Special to L. Neil Smith’s The Libertarian Enterprise

Recently the digital currency exchange FTX filed for bankruptcy. There were about 130 related companies that all filed for bankruptcy at the same time, including a Delaware corporation and a Bahamas corporation. About a million customers were harmed, including people I know. As well, the assets of FTX and related companies appear to have been used in ways that are harmful to the shareholders, creditors, and customers of these companies. One of the chief beneficiaries of the improper conveyance of assets appears to be the founder of the company, Sam Bankman-Fried (Sam).

Sam was recently arrested and was in custody in the Bahamas where he had been vacationing after being ousted as CEO following the bankruptcy of FTX. After a short time in custody in the Bahamas, Sam was extradited to the United States. He did not resist extradition. A court in New York reviewed his case for bail. Then he was released on his own recognizance.

More recently it develops that the judge in the case agreed to the $250 million bond secured by the $8 million house of Sam's parents with the stipulation that there be two co-guarantors. They are now planning to post their guarantees with the court (2023 01 05) but have asked the court that they not be named in any published court materials. So, nobody else will know if they are capable of the guarantee, nor who is backing Sam's not guilty plea.

Curiously, the day after his return to the basement of his parents’ home, or wherever they have him hanging out, the assets tracked from the Alameda wallets were again on the move.

Just as curious, Sam was expected to testify before congress, then was arrested, then was extradited, then was released to the custody of his parents, and their home near Stanford is now cordoned off by private security. But he’s got access to computers and the Internet, so additional crimes may be happening. Why?

Well, for one thing, Sam has claimed to have made substantial donations to conservative candidates in some carefully (shrewdly) secretive ways, and has made open donations of tens of millions of dollars to Democrat candidates. One report has him making $70 million of donations in about 18 months. There is also evidence that Sam has sent and received money to and from the Ukraine government, presumably for the purpose of laundering the funds and hiding the source of them. Given the recent festivities in congress celebrating the distribution of tens of billions more to the Ukraine government, complete with flying that country’s flag in the USA capitol, Sam may rise again as some sort of connected and protected scion of big corruption. Sam is popular with some very powerful people.

Who is Sam?

Sam Bankman-Fried is the son of university professors Joseph Bankman and Barbara Fried. He was born in 1992 making him 30 years old. His parents teach at Stanford University’s Law School. His aunt is dean of Columbia University’s school of public health. His brother Gabriel is formerly a Wall Street trader and former director of Guarding Against Pandemics and its political action committee. Sam has a 2014 bachelor of science in physics, minor in mathematics, from Massachusetts Institute of Technology.

Sam got involved in finance as a summer intern in 2013 working for Jane Street Capital. In 2014 he returned to work there. In 2017 he left that company and began work with Centre for Effective Altruism in Berkeley. Also in 2017 Sam founded Alameda Research as a quantitative trading firm. Late in 2018 he moved to Hong Kong for a time. One of his clever ideas was to set up arbitrage between the bitcoin available elsewhere and that sold in Japan at a substantially higher price.

FTX

In 2019 Sam started FTX, an online exchange service providing conversion services. So, you could place fiat money with FTX and use that money to buy Bitcoin, Litecoin, or other crypto-currencies. You could use the cryptocurrencies in your FTX wallet to buy other cryptocurrencies. In theory, for a time, you could cash out of your FTX wallet to put your Bitcoin into your own wallet, or to put your cryptocurrencies into fiat form and have the funds moved to your bank account.

Throughout this essay and others, I will use “fiat” to refer to government issued currencies that are not redeemable for gold or silver. Pretty much all the currencies listed on Xe.com that involve a national government or a super-national group like the European Central bank are fiat currencies. Fiat is simply a Latin word meaning “let there be” and is in the Latin bible as the first word from God, “Fiat lux” or “let there be light.” Fiat currencies are simply declared to have value, usually by being accepted by the government for the payment of taxes. Doing so creates some demand for them, and so businesses often accept them in exchange for goods and services. An old friend, the late Clyde Harrison, once said, “Fiat currencies don’t float. They sink at different rates.”

Two other prominent officers of FTX were Gary Wang and Caroline Ellison. A bit more about them below.

