Sam Bankman-Fried’s downfall sends shockwaves through crypto

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NEW YORK (AP) — Sam Bankman-Fried received numerous acclaim as he quickly rose to superstar status as head of cryptocurrency exchange FTX: the savior of crypto, the newest force in Democratic politics and possibly the world’s first trillionaire.

Now, comments aren’t so friendly about the 30-year-old Bankman-Fried after FTX filed for bankruptcy on Friday, causing its investors and customers to feel betrayed and many others in the crypto world fearing the repercussions. Bankman-Fried himself could face civil or criminal penalties.

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

Under Bankman-Fried, FTX quickly grew to become the third largest exchange by volume. The stunning collapse of this nascent empire has sent tsunami-like waves through the cryptocurrency industry, which has seen a lot of 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 domino-like failures of Wall Street companies during the 2008 financial crisis, especially now that supposedly healthy companies like FTX are failing.

A venture capital fund wrote off over $200 million worth of investments in FTX. Cryptocurrency lender BlockFi suspended customer payouts on Friday after FTX filed for bankruptcy protection. Singapore-based exchange Crypto.com saw withdrawals spike this weekend for internal reasons, but some of the action could be attributed to FTX’s bare nerves.

Bankman-Fried and his company are under investigation by the Justice Department and the Securities and Exchange Commission. The investigation likely focuses on the possibility that the company may have used customer deposits to fund bets at Bankman-Frieds hedge fund Alameda Research, in violation of US securities laws.

“This is the direct result of a rogue player violating every single basic rule of fiscal responsibility,” said Patrick Hillman, chief strategy officer at Binance, FTX’s biggest competitor. Earlier last week, Binance seemed poised to step in to save FTX, but backed out of FTX after a review of its books.

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

“I’m concerned because retail investors suffer the most and because too many people still mistakenly associate Bitcoin with the fraudulent ‘crypto’ space,” said Cory Klippsten, CEO of Swan Bitcoin, who has spent months raising concerns about Bitcoin’s business model FTX expressed. Klippsten is publicly enthusiastic about Bitcoin but has long held deep skepticism about other parts of the crypto universe.

Bankman-Fried founded FTX in 2019 and grew rapidly – it was recently valued at $32 billion. The son of Stanford University professors who famously played the League of Legends video game during meetings, Bankman-Fried attracted investment from Silicon Valley’s highest echelons.

Sequoia Capital, which has invested in Apple, Cisco, Google, Airbnb and YouTube, described their meeting with Bankman-Fried as likely “talking to the world’s first trillionaire.” Sequoia enthusiastically invested in FTX after a Zoom meeting in 2021.

“I don’t know how I know, I just do it. SBF is a winner,” Sequoia Capital’s Adam Fisher wrote in a Bankman-Fried profile for the company, referring to Bankman-Fried by his popular online moniker. The article published in late September has been removed from Sequoia’s website.

Sequoia wrote down its $213 million investment to zero. A pension fund in Ontario, Canada also wrote off its investment to zero.

In a succinct statement, the Ontario Teachers’ Pension Fund said: “Obviously not all early-stage investments in this asset class are performing as expected.”

But until last week, Bankman-Fried was considered the white knight of the industry. Whenever the crypto industry has had one of its crises, Bankman-Fried was the person who likely flew in with a rescue plan. When online trading platform Robinhood ran into financial difficulties earlier this year — collateral damage from falling stock and crypto prices — Bankman-Fried stepped in to buy a stake in the company in a show of support.

When Bankman-Fried bought the assets of bankrupt crypto firm Voyager Digital for $1.4 billion this summer, there was a sense of relief for Voyager account holders, whose assets have been frozen since their own failure. That salvation is now in question.

As the king of cryptography, his influence began to seep into political and popular culture. FTX bought prominent sports sponsorships with Formula Racing and bought the naming rights to an arena in Miami. He pledged to give $1 billion to the Democrats this election cycle — his actual giving has been in the tens of millions — and prominent politicians like Bill Clinton have been invited to speak at FTX conferences. Soccer star Tom Brady invested in FTX.

Bankman-Fried had been the subject of some criticism prior to FTX’s collapse. While largely operating FTX outside of U.S. jurisdiction from its headquarters in the Bahamas, Bankman-Fried has increasingly argued for the need for more regulation of the cryptocurrency industry. Many crypto advocates oppose government oversight. Now, FTX’s collapse may have helped push for tighter regulation.

One of those critics was Binance founder and CEO Changpeng Zhao. The feud between the two billionaires spread to Twitter, where Zhao and Bankman-Fried combined had millions of followers. Zhao helped spur the withdrawals that doomed FTX when he said Binance would sell its stake in FTX’s crypto token FTT.

“Which doesn’t show up as (asterisk) (asterisk)… and it’s going to be Crypto’s fault (rather than some guy’s fault),” Zhao wrote on Twitter Saturday.

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

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