Crypto insiders paint a picture of a charismatic tech founder who became the darling of high-powered investors, even as he was brazen about his cryptocurrency exchange’s shaky business model and kept the books closed to all but a few confidants.
Well before the catastrophic collapse of his FTX cryptocurrency exchange, Sam Bankman-Fried told everyone what he was doing. He told them about his appetite for risk. He told them some crypto exchanges were “secretly insolvent.” Last year, when declaring his net worth to be an estimated $10 billion, he said it was in “mostly illiquid” assets. Even when Bloomberg’s Matt Levine suggested he was in the “Ponzi business” during an interview in April, Bankman-Fried didn’t disagree. “I think that’s a pretty reasonable response,” he said.
That he was headed for calamity was inevitable. But with the ecosystem of hype and awe built around him, few heard what he was really saying. Employees, customers, and investors alike all saw the dollar signs being minted from his crypto market makers, including FTX, leaving few reasons to believe what Bankman-Fried had been saying all along. Prominent FTX backer Sequoia Capital was also caught in the gravitational pull, publishing a now-deleted 14,000 word paean to Bankman-Fried that likened him to fictional protagonist Jay Gatsby. (“Is crypto the new jazz?” the author wondered, apparently not considering that the titular Gatsby earned his fortune through crime.) This week, Sequoia wrote down its $213 million FTX investment to $0.
“Sam Bankman-Fried was the devil in nerd’s clothes,” said a BlockFi director whose future is now uncertain thanks to a now defunct deal with FTX that could have soothed the crypto lender’s liquidity woes after filing for bankruptcy itself in October.
After a week that saw FTX admitting to a liquidity crunch on Monday and filing for Chapter 11 bankruptcy protection by Friday, the unfolding catastrophe has sent a tsunami barreling through the crypto market, triggering the collapse of more than 100 affiliated companies, lending platforms and exchanges once seen as unshakeable infrastructure providers to the industry.
“Sam ran the shop, Sam ran everything, we all trusted him, and believed him. It was a dictatorship, in a good way, a benevolent dictatorship.”
This is not how it was supposed to go, according to the legend that had been built around Bankman-Fried by legions of crypto fans–including big-name Silicon Valley venture capitalists, who heaped praise on him even as they failed to make sure his business was legit. According to the myth, before the age of thirty, Bankman-Fried made himself one of the world’s richest people by building the second largest cryptocurrency exchange, FTX, as well as its American arm, FTX.US, while simultaneously running Alameda Research, his ostensibly lucrative trading firm.
His mystique was bolstered by his embrace of philosophies like effective altruism, which added a moral heft to his ruthless money making. The rare facade of a do-gooder billionaire was maintained by lavish spending on marketing with professional sports teams and donations to charities—under the guise of effective altruism—and an unusually warm embrace of Washington lawmakers, with large sums of political donations and calls for more regulation of an industry he helped build. Along the way, he raised more than $2 billion from investors like Sequoia, NEA and Lightspeed Venture Partners–several of whom are now carving nine-figure losses into their balance sheets.
But behind the curtain was a man who oversaw a workforce that believed (or at least pretended to) in Bankman-Fried’s mission to pile up money in order to give it away, but knew little of the high-level machinations that led to the downfall of his empire this week. While the crypto leader told Congress that the industry needed “disclosure and transparency,” his secrets were held closely within a circle of friends who reportedly partied together and dated one another–leaving even the company’s high-level executives in the dark on FTX’s financials.
In the meantime, FTX employees and customers reeling from the exchange’s abrupt and utter collapse are demanding answers. “All of our life’s work has evaporated,” one current FTX employee told Forbes. “A lot of people are trying to understand how this happened.”
Bankman-Fried, FTX, and Alameda Research did not respond to requests for comment.
This article was first published on forbes.com