Late in 2019 Changpeng Zhao of Binance bought a 20% state in FTX for $100 million. So, at that point, at least to Zhao and Binance, FTX was worth $500 million. (A thing is worth, to the buyer, what it sells for.) Binance is a competitor in the digital currencies exchange business. Zhao probably made the investment in order to be positioned to gain favor if FTX were one of the chosen few exchanges allowed by government regulators.

Zhao, also known widely as CZ, was born in China but is a Canadian citizen. He was moved by his family at age 12 from Jiangsu province to Vancouver, British Columbia. Zhao graduated from McGill University in Montreal.

In July 2021, FTX raised $900 million from over 60 investors, including Softbank, Sequoia Capital, and other companies. At that point, the value of their investments was 4.74% of $19 billion.

Sam bought out Zhao's stake for approximately $2 billion in September 2021. It is likely that Zhao’s ownership was diluted by stock sales, so by the time of the buy-out it was presumably less than 20% of the company. Nevertheless, this corroborates the order of magnitude of value of FTX in 2021.

Peak valuation for FTX came in early 2022 when the company announced a venture fund and raised $400 million at a $32 billion value.

Perhaps out of hubris at about this time, Alameda Research and FTX seem to have begun placing bets against a somewhat fragile “stable” coin system called Terra and Luna. More about that below. The collapse of Terra/Luna dramatically reduced the value of Bitcoin and other crypto-currencies some of which were fire sold to try to keep Terra/Luna afloat. There’s a sort of “hoist by his own petard” aspect to this matter, since it would result in the dramatic downward valuation of FTX’s purported assets.

Over the Summer of 2022, the president of FTX, Brett Harrison, posted a tweet on Twitter. In it, he claimed that employer deposits to FTX account holder accounts were held in FDIC insured bank accounts in the account holder’s names. The FDIC established that was false, and issued a cease and desist order. The news was reported in the Financial Times and other publications, bringing some attention to the fraudulent disregard of the truth at FTX.

Who else is involved?

Caroline Ellison is the daughter of university professors who teach economics at MIT. She met Sam during his time at Jane Street Capital, where she also worked. There is information that Sam and Ellison were in a personal relationship as well. In early November 2022, she responded to concerns from the crypto industry news site Coindesk that there were not enough assets in Alameda Research by saying that $10 billion in additional assets were controlled by Alameda but were not on their published balance sheet. This admission might represent criminal conduct, because published balance sheets should not be in error by as much as $10 billion. A few days later, Ellison said that Alameda had been provided funds by FTX that belonged to FTX customers. FTX doing so would be provably a violation of its own terms of service and of various laws in sundry countries.

More recently, Ellison has apparently been offered some sort of plea deal. She has pleaded guilty apparently in exchange for testimony regarding FTX, Alameda, and Sam.

Gary Wang is a former Google employee. He met Sam at Mathcamp. They are both members of the MIT co-ed fraternity Epsilon Theta. Sam and Wang co-founded FTX. In December 2022, Wang pleaded guilty to various criminal charges, presumably in exchange for testimony regarding FTX, Alameda, and Sam.

FTX's chief regulatory officer was Daniel Friedburg. According to Matthew Crawford, Friedburg was “the lawyer/fixer from the Ultimate Bet and Absolute Poker cheating scandals (secret tapes here)”. Owing in part to this choice in regulatory officer and other factors, the 2ndsmarestguyintheworld blog suggests that illegal activities might have been planned from the beginning or near the beginning of the FTX story.

Gary Gensler is another interesting character in this story because he is the head of the USA securities and exchange commission. He appears to have been advising FTX. One report on his Zoom meeting with Sam suggests that Gensler may have been prepared to make an exclusive offer to FTX to have SEC approval for a crypto-currency exchange. The ethics of this meeting by itself are questionable given Gensler’s position as chair of the SEC. The purported offer of a special carve out for FTX would be extraordinarily illicit. Corrupt transactions are reported with the Biden administration so this one would not be the first.

What assets are currently in the control of SBF?

Sam probably still has $900 million from the billion dollars lent by Alameda. It is not clear, of course, what assets are under his personal control. He made public statements in the last two months to the effect that he has $100,000 in the bank, but which bank? And what assets does he have in other financial accounts? Given his current reputation for false dealings, including improperly mixing funds from different company accounts, lending FTX customer funds to Alameda for trading, and failing to make good on the obligations of FTX and other companies, it would be an error to trust his claim that he has only $100,000 in the bank as an indication of the funds under his direct control.

