Till as recently as a month ago, Sam Bankman-Fried, the poster child for crypto trading thanks to his cryptocurrency exchange FTX, was enjoying the sweet taste of success. Today, after a stunning series of events led to the complete and utter collapse of FTX, that taste has turned to ashes.
In an interview with CNBC's Andrew Ross Sorkin, Bankman-Fried said he was deeply sorry for everyone who lost their money to FTX — in some cases, entire life's savings — and that he never meant to commit fraud on anyone, and denied the widely reported fact that Bankman-Fried — dubbed SBF — and his coterie siphoned customers' funds to the tune of $8 billion to his other cryptocurrency trading firm, Alameda Research. SBF called it a "massive failure of oversight of risk management". He said he was surprised by the long position Alameda took on FTX, and blamed it on his failure to appoint someone to be in charge of this aspect.
Here are five takeaways from the interview.
1. How does Alameda come into the picture?
The way Alameda made money by buying cryptocurrencies in one part of the world and selling them in another, pocketing the margin. According to The New York Times, it used “leverage” — or borrowed money — to fuel its trades and make bigger returns.
So, SBF and pals decided to create a cryptocurrency exchange — FTX — whose token (FTT) their customers can use to trade assets on Alameda. This symbiotic relationship between Alameda and FTT caused an inflation of the token's value, which Alameda then used as collateral to take out loans.
When the crypto prices came crashing down, FTT was essentially wiped out, and Alameda struggled to pay its investors. This felled a chain of dominoes that resulted in FTX's dissolution and SBF's sudden fall from grace.
2. How was FTX affected?
Bankman-Fried tries to explain this away during his interview with Sorkin by claiming Alameda was primarily engaged in margin trading — customers borrowing from each other — and held perhaps an unrealistic long position on FTX. In essence, SBF, says, this gave the management the impression that in case of short-selling, FTX could "margin call those positions", close them down on time and liquidate its assets to pay customers back what they had invested in its token.
"You look at what happened this month — (there was an) all-out assault which led to a total market collapse in a pretty short period of time. No mid-side liquidity ... more than $10 billion were wiped off in a matter of days. And realistically speaking. No ability for FTX to be able to liquidate that position and generate everything that was owed," SBF said.
3. Was this oversight or deliberate?
Sorkin said a generous view is that SBF is a young man who made a series of terrible decisions. The less generous view is that he committed massive fraud, that it was a Ponzi scheme, a manipulation of the system.
"Clearly I made a lot of mistakes — things I would give anything to be able to do over again. I didn't ever uh try to commit fraud on anyone," Bankman-Fried said, adding, "I was excited about the prospects of FTX a month ago. I saw it as a thriving, growing business. I was shocked by what happened this month."
He tried to draw a distinction between the US platform — which he claims is regulated and fully solvent and that withdrawals are possible — and the international, margin-trading platform for non-US users. "Alameda Research did have a long position. It's a platform where all the clients were, you know, going on placing something as collateral and using that to put on a position — be it a futurist position, a spot position, a borrow, and, you know, with the exchange restoring the collateral from all of those positions," he said.
4. Was there co-mingling of funds between FTX and Alameda?
FTX's terms of service say "none of the digital assets in a (depositor's) account are the property of FTX — FTX trading does not represent or treat digital assets and users' accounts as belonging to FTX trading".
But Alameda used the overall value of FTT deposits as collateral to borrow huge sums. According to the NYT, "Alameda’s need for funds to run its trading business was a big reason Mr Bankman-Fried created FTX in 2019. But the way the two entities were set up meant that trouble in one unit shook up the other as crypto prices began to drop in the spring. In the end, it brought down both Alameda and FTX."
Bankman-Fried told Sorkin, that it was "a massive failure of oversight of risk management, and of diffusion of responsibility from myself, running FTX".
As to the allegation of co-mingling of funds, SBF said by nature, margin trading involves customers borrowing from each other, and because FTX and Alameda — a margin-trading platform, per Bankman-Fried — were so intertwined, there was going to be some mixing.
"I am frankly surprised by how big Alameda's position was, which points to another failure of oversight on my part — a failure to appoint someone to be chiefly in charge of that. But I wasn't trying to co-mingle funds," he said.
5. So what happened, according to SBF?
"What seems to have happened is, in the middle of the year, most of the borrow-lending desks in this space blew out or closed down. And It seems like Alameda had margin positions opened with them and that it likely moved a bunch of that over to FTX this year when they shut down. I think it was over-collateralised," Bankman-Friend said.
Bankman-Fried said on Twitter that this whole mess was an "$8 billion accounting mistake".
He elaborated on that tweet: "Looking through what happened, I think that there was a substantial discrepancy between what the financials were — what the audited financials were, what the true financials were and what the exchange understood. All that was inconsistent."
First Published: Dec 1, 2022 3:37 PM IST
