FTX: How Sam Bankman-Fried Built a House of Cards

Lawyers for deposed crypto exchange FTX argued at the firm bankruptcy hearing On Tuesday, the company served as a personal “fiefdom” for founder Sam Bankman-Fried, hitting $40 billion in market capitalization in January before collapsing in recent weeks to its current valuation of around $422 million.

Those who looked under the hood in the wake of the crash, including new FTX CEO John J. Ray III, expressed dismay at the company’s lack of basic accounting and compliance protocols, prompting questions about how Bankman-Fried was able to build such a huge, uncontrolled operation that gained him incredible influence and political power.

Sam Bankman-Fried, founder and CEO of FTX, speaks during an interview on “Bloomberg Wealth with David Rubenstein” in New York on August 17, 2022. (Jeenah Moon/Bloomberg via Getty Images/Getty Images)

So how did Bankman-Fried do it? Ben McMillan, co-founder of IDX Digital Assets, puts it with a simple analogy:

In a hypothetical scenario, imagine someone owns all the houses in a neighborhood of 100 houses and forces a sale on one house for $1 million, then uses that sale to show that he has $100 million in “equity”. But then the owner is forced to sell the remaining 99 homes, and the homes only sell for $100,000 each, meaning $90 million of their so-called equity disappears.


But that fairness never existed in the first place.

Mcmillan said FOX Business this is exactly what Bankman-Fried did with his FTT tokens, since he controlled the float.

FTX logo seen in Miami

The FTX logo is seen at the entrance to the FTX Arena in Miami on November 12, 2022. (Reuters/Marco Bello/File/Reuters Photos)

FTX, according to McMillan, would insure and trade a small portion of FTT and other coins like Serum at a favorable enough dollar price to create the “equity” reflected in the balance sheet. So Bankman Fried would borrow a lot of money against what was essentially a very large – and very fake – number of assets.

This, in turn, allowed FTX and its hedge fund, Alameda Research, to artificially inflate assets.


“This isn’t new or unique to crypto, by the way,” McMillan explained. “This was done by more than a few hedge funds during the crash of 2008 – particularly in the area of ​​distressed debt.”

FTX and Alameda accelerated the scenario by using the inflated asset count to underwrite very real liabilities, according to McMillan. It also appears that Bankman-Fried was acquiring businesses and forcing them to be “guarded” by FTX so it could allegedly continue the cycle using client assets.

Caroline Ellison, CEO of Alameda Research

Caroline Ellison, CEO of Alameda Research, via Twitter (Twitter @carolinecapital)

McMillan says a major eye-opener was when Changpeng Zhao, founder and CEO of major crypto exchange Binance, announced on Nov. 6 that his company was selling a large amount of FTT on the open market, and Caroline Ellison, CEO of Alameda quickly responded by offering to buy all the tokens for $22 each.


This amount, which many are now speculating, was the crucial number above which FTT needed to trade in order for FTX and Alameda to remain solvent.

“Once the FTT fell sharply on November 8,” McMillan notes, “the house of cards collapsed.”

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