Sam may have functional control of Paper Bird Inc. which borrowed $2.3 billion from Alameda Research according to bankruptcy documents. It is not clear if Paper Bird Inc. is included in the bankruptcy proceedings in either the United States or Bahamas. You can read a bit about them at the Corporations filing site here. It is a part of the FTX grouping of corporations, identified here. Interesting to find a Uganda corporation among them.

After the bankruptcy was declared, according to one report, over $500 million in assets of Alameda Research and of FTX were supposedly stolen using a back door. Someone who would have had insight into control of those assets and who may have established back door access to them is: Sam.

Also of interest is a very recent series of transactions in which wallets apparently under Sam’s control were used to cash out $687,000 in the Seychelles. That would violate a court order regarding his bail conditions that he is not to spend more than $1,000 without the court’s permission.

How did Sam attack Terra/Luna?

For reasons that are not completely clear, but probably seeking to materially benefit from the destabilization of the crypto-currency industry, FTX and Alameda repeatedly pushed the Terra/Luna eco-system out of par with the USA dollar. Doing so was evidently malicious and purposeful, even though the reasons are not entirely clear.

Here it would probably be a good thing to explain what a stable coin is. Bitcoin has been very important since the genesis block was mined in 2009. Its price has gone up over $60,000 per bitcoin and has dropped dramatically at various times. Currently the price is about $16,500. So the purpose of a stable coin is to be stable in terms of some other currency, such as the US dollar. A stable coin can also be pegged to the price of a commodity, such as an ounce of gold. In theory a stable coin can be kept stable by being backed by assets, including dollars in bank accounts, certificates of deposit, or other cryptocurrencies such as Bitcoin.

In practice, stable coins are rarely stable. Some examples of stable coins are True USD, Tether USD, and USD Coin. Terra USD was not backed by assets but was intricately tied to another related currency, Terra Luna. In May 2022 the peg to the US dollar failed and Terra USD plunged to about 10 cents, whereas Terra Luna was wiped out. There is widespread conjecture that FTX and Alameda had acted to destabilize these currencies. Among other results, about $45 billion of market cap was wiped out of the Terra/Luna system.

Possibly if their team had been able to focus on their trading goals the might have been able to systematically profit from the changes they were causing, but it seems evident they routinely failed to do so. It might have been a deliberate effort to wreak havoc in the crypto space with the goal of pushing for regulation and eviscerating free market money. Again. Still.

Thing is, it was the instability in the industry that was caused by the collapse of Terra/Luna that led to the collapse of asset values which brought into question how much FTT (the in-house currency of FTX) was really worth. If you didn’t plan to have FTX disappear in an explosive bankruptcy, why destabilize the industry?

At best, there is tremendous irony in the possibility that by aggressively speculating in the Terra/Luna exchange space, FTX and Alameda brought about their own downfall.

One aspect of the difficulties in understanding how all the actions of Sam, FTX, and Alameda came about is the significant evidence that there were mind altering drugs involved. Tweets by Sam and others reflect interest in stimulants. One report confirms that Sam wore a patch for an anti-depressant called EMSAM. That same report confirms that Sam used Adderall every four hours. Adderall contains dextroamphetamine and amphetamine. It is chemically similar to some forms of the street drug meth.

What is it all about?

One of the difficulties inherent in the FTX and Alameda mess is establishing beneficial ownership and operational control over the assets involved. The fact that wallet addresses Sam has publicly tweeted about track to assets currently being moved is an indication that he has control over those assets. Given Sam’s parents having quite a bit of insight into the topic of compliance with government regulatory regimes, it seems likely that the obfuscation of ownership and control has been deliberate.

Sam may become the poster child for “why the United States government must regulate these out of control crypto-currencies” or ban some of them and promote a small number of players. So, in addition to funding the political campaigns of various prominent people, and possibly laundering money through and for Ukraine, Sam may also have been part of a long term plan to discredit the alternative finance industry. Given the importance of financial autonomy, that’s one of the sad parts of this story.

