Sam Bankman-Fried’s Crypto Crash – WSJ

Mr. Bankman-Fried, FTX’s co-founder, was arrested Monday in the Bahamas and is expected to be extradited. SBF, as he is often called, has been on a media tour since FTX’s failure, and he portrays himself as a well-intentioned doofus savant who got in way over his head and—whoops—lost billions of dollars. The sloppiness of bookkeeping is true enough: Mr. Ray said invoices and expenses were communicated via Slack chats, and “they used QuickBooks.”

But Mr. Ray’s darker story is backed by allegations in the federal indictment, along with a civil complaint from the Securities and Exchange Commission. Prosecutors say Mr. Bankman-Fried “engaged in a scheme to defraud customers of FTX.com by misappropriating those customers’ deposits.” The money was diverted to Alameda Research, SBF’s crypto hedge fund. The indictment alleges he defrauded lenders as well, and prosecutors also threw in a campaign-finance violation for excessive political donations made “in the names of other persons.”

The SEC complaint is more voluble. “From the inception of FTX, Bankman-Fried diverted FTX customer funds to Alameda,” it says, to the point that “there was no meaningful distinction.” Then SBF “used Alameda as his personal piggy bank to buy luxury condominiums, support political campaigns, and make private investments.” He took enormous loans, “including two instances in which Bankman-Fried was both the borrower in his individual capacity and the lender in his capacity as CEO of Alameda.”

Mr. Bankman-Fried claimed Alameda had no special privileges on the FTX platform. Yet the SEC says his hedge fund was granted a “virtually unlimited” credit line and was exempt from the “automated risk mitigation protocols” that SBF trumpeted as ensuring FTX’s stability. The mixing of funds was obfuscated in internal accounts. The beginning of the end arrived when crypto prices fell and “many of Alameda’s lenders demanded repayment of loans.”

If the authorities are correct, this is a story as old as time that reoccurs every time there is a financial mania. The thoroughly modern twist in the SBF allegation was to convince investors to place money into a digital box, except with a hole in the bottom leading directly to a proprietary hedge fund. In such a case, the remedy is also old and familiar: Enforce the fraud laws already on the books.

House Democrats implied Tuesday that new government regulation is needed in response to FTX’s bankruptcy. It’s notable, however, that the exchange’s collapse and the entire cryptocurrency meltdown haven’t created contagion in the financial system.

One interesting question is whether this is due in part to the unregulated nature of crypto markets. Nothing screams caveat emptor like buying invented digital tokens that lack any history of stability. Perhaps a regulated crypto industry would look safer even if it isn’t.

Special mention to the Federal Reserve for keeping interest-rates too low for too long and inspiring the search for exotic returns. The apparent lack of due diligence by serious investors to FTX is another point of interest. Mr. Bankman-Fried’s case will be fascinating to watch.

His defense might be that he lacked fraudulent intent and was hoping that his crypto bets would save FTX in the end. Maybe so, but a jury will want to know why so much money went to personal loans and real estate. He will also have to defend why he didn’t tell investors about his co-mingling of their money with other assets to fund his ventures. Fraud is a crime, in real or crypto currency.