02 November 2023
On Sam Bankman-Fried's conviction for wire fraud, securities fraud and money laundering yesterday, US Attorney Damian Williams said that whilst "the cryptocurrency industry might be new.... this kind of corruption is as old as time."
The Financial Times provided a great summary of the case, which raises questions about the regulation of cryptocurrencies and cryptoexchanges currently being addressed by governments including the UK.
With a lot of hype around Sam Bankman-Fried himself, it's good to remember that this case is essentially about fraud enabled by major compliance and corporategovernance failings, in particular:
FTX's failure to honour withdrawal requests from thousands of customers, due to an $8bn "hole" in the FTX balance sheet
A lack of separation between FTX as creator of its token FTT and its role as cryptoexchange
Customer money from FTX being used for venture investments, corporate sponsorship, real estate and political donations
$10bn of customer money from FTX being used to prop-up crypto hedge fund Alameda Research, run by Sam Bankman-Fried's then girlfriend
A "complete absence of trustworthy, financial information" according to John Ray, the insolvency expert who took over FTX after bankruptcy
FTX and Alameda Research being run by "a group of hapless young people who did not have the required skills, maturity or patience" (David Streitfeld, New York Times)
The FTX collapse prompted a review of due diligence processes at Sequoia Capital, which invested $225mil in FTX, and is one of the drivers behind the UK's recent plans to regulate cryptoassets and cryptocurrencies.
Whilst some of the issues raised by the case may be specific to new technologies and cryptocurrencies, some are the result of governance failings and fraud that, as Damian Williams stated, are "as old as time."