everyone likes us”. Bankman-Fried confirmed those words were his, but said that he thought had been engaged in a private conversation with a friend.

Blast radius

The home of Miami Heats was renamed  FTX Arena in June 2021
The home of basketball team Miami Heat was renamed FTX Arena in June 2021 CREDIT: Matias J. Ocner/Miami Herald/Tribune News Service via Getty Images

The “blast radius” of FTX’s spectacular demise threatens balance sheets and reputations far beyond the shady world of crypto-finance.

First are the retail investors lured in by SuperBowl ads and glowing profiles of Bankman-Fried, who found they couldn’t withdraw their funds. The immediate fallout extends to FTX’s investors. Sequoia Capital wrote off $214 million of investment. Singapore’s wealth fund Temasek invested $230 million. Softbank has reportedly lost under $100 million, which pales against its reported $27.4 billion annual loss in one year, after a string of bad bets including WeWork, WireCard and Uber.

But the reputational damage goes much further. The chairman of the SEC, Gary Gensler, is under fire for going after over 100 crypto-finance operations – but somehow missing the biggest.

Bankman-Fried had met Gensler to discuss regulation – a task serious enough for the CEO to don a serious suit and tie.

“According to Gary Gensler, everything is a scam! Other than FTX — the one, bonafide, consensus scam. That’s what he didn’t consider a scam,” said Balaji Srinivasan, former CTO of rival exchange CoinBase and partner at Andreessen Horowitz, which passed on investing in FTX.

That didn’t get much sympathy from figures who view the entire crypto-finance sector as toxic. “I love these Silicon Valley clowns acting like SBF [Bankman-Fried] was some isolated actor instead of one piece of a much larger scheme Andreesson and Sequoia pushed for years,” fumed the populist anti-monopoly crusader Matt Stoller.

But it wasn’t just the civil sector “blob” that wanted to believe in the miracle money of crypto-finance. Research by the Tech Transparency Project seen by The Telegraph documents 245 officials moving from high level positions in government, federal agencies or advisors to Congressional staff to crypto finance operations, or firms that lobby on their behalf.

They previously held posts at bodies including the watchdog the Securities and Exchange Commission, the Federal Reserve Board and the Department of Justice.

FTX hired Ryne Miller, legal advisor to SEC chair Gary Gensler, as general counsel. Adam Cochran, an adjunct professor and investor, noted how Bankman-Fried and Gensler had crafted regulation that inhibited de-centralised exchanges.

With regulation preventing Binance from operating in Western markets, that would have left just two centralised exchanges as the gateways to traditional money: FTX, and Coinbase.

“When you can capture the regulator you can score a lot of points,” one insider said.

However, the concerns raised by Cohodes point to a blast radius wider than anyone has reported so far. Much of the cash that washes through crypto finance is criminal. One estimate by Chainalysis said that almost $11 billion was laundered through crypto operations in 2019, and the market has expanded greatly since then. Europol says crypto is the launderers’ first choice.

Here the ownership and operation of FTX will be examined much more deeply: Cohodes is concerned that FTX provided a platform for Chinese interests to launder money. What’s not in dispute is how the regulatory and political interests were happy to look the other way – and that included promoting a character as improbable as Bankman-Fried.

Perhaps they should have taken heed of Warren Buffet’s right-hand man, a sprightly 98-year-old Charlie Munger. The old vice chairman of Hathaway was nine years old when FD Roosevelt was inaugurated, and blames fear of missing out.

“There are people who think they’ve got to be on every deal that’s hot. They don’t care whether it’s child prostitution or Bitcoin,” he told cable TV news last week. “This is a very, very bad thing. This country did not need a currency that is good for kidnappers.”

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