Sam Bankman-Fried’s downfall sends shockwaves through cryptocurrency

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NEW YORK — Sam Bankman-Fried quickly achieved superstar status as head of cryptocurrency exchange FTX, earning numerous accolades: the savior of cryptocurrency, the newest force in democracy, and the potential to become the world’s first millionaire. billionaire.

Now, after FTX filed for bankruptcy protection on Friday, comments about the 30-year-old Bankman-Fried are less friendly, leaving his investors and customers feeling cheated while many others in the cryptocurrency world are worry about being affected. Bankman-Fried himself may face civil or criminal charges.

“Sam, what have you done?” Sean Ryan Evans, host of the cryptocurrency podcast Bankless, tweeted after filing for bankruptcy.

Under Bankman-Fried’s leadership, FTX quickly grew to become the third largest exchange by trading volume. The stunning collapse of the nascent empire has brought a tsunami-like wave to the cryptocurrency industry, which has seen considerable volatility and turmoil this year, including a sharp drop in the price of bitcoin and other digital assets. For some, the events are reminiscent of the dominoes of Wall Street firms during the 2008 financial crisis, especially now that so-called healthy companies like FTX are failing.

A venture capital fund wrote down its FTX investment worth more than $200 million. Crypto lender BlockFi suspended customer withdrawals on Friday after FTX sought bankruptcy protection. Singapore-based exchange Crypto.com saw an increase in withdrawals this weekend for internal reasons, but some of the action could be attributed to nervousness in FTX.

Bankman-Fried and his company are being investigated by the Justice Department and the Securities and Exchange Commission. The probe could focus on the possibility that the company may have used customer deposits to fund bets by Bankman-Fried’s hedge fund, Alameda Research, in violation of U.S. securities laws.

“This is a direct result of a rogue actor violating every basic rule of fiscal responsibility,” said Patrick Hillman, chief strategy officer at FTX’s biggest rival Binance. Earlier last week, Binance appeared to be poised to step in to bail out FTX, But backed off after reviewing FTX’s books.

The ultimate impact of FTX’s bankruptcy is uncertain, but its failure could lead to billions of dollars in wealth being destroyed and more skepticism about cryptocurrencies at a time when the industry could use a vote of confidence.

“I’m concerned because it’s retail investors who suffer the most, and there are too many who still wrongly associate Bitcoin with the ‘crypto’ space of scams,” said Cory Klippsten, CEO of Swan Bitcoin, who has been working for several months. has been concerned about FTX’s business model. Klippsten is openly enthusiastic about Bitcoin, but has long been deeply skeptical of the rest of the crypto world.

Bankman-Fried founded FTX in 2019, and it’s growing rapidly — recently valued at $32 billion. The son of a Stanford professor, Bankman-Fried is known for playing the video game “League of Legends” during conferences, attracting investment from the highest echelons of Silicon Valley.

Sequoia Capital, which has invested in Apple, Cisco, Google, Airbnb and YouTube, said their meeting with Bankman-Fried was likely to be “talking to the world’s first trillionaire.” Several Sequoia partners have become enthusiastic about Bankman-Fried after the 2021 Zoom meeting. After several more meetings, Sequoia decided to invest in the company.

“I don’t know how I knew it, I just knew it. SBF was the winner,” wrote business journalist Adam Fisher, who wrote the Bankman-Fried profile for the company and used his popular Online nickname to refer to Bankman-Fried. The article, published in late September, has been removed from Sequoia’s website.

Sequoia Capital has written down its $213 million investment to zero. A pension fund in Ontario, Canada, also wrote down its investments to zero.

“Of course, not all investments in this early-stage asset class have lived up to expectations,” the Ontario Teachers’ Pension Fund said in a brief statement.

But until last week, Bankman-Fried was seen as the industry’s white knight. Whenever there is a crisis in the cryptocurrency industry, Bankman-Fried may be the one flying in with a rescue plan. Earlier this year, when online trading platform Robinhood was in financial trouble — collateral damage from falling stock and cryptocurrency prices — Bankman-Fried bought a stake in the company as a show of support.

This summer, when Bankman-Fried acquired the assets of bankrupt crypto firm Voyager Digital for $1.4 billion, it was a relief for Voyager account holders whose assets had been frozen since the bankruptcy. That rescue is now being questioned.

As the king of cryptocurrencies, his influence began to pour into politics and pop culture. FTX has purchased prestigious sports sponsorships through Formula Racing and purchased the naming rights to the Miami Arena. He has pledged $1 billion to Democrats this election cycle — his actual donations run into the tens of millions — and has invited prominent politicians like Bill Clinton to speak at the FTX conference. Football star Tom Brady invested in FTX.

Before the collapse of FTX, Bankman-Fried had been the subject of some criticism. While his Bahamas-based headquarters primarily operates FTX outside of U.S. jurisdiction, Bankman-Fried has increasingly voiced the need for more regulation of the cryptocurrency industry. Many cryptocurrency proponents oppose government surveillance. Now, the collapse of FTX may help enact stricter regulations.

One such critic is Changpeng Zhao, the founder and CEO of Binance. The feud between the two billionaires spread on Twitter, with Zhao and Bankman-Fried sharing millions of followers. When Zhao said Binance would sell its stake in FTX’s crypto token, FTT, he helped initiate withdrawals destined for FTX.

“(asterisk)(asterisk)t show what…it will be the fault of the cryptocurrency (not one person),” Zhao tweeted on Saturday.

Journalists Michael Balsamo in Washington and Cathy Bussewitz in New York contributed.

This story has been corrected to say Adam Fisher is a business journalist who is a freelancer for Sequoia Capital. An earlier version of the story identified Fisher as a Sequoia employee.

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