A recent report reveals that Sam has contested ownership, through a company that was kept out of the bankruptcy filings so far, of 56.3 million shares of Robinhood (the stock trading app). He is trying to make use of these shares to pay his legal bills. As reported by ZeroHedge, the shares are owned by Emergent Fidelity Technology Ltd which in turn is 90% owned by Sam. His lawyers are claiming that prior to conviction it is still a matter of conjecture whether every financial asset Sam has ever touched involved fraud. However, it is also clear that Sam and his associate Gary Wang borrowed $546 million from Alameda Research to buy the shares for Emergent. They could not have done that without being insiders to the Alameda team, and there is extensive evidence that FTX customer funds were improperly transferred to Alameda.

Elizabeth Warren's office is interested in the case, as a prelude to legislation about crypto industry activities.

I was able to confirm that Paper Bird is among the companies named in the bankruptcy filing, which is a good thing for FTX customers.

Take Aways

How should you react to the situation? I would suggest being cautious of stable coins, especially ones that are not provably backed by audited assets.

You might also consider the difficulties inherent in cryptocurrencies that rely upon proof of stake as opposed to proof of work. Ethereum is one of the largest and most valuable proof of stake coins. The Ethereum virtual machine uses the programming language to make it possible to post smart contracts on the Ethereum blockchain. It is the model for many similar “EVM” or Ethereum virtual machine compatible coins. It is possible that all these proof of stake coins will work out, but since you are unlikely to have a very large stake in any of them, you should be cautious.

The principle of the market place, especially where novelty has limited any sort of clarity, is caveat omni. That would be Latin for “let everyone beware.” You’ve probably seen caveat emptor, meaning let the buyer beware. But sellers also have to beware.

Will regulations solve any of these problems? Briefly, no. Regulations are likely to be imposed and are likely to pick winners and losers. Regulations do not confer honesty to any of the regulated players.

Should you abandon Bitcoin? I don’t think so. Bitcoin is based on a very stable and well-understood protocol, is mathematically valid, involves proof of work so there is no particular group of people in control, and has the decentralized properties that one wants in an independent and auditable currency.

What about other crypto industry projects? These are much harder to evaluate. Some people seem to believe that all crypto other than Bitcoin is terrible, evil, untrustworthy, and anyone advocating for any development of any application, any cryptocurrency, or any transactions that are not directly performed on the Bitcoin blockchain are evil, must be federal agents (“feds”), or must be intended to bring about regulatory opposition to Bitcoin.

In one of the more bizarre recent exchanges I’ve had on Twitter, because I happen to know a great many people involved in projects like NEAR, various exchanges like Kraken, and other cryptocurrency industry activities, and because I would not say that only Bitcoin is okay, I was accused of being a “fed.” Which accusation I find hilarious. One would think that my lack of consistent financial success would be a strong indication that I’m not one of the corrupt decadent people in the national government, but perhaps such critical thinking is not available to everyone.

I do think there are some projects that are well conceived and operated by good people. I happen to know personally Arto Bendiken and worked with him on J. Neil Schulman’s Alongside Night film and book project back in 2009. Arto and cypherpunk legend Frank Braun are involved in the NEAR project. I think well of them.

I also think that Bitcoin, Litecoin, and other proof of work currencies, because they are decentralized and automated, are not dependent on the vicissitudes of individual behavior. People can use them reliably because they are not under the control of any one person nor of any group of people.

Final take away: be cautious. Think through any purchase of anything. Don’t put all your eggs in one basket. And do get to know the people involved in whatever you’re doing. If there is a way for some individual to screw things up for you, then you have to be sure not to trust them with more value than you can afford to lose.

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In addition to the links provided in-line, there was information found here:

https://en.wikipedia.org/wiki/Caroline_Ellison

https://en.wikipedia.org/wiki/FTX

https://en.wikipedia.org/wiki/Alameda_Research

https://en.wikipedia.org/wiki/Sam_Bankman-Fried

https://en.wikipedia.org/wiki/Changpeng_Zhao

https://www.innercitypress.com/sdny12cryptoftxsbficp010323.html

as well as at various Twitter profiles, substacks, blogs, and other online sources.

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Jim Davidson is the author of The Atlantis Papers, Being Sovereign, Being Libertarian, Space Scouts field manual parody, Freedom Decentral: Free the Slaves, several hundred essays, hundreds of business plans and white papers, some 164,000 tweets, and various posts at other social media sites. He’s been a published writer since 1977. He currently owns and operates After Dark Publications, founded 1994, and works with Courtney Smith on various finance related publications. You can keep up with him at L5News.substack.com if you wish.