Weekends are for Sunday roasts, catching up with friends, and watching with incredulity the hourly barrage of insane revelations emerging from Sam Bankman-Fried’s toppled crypto empire.
It started typical enough: Late on Friday, SBF commenced bankruptcy proceedings for FTX, Alameda Research, and his 130-odd web of companies that would make the most far-reaching of global conglomerates blush for its complexity.
Here the first dagger to be plunged into loyal customers’ backs came unsheathed.
FTX.US, the exchange’s subsidiary for US-based traders, was listed among the companies joining bankruptcy proceedings, even though, only a day prior, SBF assured us that “FTX US, the US-based exchange that accepts Americans, was not financially impacted by this shitshow. It's 100% liquid”.
In conjunction with the bankruptcy proceedings, SBF promptly resigned as chief executive in order for restructuring counsel John J. Ray III to take the reins.
But another dagger was slowly being withdrawn post-resignation.
Customers’ funds, already in a precarious position given their unsecured creditor position in Chapter 11, started pouring out of FTX on Saturday in an apparent hack.
FTX was nice enough to keep everyone updated on Telegram, while SBF went dark, right after apologising for not communicating the situation well enough.
"FTX has been hacked. FTX apps are malware. Delete them. Chat is open. Don't go on FTX site as it might download Trojans," read the pinned message.
A stunning pivot for FTX: From the second-most powerful crypto exchange in the world to malware in the space of days.
Rumours inevitably began to swirl around SBF’s location, with some suggesting Argentina, despite the lack of evidence and SBF texting “nope” to Reuter’s journalists upon asking.
It’s hard to argue with that robust denial.
In fairness, there was some validity to the rumour: A Gulfstream G450 jet, the same model apparently owned by SBF, departed from his home city of Nassau, Bahamas to Argentina.
That jet briefly became the most-tracked aircraft on Flightradar, but this article from Spanish-language aviation media website Aviacionline seemed to pour cold water on the rumour.
You know things are serious in the crypto world when even aviation media are reporting on the story.
The identity of the hacker is still unknown, but it should come as no surprise that the finger swiftly turned to SBF, or another member of either FTX or Alameda Research.
Suffice to say, without proof, nobody should be jumping to conclusions, though there’s plenty of fuel to fan the flames of the rumour mill.
Strange bedfellows
One of the biggest revelations emerging from this whole debacle pertains to the entangled relationship between FTX and Alameda Research, the two meatiest arms of SBF’s once-massive crypto empire.
Ostensibly two totally separate entities, it turns out that FTX and Alameda were closer bedfellows than they purported to be (as were the higher-ups in SBF’s inner circle, but let’s leave the salacious content for the gossip columns).
Specifically, Alameda was illegally using FTX as a funds tap of sorts. Reuters reported that ten billion dollars in customers’ funds were transferred out of the FTX exchange and into Alameda.
This was in clear contradiction to FTX’s terms of service, which clearly states: “None of the digital assets in your account are the property of, or shall or may be loaned to, FTX Trading; FTX Trading does not represent or treat digital assets in User’s Accounts as belonging to FTX Trading. You control the digital assets held in your account.”
FTX’s terms of service: Gap between promises and reality – Source: FTX
If reports are accurate, it definitely explains how Alameda was able to commit to a multibillion-dollar spending spree that saw the venture fund offering to bail almost every cryptocurrency enterprise afflicted by this year’s first market collapse.
Once again, if reports are accurate, this backdoor could prove a little too convenient for SBF to defend himself against those hacking accusations.
2/ Among other things, we are in the process of removing trading and withdrawal functionality and moving as many digital assets as can be identified to a new cold wallet custodian. As widely reported, unauthorized access to certain assets has occurred.
— Ryne Miller (@_Ryne_Miller) November 12, 2022
Back to SBF’s whereabouts, the likely scenario is that he’s holed up in one of his Nassau properties.
This scenario is corroborated by a CoinTelegraph report citing anonymous sources saying that SBF, FTX co-founder Gary Wang, and director of engineering Nishad Singh, are “under supervision” by Bahamian authorities.
This source also suggested that SBF and his entourage want to flee to Dubai, which has become a safe haven of sorts for disgraced crypto kingpins.
Su Zhu and Kyle Davies, founders of collapsed crypto-focused venture fund Three Arrows Capital, and Terraform Labs founder Do Kwon – who probably held the title of ‘most hated man in crypto’ up until last week – are all purported to be in Dubai, enticed by the apparent lack of an extradition treaty between the US and the United Arab Emirates.
