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Tuesday, March 21, 2023

Sam Bankman-Fried Crash Sends Shockwaves Through Crypto

By KEN SWEET, AP Business Writer

NEW YORK (AP) — Sam Bankman-Fried drew widespread applause as he quickly rose to superstar status as head of cryptocurrency exchange FTX — the savior of cryptocurrency, the newest force in Democratic politics and potentially the world’s first billionaire.

Now, the comments about Bankman-Fried, 30, are not so kind after FTX filed for bankruptcy on Friday, leaving its investors and customers feeling cheated and many others in the crypto world fearing repercussions. Bankman-Fried himself could face civil or criminal charges.

“Sam, what have you done?” tweeted Sean Ryan Evans, host of the cryptocurrency podcast Bankless, after filing for bankruptcy.

Under Bankman-Fried, FTX quickly grew to become the third largest exchange by volume. The shocking collapse of this nascent empire has sent tsunami-like waves through the cryptocurrency industry, which has seen its fair share of volatility and turmoil this year, including a sharp drop in the price of bitcoin and other digital assets. To some, the events are reminiscent of the domino-like bankruptcies of Wall Street companies during the 2008 financial crisis, particularly now that supposedly healthy companies like FTX are failing.

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A venture capital fund wrote off investments in FTX worth more than $200 million. Cryptocurrency lender BlockFi halted customer withdrawals on Friday after FTX sought bankruptcy protection. Singapore-based exchange Crypto.com saw withdrawals rise this weekend for internal reasons, but some of the action could be attributed to nerves at FTX.

Bankman-Fried and his company are being investigated by the Justice Department and the Securities and Exchange Commission. The investigations are likely to focus on the possibility that the firm used customer deposits to finance bets in Bankman-Fried’s hedge fund Alameda Research, a violation of US securities law.

“This is the direct result of a rogue actor breaking all the basic rules of fiscal responsibility,” said Patrick Hillman, chief strategy officer at Binance, FTX’s biggest competitor. Earlier last week, Binance seemed ready to step in to bail out FTX, but backed off after a review of FTX’s books.

The ultimate impact of the FTX bankruptcy is uncertain, but its failure is likely to result in the destruction of billions of dollars of wealth and further skepticism of crypto at a time when the industry could use a vote of confidence.

“I care because it’s the retail investors who suffer the most, and because too many people still mistakenly associate bitcoin with the fraudulent ‘crypto’ space,” said Cory Klippsten, CEO of Swan Bitcoin, who for months has raised concerns about the Bitcoin model. FTX business. Klippsten is publicly enthusiastic about bitcoin, but he has long had deep skepticism about other parts of the crypto universe.

Bankman-Fried founded FTX in 2019 and grew rapidly – ​​it was recently valued at $32 billion. The son of Stanford University professors, known for playing the video game “League of Legends” during meetings, Bankman-Fried attracted investment from the highest echelons of Silicon Valley.

Sequoia Capital, which has invested in Apple, Cisco, Google, Airbnb and YouTube, described its meeting with Bankman-Fried as probably “talking to the world’s first trillionaire.” Several of Sequoia’s partners became enthusiastic about Bankman-Fried following a Zoom meeting in 2021. After several more meetings, Sequoia decided to invest in the company.

“I don’t know how I know, I just know. SBF is a winner,” wrote Adam Fisher, a business journalist who wrote a Bankman-Fried profile for the firm, referring to Bankman-Fried by his popular online nickname. The article, published in late September, has been removed from Sequoia’s website.

Sequoia has reduced its $213 million in investments to zero. A pension fund in Ontario, Canada, also reduced its investment to zero.

In a brief statement, the Ontario Teachers’ Pension Fund said: “Naturally, not all investments in this early-stage asset class perform as expected.”

But until last week, Bankman-Fried was seen as an industry white knight. Whenever the crypto industry had one of its crises, Bankman-Fried was the person most likely to come with a bailout. When online trading platform Robinhood was in financial straits earlier this year (collateral damage from falling stock and crypto prices), Bankman-Fried stepped in to buy a stake in the company as a sign of support for.

When Bankman-Fried bought the assets of bankrupt crypto firm Voyager Digital for $1.4 billion this summer, it brought a sense of relief to Voyager account holders, whose assets have been frozen since their own bankruptcy. That ransom is now in doubt.

As the king of cryptocurrencies, his influence was beginning to spill over into political and popular culture. FTX purchased major sports sponsorships with Formula Racing and purchased the naming rights to a stadium in Miami. He has pledged to donate $1 billion to Democrats this election cycle (his actual donations from him were in the tens of millions) and prominent politicians like Bill Clinton have been invited to speak at FTX conferences. Soccer star Tom Brady invested in FTX.

Bankman-Fried had been the subject of some criticism before FTX collapsed. While FTX largely operated outside of US jurisdiction from its headquarters in the Bahamas, Bankman-Fried has increasingly expressed the need for more regulation of the cryptocurrency industry. Many cryptocurrency supporters oppose government oversight. Now, the collapse of FTX may have helped make the case for tighter regulation.

One such critic was Binance founder and CEO Changpeng Zhao. The feud between the two billionaires spilled over onto Twitter, where Zhao and Bankman-Fried collectively had millions of followers. Zhao helped fuel the withdrawals that doomed FTX when he said that Binance would sell its holdings in FTX’s FTT crypto token.

“What is shown as (asterisk) (asterisk)… and it will be crypto’s fault (instead of one of the guys’ fault),” Zhao wrote on Twitter on Saturday.

Reporters Michael Balsamo in Washington and Cathy Bussewitz in New York contributed.

This story has been corrected to say that Adam Fisher is a business journalist who freelanced for Sequoia Capital. An earlier version of the story identified Fisher as an employee of Sequoia.

Copyright 2022 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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