The World Series of crypto rackets

MLB umpire Hunter Wendelstedt with the FTX logo. (Photo by Mark Cunningham/MLB Photos via Getty Images)

Earlier this month, as the Houston Astros faced the Philadelphia Phillies in the World Series, the home plate umpire presided over the game with the FTX logo emblazoned across his chest. In July 2021, FTX, a cryptocurrency exchange founded by Sam Bankman-Fried, paid Major League Baseball untold millions to be featured on the uniform of every umpire. FTX was the "first-ever umpire uniform patch partner" — a placement that communicates authority, fairness, and stability. 

Less than a week after the Astros won the World Series in six games, FTX declared bankruptcy. Bankman-Fried's net worth plummeted from $32 billion to essentially zero. 

What happened? Publicly, FTX marketed itself as an exchange. Customers deposited funds and were able to use the FTX platform to buy cryptocurrencies. FTX was supposed to make its money on the fees it collects when customers make a trade. As the value of bitcoin and other digital currencies exploded in 2020 and 2021, this was a profitable business. Many people wanted to convert their dollars (or other traditional currency) to crypto and ride the wave. And FTX was there to make it easy and collect a fee. 

But for Bankman-Fried, also known as SBF, this wasn't enough. According to reports, Bankman-Fried "lent billions of dollars worth of customer assets to fund risky bets by its affiliated trading firm." This happened even though FTX's terms of service prohibit the lending of customer funds. Bankman-Fried was able to get away with it while the value of crypto was rising rapidly, and most of the bets by his trading firm, Alameda Research, were successful. But then the crypto market cooled, and word about the entanglement between FTX and Alameda leaked. This caused many of FTX's customers to pull their money all at once. FTX quickly ran out of money and halted withdrawals. Alameda Research reportedly "owes FTX about $10 billion," more than half of the customer assets that FTX was supposed to be holding. 

Bankman-Fried's explanations for the collapse, thus far, have been lacking. He told the Financial Times that he “accidentally” lent Alameda Research $8 billion in client funds. Meanwhile, FTX owes customers billions but has few assets with any real value. According to a spreadsheet obtained by the Financial Times, FTX's "biggest asset as of Thursday was $2.2 [billion] worth of a cryptocurrency called Serum." Serum is a cryptocurrency created in 2020 by Bankman-Fried. The total value of all Serum in existence, as of November 13, 2022, is just $66 million. 

The collapse of FTX is not about the failure of one man. Rather, Bankman-Fried had a throng of enablers.

Buying a banana from a crypto app

Bankman-Fried raised more than $2 billion from some of the top venture capitalists in the world, including Sequoia Capital, SoftBank, BlackRock, Thoma Bravo, and Altimeter Capital. None of these firms required Bankman-Fried to meet basic standards of corporate governance. 

None of the venture capital firms conditioned their investment with a seat on the board of directors to independently oversee its activities. Moreover, these firms didn't even require Bankman-Fried to create a real board of directors. FTX's board, until its bankruptcy filing, consisted of Bankman-Fried, Jonathan Cheesman (who was an FTX executive until September), and Arthur Thomas (a lawyer based in Antigua who specializes in online gaming). The absence of a real board of directors meant no one outside of the company had visibility into the company's operations. 

What were these wealthy investors thinking? Sequoia Capital published a lengthy profile of FTX and Bankman-Fried — and its decision to invest — on September 22, 2022. Sequoia Capital recognized that providing FTX with its money would provide FTX with credibility in the marketplace. It wasn't just providing cash. It was sending a signal to the world that FTX is for real and a safe place to invest:

Alameda was not immune to the exchange-level shenanigans that gave crypto as a whole its sleazy reputation. But FTX had an ambition to change that. It was built to be the exchange traders could count on. SBF needed to get the word out. He wanted FTX to be known as the respectable face of crypto. This required ad campaigns, sponsorship deals, a charitable wing—and a war chest to pay for it all.

…FTX did need money, after all. And it needed that money from credible sources so it could continue to distinguish itself from the bottom-feeders who came to crypto to fleece the suckers. 

