The Washington PostDemocracy Dies in Darkness

FTX chief Sam Bankman-Fried resigns as firm files for bankruptcy

U.S. regulatory probe of the exchange’s collapse could unearth array of problems

Sam Bankman-Fried, founder of FTX. (Jeenah Moon/Bloomberg News)

FTX, one of the world’s largest cryptocurrency exchanges, announced Friday that it will file for bankruptcy, with its CEO, Sam Bankman-Fried, stepping down in the wake of a trading scandal that has embroiled the firm in regulatory inquiries.

The company’s dramatic unraveling over the past few days marked a stunning collapse of what was believed to be one of the world’s most stable crypto firms. And now angry investors and a growing number of government entities are trying to determine what happened.

It’s also a stunning turnaround for Bankman-Fried. The 30-year-old emerged as one of the Democratic Party’s top donors this election cycle and in recent months became the crypto industry’s self-appointed ambassador to Washington. Pledging transparency and cooperation, he was a major force in advocating for a bipartisan Senate bill that would hand significant authority over crypto to the Commodity Futures Trading Commission. He also gave close to $40 million to left-leaning political action groups, including $27 million to his own Protect Our Future PAC, which focuses on pandemic preparedness and crypto policy.

Is crypto a house of cards?

The Justice Department, Securities and Exchange Commission and CFTC have launched probes into FTX, looking into whether the exchange skirted rules on safeguarding consumer deposits and relationships with trading affiliates, according to four people familiar with the inquiries.

Authorities initiated an investigation of FTX last year, examining whether the crypto giant’s trading and lending programs were properly registered with the SEC.

The SEC and CFTC are also probing connections between FTX International, FTX.US and Alameda Research, FTX’s sister trading firm, said the people, who spoke on the condition of anonymity because the work is ongoing.

Cryptocurrency, after seeing a surge in popularity during the pandemic and drawing in millions of new investors, has faced a painful reckoning this year. Prices of bitcoin and other tokens have fallen precipitously, leading to a rush of clients trying to withdraw money. The value of bitcoin has fallen from roughly $68,000 a year ago to $17,000 now.

That collapse has toppled a number of companies. But the implosion of FTX is seen as one of the most striking failures in an industry that has intentionally operated outside traditional banking and finance rules.

Why the FTX collapse has plunged the crypto world into upheaval

Bankman-Fried, who also runs Alameda Research, allegedly used $10 billion worth of FTX customer deposits to fund transactions by the trading firm, the Wall Street Journal reported Thursday. Bankman-Fried, in a since-deleted tweet on Monday, said FTX did not make bets with customers’ assets.

FTX is headquartered in the Bahamas, but Bankman-Fried has spent much of the year working to gain influence in Washington, both on Capitol Hill and with regulators.

The firm’s tailspin began in earnest on Sunday, when Changpeng Zhao, CEO of rival crypto exchange Binance, announced he would sell off $530 million worth of an FTX-issued crypto token. Bankman-Fried was leaning on the native token to secure his firms’ sizable debts.

The move sparked a panic, with FTX customers racing to pull $5 billion worth of deposits off the platform. In a last-minute bid to meet the demands, Bankman-Fried turned to Zhao for help, but the Binance chief balked at buying FTX after he said a review of its books revealed “mishandled customer funds.”

For his part, Bankman-Fried on Thursday blamed FTX’s collapse on his own faulty math about its ability to cover its liabilities. “And so we are where we are. Which sucks, and that’s on me,” he tweeted. “I’m sorry.”

Representatives from the Justice Department, SEC and CFTC declined to comment.

For now, FTX will be headed by John J. Ray III, a veteran corporate lawyer who oversaw the liquidation of Enron and was tapped Friday as its new CEO. Bankman-Fried will stay with FTX during the bankruptcy process, the company said.

“I want to ensure every employee, customer, creditor, contract party, stockholder, investor, governmental authority and other stakeholder that we are going to conduct this effort with diligence, thoroughness and transparency,” Ray said in a statement.

The earthquake in the already volatile crypto industry set off a flurry of activity among regulators and policymakers. In the past six months, four crypto institutions — crypto hedge fund Three Arrows Capital, lenders Voyager Digital and Celsius Network and stablecoin issuer Terra Luna — all collapsed.

