How FTX's Sam Bankman-Fried went from crypto kingpin to convicted fraudster

Two years ago, Sam Bankman Fried was a 30-year-old billionaire living in a $35 million Bahamas penthouse, partying with his friends while running one of the world's most valuable cryptocurrency companies.

Today, he is a 32-year-old inmate at the Metropolitan Detention Center in Brooklyn, waiting for a judge to tell him how long he will spend behind bars for masterminding “one of the largest financial frauds in American history,” as he puts it. American lawyer Damian Williams.

Freed Bankman, founder and former CEO of failed cryptocurrency exchange FTX, will head to federal court in midtown Manhattan on Thursday, where U.S. District Judge Lewis Kaplan will sentence him. The prosecution recommended a prison sentence of between 40 and 50 years.

It took jurors only about three hours of deliberation in November to convict Bankman-Fried of all seven criminal charges against him. For a high-profile trial that lasted a month and involved nearly 20 witnesses and hundreds of pieces of evidence, experts at the time said they had never seen such a quick resolution. Bankman-Fried plans to appeal his conviction and sentence.

It has been a sharp and rapid fall for Bankman Fried, who was once viewed as a titan of the industry and whose net worth – on paper – was about $26 billion.

I started with a kimchi swap.

In 2017, Bankman Fried, a quantitative trader at Jane Street, noticed something funny when he looked at Bitcoin prices on CoinMarketCap.com. Instead of a uniform price across exchanges, Bankman Fried would sometimes see a 60% difference in the value of the cryptocurrency. He said his immediate instinct was to get into an arbitrage trade — buying bitcoin on one exchange and selling it again on another, and pocketing the difference.

“This is the lowest hanging fruit,” Bankman-Fried told CNBC in September 2022.

The arbitrage opportunity was particularly compelling in South Korea, where the exchange-listed price of Bitcoin was much higher than in other countries. It was called “Kimchi Premium,” a reference to the traditional Korean side dish of salted and fermented cabbage.

After a month of getting personally involved in the market, Bankman-Fried launched Alameda Research, named after the California county that housed his first office. Bankman-Fried told CNBC that the company sometimes made as much as $1 million a day trading bitcoin.

Alameda's success spurred the launch of FTX. In April 2019, Bankman-Fried co-founded FTX.com, an international cryptocurrency exchange that provides clients with innovative trading features, a responsive platform, and a reliable experience. FTX's success led to the creation of a $2 billion investment fund that has seeded other cryptocurrency companies.

Soon the FTX logo adorned everything from Formula 1 race cars to a basketball arena in Miami. Bankman Fried talked about one day buying Goldman Sachs, and he has become a fixture in Washington as a major donor to the Democratic Party.

Then the market turned.

The so-called crypto winter of 2022 has decimated hedge funds and lenders across the crypto world. Bankman Fried bragged that he and his company were immune. Behind the scenes, Alameda has been borrowing money to invest in failed digital asset companies to keep the industry afloat.

May 2022 brought the collapse of the Luna stablecoin, creating a domino effect that sent cryptocurrency prices plummeting, devastating other lenders.

Alameda had borrowed from banks like Voyager Digital and BlockFi, and both ended up bankrupt. Alameda secured its loans using FTT tokens, minted by FTX. The Bankman Fried empire controlled the vast majority of available currency, with only a small amount of financial transaction tax actually in circulation at any given time.

The Alameda company priced its entire collection of financial transaction tax at the prevailing market rate despite it being an almost illiquid asset. The fund used the same methodology with other coins as well, including Solana and Serum (a token created and promoted by FTX and Alameda), and used them to guarantee billions of dollars in loans. Industry insiders called the tokens “SAM coins.”

When faced with margin calls due to falling rates, Bankman-Fried took FTX customer deposits to the tune of billions of dollars by mid-2022. According to the company's bankruptcy filings, it had almost nothing in terms of record keeping.

On November 2, 2022, cryptocurrency trading site CoinDesk published details of Alameda's balance sheet, which showed assets worth $14.6 billion. Over $7 billion of these assets were either FTT tokens or Bankman-Fried backed coins like Solana or Serum. Another $2 billion was locked up in equity investments.

Investors began withdrawing their holdings from FTX, creating a threat to withdraw funds from the bank by default. Both Alameda and FTX are now facing a liquidity crisis.

On November 6, four days after the CoinDesk article, Binance founder Changpeng Zhao brought down the hammer. Binance was the first outside investor in FTX in 2019. Two years later, FTX bought back its stake with a mix of FTT and other coins, according to Zhao.

Zhao wrote in a tweet that due to “recent discoveries that have emerged [sic] “For the record, we have decided to liquidate any FTT remaining on our books.” FTX executives scrambled to contain the damage, and Alameda traders were able to stave off outflows for a few days.

On November 7, Bankman-Fried tried to sound confident, tweeting: “FTX is OK. Assets are OK.” The post has been deleted.

Internal discussions were different. Bankman-Fried and other executives admitted to each other that “FTX's customer funds were irretrievably lost because they were seized by Alameda Corporation.” By November 8, the customer deficit had risen to $8 billion. Bankman Fried has been courting outside investors for a rescue package but has found no suitors.

FTX issued a temporary halt to all customer withdrawals that day. FTT price fell by more than 75%. Among the available options, Bankman Fried turned to Chow, who announced that he had signed a “non-binding” letter of intent to acquire FTX.com.

But a day later, on November 9, Binance said it would not proceed with the acquisition, citing reports of “mishandling of customer funds” and federal investigations.

FTX filed for bankruptcy on November 11, and Freed Bankman resigned as CEO of FTX and its related entities. He immediately lost 94% of his personal wealth.

Sullivan and Cromwell, FTX's longtime lawyers, approached John J. Ray, who had overseen Enron during its bankruptcy, to take over for Bankman Fried's former position.

On December 12, Bankman-Fried was arrested by Bahamian authorities and extradited to the United States, where he was detained. Federal prosecutors and regulators accused Bankman Fried of committing fraud “from the beginning,” according to a report from the Securities and Exchange Commission.

Bankman-Fried was released on $250 million bail and was initially living under house arrest with a court-ordered ankle monitor at his parents' home in Palo Alto, California, on the campus of Stanford University. He was quickly taken back into custody on charges of witness tampering.

While Bankman-Fried was awaiting trial, several of his closest friends and associates turned into key witnesses for the prosecution, leaving the former cryptocurrency billionaire to fend for himself. Less than a year after his arrest, a 12-person jury found Bankman-Fried guilty of all criminal charges against him.

— CNBC's Rohan Goswami contributed to this report.