How did Sam Bankman-Fried go from hero of the cryptocurrency revolution – the super-wealthy wunderkind who’d pledged to donate billions to good causes – to a disgraced prisoner regarded as the millennial Bernie Madoff?
The devoted do-gooder
The son of eminent professors at the super-prestigious Stanford Law School, Sam Bankman-Fried was raised in a rarefied, academic atmosphere. Lofty philosophical concepts were the stuff of everyday family chat, with the household being particularly interested in utilitarianism – an ethical approach to life and work which emphasises doing the most amount of good for the most amount of people.
As his mother later said in an interview, the young Sam Bankman-Fried was an uncompromising, ‘take-no-prisoners’ utilitarian who was determined to help improve society. This urge only intensified while he studied at the Massachusetts Institute of Technology, where he launched a blog which discussed utilitarian theories. His online essays revealed his restless desire to slay sacred cows and question everything (one article even declared that Shakespeare was overrated, describing Romeo and Juliet as ‘absurd’ and ‘flimsy’).
Bankman-Fried refined his ambitions after discovering ‘Effective Altruism’, a social movement which advocates taking practical measures to benefit society – for example, by deliberately embarking on a highly-paid career path so you can give away more money to charity. According to Bankman-Fried, this inspired him to jettison any thoughts of getting into academia and become a do-gooding capitalist instead.
The rise of the crypto king
After graduating, Bankman-Fried worked at one of New York’s top financial firms, honing his skills as a big-money trader. Then, in 2017, he founded Alameda Research, a firm specialising in trading cryptocurrencies in different markets around the world.
Alameda was ostensibly driven by Effective Altruism (EA) principles, with many of the early recruits being fellow EA advocates who pledged to donate substantial chunks of their salaries to good causes. A few years later, Bankman-Fried founded a crypto exchange platform called FTX, which by 2021 had a million registered users and was valued at an eye-watering $18 billion.
In almost no time at all, Bankman-Fried had established himself as the latest billionaire whizz-kid of the digital age, although his apparent dedication to altruism gave him an aura of virtue which the likes of Jeff Bezos and Mark Zuckerberg notably lacked.
He was feted by the media and praised by celebrities and world leaders, sharing stages with the likes of Tony Blair and Bill Clinton. Meanwhile, FTX was fast becoming known even to those who had barely heard of Bitcoin, with a major basketball stadium in Florida being renamed FTX Arena under a multi-million-dollar deal.
The bombshell
Bankman-Fried had the world at his feet – until the cryptocurrency news site CoinDesk published an article in November 2022 which caused his business empire to come crashing down around him.
Delving into Alameda’s balance sheet, it revealed that a substantial amount of the trading firm’s assets consisted of FTT – a cryptocurrency token issued by Bankman-Fried’s other company, FTX. As the CoinDesk article pointed out, there was ‘nothing per se untoward or wrong about that’, but it did show that Alameda was resting ‘on a foundation largely made up of a coin that a sister company invented, not an independent asset like a fiat currency or another crypto.’
The revelation immediately spooked industry bigwigs – notably, the CEO of a rival crypto exchange, who tweeted his concerns about the news and decided to sell off hundreds of millions of dollars worth of FTT tokens. This caused the price of FTT to plummet, while those who had money invested in the FTX exchange panicked and tried to withdraw their assets.
More than $6 billion was taken out in 72 hours, but many users were unable to access their funds before the site collapsed. Wealthy investors lost millions, and numerous ordinary people also saw their life savings vanish into the digital abyss. Just a few days after this apocalyptic turn of events, both FTX and Alameda filed for bankruptcy.
The ugly truth
The debacle caused authorities to scrutinise the financial dealings of both Alameda and FTX. In January 2023, Sam Bankman-Fried found himself in the dock, pleading not guilty to a succession of charges relating to what one federal prosecutor called ‘a fraud of epic proportions’.
The former face of ethical capitalism was accused of siphoning billions of dollars from FTX (that is to say, money entrusted to FTX by its huge user base) into Alameda, in order to plug gaps in the trading firm’s finances, make huge political donations and investments, and line his own pockets.
During his trial, prosecutors alleged that almost everything about Bankman-Fried had been calculated to lull investors into a false sense of security, from his lofty talk of effective altruism to the unruly hair and humble clothes which gave him the air of a loveable eccentric.
Former associates from Alameda and FTX, who had themselves pleaded guilty to fraud, testified against Bankman-Fried, recounting how he’d splurged vast amounts of misappropriated funds on everything from lavish real estate to celebrity endorsement deals for FTX. Meanwhile, Bankman-Fried’s defence team sought to portray him as an ‘awkward high school math nerd’ who never purposefully defrauded anyone, and whose ‘poor risk management’ was the real issue at hand.
The jury was not won over by this argument, and Bankman-Fried’s disgrace was complete when he was found guilty and handed a 25-year jail sentence. The man once hailed as the king of crypto now has the far more dubious distinction of being ranked alongside Bernie Madoff as one of the biggest fraudsters in American history.