Meanwhile, there were fresh signs of crypto market contagion in the wake of FTX’s cratering. BlockFi, a New Jersey-based crypto lending platform that received a $250 million bailout from FTX in June, announced Thursday night it was halting customer withdrawals. “Given the lack of clarity on the status of FTX.com, FTX US and Alameda, we are not able to operate business as usual,” the company said in a statement. It said it would limit activity on its platform “until there is further clarity.”

Bankman-Fried has tried to give his company the imprimatur of institutional investors, such as major venture capital firms and pension plans. Crypto experts said an effective regulatory regime in Washington could give even larger institutional investors the confidence to include crypto assets in their portfolios.

FTX has also pursued major marketing ploys to boost consumers’ faith in the industry. It purchased advertising space on the uniforms of Major League Baseball umpires, attempting to project an image of consistency and calm.

The National Basketball Association’s Miami Heat said it would terminate its $135 million arena naming rights deal with FTX in the wake of the company’s collapse. The agreement, signed in 2021, originally was slated to run for 19 years.

The defending NBA champion Golden State Warriors have their own deal for FTX to be the club’s official cryptocurrency platform and NFT marketplace, with promotions around San Francisco’s Chase Center.

FTX investors fear their money is lost as crypto company collapses

That aggressive image maintenance, experts say, made the collapse of FTX, which was valued at $32 billion during a round of fundraising earlier this year, all the more surprising. It has drawn comparisons to failures — and impropriety — among mainstream financial institutions, including investment banking firm Lehman Brothers and convicted Ponzi schemer Bernard Madoff.

“Ultimately to most of the investors, it was a black box,” said Lou Kerner, founder of Web3 advisory service CryptoOracle. “To me, it doesn’t appear any different than the people who lost money with Bernie Madoff. Anytime you invest in a black box, you run the risk of that being true.”

SEC Chairman Gary Gensler told CNBC’s “Squawk Box” on Thursday morning that “investors need better protection in this space” and that the crypto sector has been “significantly noncompliant” with securities laws already on the books. He warned crypto executives that the industry’s “runway” is getting shorter.

“This is a very interconnected world in crypto with a few concentrated players at the middle, and one of those players had the toxic combination of lack of disclosure, customer money, a lot of leverage, meaning borrowing, and then trying to invest with that,” Gensler said. “And then when markets turned on them, it appears that a lot of customers lost money.”

Venture capital firm Sequoia Capital, which invested about $210 million in FTX, told limited partners in a letter on Wednesday that it was marking down the entire amount. The Ontario Teachers’ Pension Plan, Canada’s third-largest pension fund, said it had a $95 million stake in the company but any loss would have a “limited impact” on the overall health of the plan.

Policymakers in Washington, meanwhile, are still struggling to make sense of FTX’s implosion, searching for more clarity about what happened and how to craft federal guardrails for the industry to prevent a repeat.

The fate of a measure pushed by Bankman-Fried — sponsored by Sens. Debbie Stabenow (D-Mich.) and John Boozman (R-Ark.), the top lawmakers on the Senate Agriculture Committee — is now in doubt. In a Thursday night statement, Stabenow said FTX’s collapse “reinforces the urgent need for greater federal oversight of this industry.” She said she will keep pushing to move the measure through her committee. Critics of the measure and crypto insiders have said the CFTC would be more lenient toward the industry than other federal overseers.

Yet congressional aides to lawmakers from both parties said support for the bill appears to be cratering. “Sam was trying to pick his own regulator,” one aide said. While legislators appeared eager to take up consumer protection measures, “Congress does bad things when they have knee-jerk reactions,” warned another aide. They spoke on the condition of anonymity to discuss sensitive negotiations around the bill.

The bill has also drawn objections from those in the crypto industry who rely on a more decentralized business model than the concentrated hub Bankman-Fried founded.

“I think that’s where he developed a long list of enemies in the sector,” Rep. Warren Davidson (R-Ohio) told The Washington Post. “It looked like he was trying to carve out a space for FTX and then use the regulation to carve out a moat for his position.”

Devlin Barrett and Steven Zeitchik contributed to this report.

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