However, things are slightly more complicated than that- while it is true that no formal treaty exists, a bilateral agreement enhancing law enforcement between the two countries was signed in February of this year.
The agreement enhanced “US law enforcement’s ability to obtain and exchange evidence needed for investigations and prosecutions and deepen the cooperation against terrorism and transnational organised crime, including cybercrime”.
With that option off the table, his options are dwindling, but tax and immigration lawyer David Lesperance of Lesperance & Associates has some predictions.
“The US Department of Justice and/or the Securities and Exchange Commission will push State to cancel his US passport,” Lesperance told Proactive.
“To avoid the hassle and time delay of an extradition, the US will then call Bahamas authorities where, at most, SBF has a work permit or residence permit.
“Bahamas will then cancel his Bahamian status as he does not possess a current and valid passport. Bahamian authorities will then deport him by driving him to the airport.”
There’s one hitch to that prediction: No passport means no boarding pass.
No problem, reckons Lesperance: “A nice person will come up to SBF and advise that the little private jet with the US flag on the tail will be happy to take him off of the island.
It’s all starting to read like excellent fodder for a Netflix thriller. The only question is, who should get the honour to play SBF?
Now we’re left wondering: What next?
FTX aside, this debacle will have far-reaching consequences for the cryptocurrency industry as a whole.
When trust in pick-and-shovels goes to pot, the regulators, who have been circling the crypto sector for years, will doubtlessly see their window of opportunity to impose stricter oversight and restrictions.
It’s hard to argue with the sentiment, but even that comes with a caveat.
Famed economist and former US treasury secretary Larry Summers predicted a “meaningful change” towards more aggressive regulation in the months to come, but rather than an altruistic desire to protect consumers, Summers wonders if these regulators are just trying to save face.
“I think there are a fair number of people who were charmed or bought by (SBF), who are looking and feeling fairly silly and who want to get well on that set of errors by looking concerned and anxious,” Summers said in a conversation with The Information.
While Summers didn’t mention him specifically, reading between the lines suggests that Gary Genser, chair of the SEC, could be among that ‘fair number of people’.
Perhaps the most hawkish of all US regulators, SBF had the upper hand on the SEC, or so goes the narrative among certain political circles.
Republican lawmaker and Minnesota representative Tom Emmer Tweeted that Gensler was allegedly helping Sam Bankman-Fried and FTX “work on legal loopholes to obtain a regulatory monopoly".
SBF's platitudes to the regulators seemed to endear him to Gensler, particularly after SBF published a roadmap to regulatory oversight in September, much to the chagrin of the wider crypto scene.
Interesting. @GaryGensler runs to the media while reports to my office allege he was helping SBF and FTX work on legal loopholes to obtain a regulatory monopoly. We're looking into this. https://t.co/SznowgcP6V
— Tom Emmer (@RepTomEmmer) November 10, 2022
When the egg on Gensler's face starts to sour, it could be all knives out against the pick and shovels.
Attention is now turning to the rest of the crypto exchange sector and the possibility of another collapse; there’s a whiff of ‘not if but when’ lingering in the air.
Binance founder Changpeng ‘CZ’ Zhao, who whether he likes it or not, was a leading cast member in the dramedy that was SBF’s demise, has already made some cryptic messages warning of “clear signs of problems” throughout the sector, without naming names.
Regardless, it’s an easy fix for anyone worried: Get your coins off the exchanges and into an external wallet! It’s free and easy.
We can also expect a great push for transparency among the surviving crypto exchanges to repair the sector’s damaged reputation. Binance has already committed to disclosing proof of reserves, with OKX, KuCoin, Poloniex, and Huobi following suit.
CZ the saviour
It appears that SBF’s arch nemesis CZ is prepared to step in to help the latest round of flailing crypto companies.
“To reduce further cascading negative effects of FTX, Binance is forming an industry recovery fund, to help projects who are otherwise strong, but in a liquidity crisis. More details to come soon. In the meantime, please contact Binance Labs if you think you qualify, he Tweeted.
Hopefully his altruistic streak doesn’t turn out to be built on lies and shitcoins too. Either way, it’s got to hurt SBF to see his nemesis step in as the crypto saviour after spending so long trying to position himself as such.
The challenge in covering this most bizarre of stories is that fresh revelations seemingly come of the hour.
Everything seems to be in the open now, but who knows? Will SBF turn out to be Satoshi Nakomoto? Will all this turn out to be some wild fever dream cooked up by bitcoin permabears?
I guess we’ll find out.