In a pitch meeting, Bankman-Fried said his ambition was to create a "super app" where you could trade crypto but also buy a banana. It's unclear why anyone would want to buy a banana from the same app where they trade speculative digital currency. But Sequoia was sold:

Suddenly, the chat window on Sequoia’s side of the Zoom lights up with partners freaking out.

“I LOVE THIS FOUNDER,” typed one partner.

“I am a 10 out of 10,” pinged another. 

“YES!!!” exclaimed a third.

What Sequoia was reacting to was the scale of SBF’s vision. 

Bankman-Fried raised $1 billion in that round, including $150 million from Sequoia Capital. Now Sequoia Capital has removed the profile from its website, and written down its investment to zero. In a note to investors, Sequoia Capital said that its fund that invested in FTX remained in "good shape." According to Sequoia, investing $150 million in a company that goes belly up after reportedly misappropriating customer funds is all part of the process. "We are in the business of taking risk," Sequoia Capital wrote. "Some investments will surprise to the upside, and some will surprise to the downside."

Sequoia Capital is right that its business, and its investors, will be fine. The same cannot be said for the retail investors who were convinced to entrust their assets with FTX based on the marketing campaigns financed with cash from Sequoia Capital and other venture capital firms. 

"I'm not an expert, and I don't need to be"

Bankman-Fried spent lavishly on celebrity endorsements. One of its TV ads starred Stephen Curry and was narrated by Shaquille O'Neal. In the ad, Shaq cheekily claims that Curry is the "world's leading expert on cryptocurrency." Curry repeatedly denies it. "I'm not an expert, and I don't need to be," Curry says, looking into the camera. "With FTX I have everything I need to buy, sell, and trade cryptos safely." 

In another ad, Tom Brady and Gisele Bündchen call everyday people, including their plumber, and convince them to invest using FTX.

FTX also struck a deal with Shark Tank's Kevin O'Leary, who tweeted that FTX met his "own rigorous standards of compliance." 

The through-line of all these ads is that FTX was a reputable company and a safe place for investing in crypto. They convinced retail investors of this by aligning themselves with celebrities that are respected and admired. But none of the endorsers (or anyone else outside the company)  had enough information to know whether FTX was safe. 

Like Sequoia Capital, FTX's endorsers will all be fine following the exchange's collapse. Some retail investors, meanwhile, have lost their life savings.

How Bankman-Fried bought DC

In addition to celebrity endorsements, Bankman-Fried bought considerable influence in Washington. At one point, he promised to spend up to $1 billion to help Democrats win elections in 2022 and 2024. He ended up only spending about $40 million in the midterms, but that still made him the largest donor on the Democratic side. 

Bankman-Fried claimed his interest was in "pandemic preparedness," but his Super PAC also donated to committees supporting right-wing politicians that are friendly to crypto — including Senator-elect Katie Britt (R-AL). Bankman-Fried spent $11 million to support the primary campaign of Oregon Congressional candidate Carrick Flynn (D), who was defeated by 18 points.

There are now serious questions about the source of the money Bankman-Fried used to make these donations. Major recipients of Bankman-Fried's political donations, including the DNC, DCCC, and DSCC, will likely face pressure to return or donate those funds.

FTX also hired several former commissioners of the Commodities and Future Trading Commission (CFTC), Brankman-Fried's preferred regulator for the industry. The CFTC is a small and underfunded agency that primarily deals with monitoring "futures contracts in basic goods such as crude oil, corn, and pork." Dennis Kelleher, the president of the financial reform group Better Markets, says that handing over crypto regulation to the CFTC would be a disaster. The CFTC, Kelleher said, "cannot fulfill their current responsibilities" and "will be beyond hopeless if they are also given responsibility for a vast, growing, and technically complex industry like crypto."

Nevertheless, Bankman-Fried was able to find members of Congress willing to do his bidding. In June, Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) introduced legislation giving the CFTC primary regulatory authority over most cryptocurrencies. 

Bankman-Fried and others in the crypto industry were attempting to avoid regulation by the more powerful and better-resourced Securities and Exchange Commission (SEC). Now, the SEC is reportedly "investigating FTX over its crypto lending activities and management of customer funds."