This analysis was first published in SvD Näringsliv, in Swedish, on October 4th, 2023. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.
He has been called “the new JP Morgan,” but now his colleagues have abandoned him. When the main trial against Sam Bankman-Fried opened on Wednesday, many were hoping for a conviction.
Sam Bankman-Fried was freshly trimmed when he appeared in the New York courtroom on Tuesday. A fellow detainee had helped with his hair. The day was spent selecting jury members. Several of them disclosed that they had lost money on cryptocurrencies.
For Bankman-Fried, a life sentence is sitting in one pan of the scales.
That the cryptocurrency market is under pressure is, of course, nothing new.
But there is no great show of solidarity from the industry behind its former colleague. On the contrary, many are hoping that Bankman-Fried gets convicted. For them, he becomes a scapegoat — someone to distance themselves from.
The reasoning is that the crash of FTX was down to a single individual who made mistakes, not the industry as a whole. Remove him from the picture, and everything is fine.
Since FTX collapsed just under a year ago, regulators have started cleaning up among bad actors and become clearer about what is and is not permitted. It sounds like an industry that has been through a purifying ordeal and is now on the road to recovery — doesn’t it?
But it is not quite that simple.
Even if Bankman-Fried’s fall is the most spectacular in the crypto market, he is far from alone in ending up there. Projects such as Terra, Celsius Network, and the entire NFT market have all crashed dramatically. As in the dotcom collapse, sites post news almost daily about various crises, security breaches, and outright fraud occurring in the crypto world. The list of projects that have collapsed — often with retail investors losing their money — is very long.
The FTX crash is different in that it also bears many similarities to the conventional financial system. The company had near-nonexistent risk management, large amounts of illiquid assets — and subsequently suffered a bank run. When customers went to withdraw their money, it was no longer there.
The situation was further complicated by the fact that they were trading cryptocurrencies — where regulation and oversight were entirely absent, and transparency around how FTX managed its affairs was very limited.
The trial concerns precisely this, along with associated fraud and money laundering. Customers’ assets were, according to the prosecution, used improperly. There is talk of houses in the Bahamas, sports arena naming rights, and expensive celebrity-fronted advertising campaigns. Money appears to have flowed almost freely between the trading platform FTX, Bankman-Fried’s hedge fund Alameda Research, and his personal finances. There are 1,300 pieces of evidence that prosecutors intend to present at trial.
Does a guilty verdict for Bankman-Fried mean the end of the crypto era?
Probably not. But not because he is so different from the rest of the industry — however much they might want people to think so.
What argues against it is simply the price of bitcoin. The underlying interest in bitcoin — the hub of the entire market — has risen 66 percent since the start of the year. How the price develops over the roughly six weeks the trial is expected to last, nobody knows, but bitcoin as an asset appears not to have been materially affected by the FTX drama so far. The core of the cryptocurrency world is volatile — as it always has been — but largely untouched by this particular episode. Confidence in this part of the market remains.
Sam Bankman-Fried made his name by applying traditional financial methods to what was then a fairly virgin crypto market. On several occasions, he described how he exploited price differences for bitcoin between Japan and the US. By buying and selling bitcoin across the two markets, he could pocket the spread — a practice known as arbitrage.
It was also there that he realised it would be more profitable to own the entire exchange, rather than to make individual trades. The idea behind FTX was born.
But there are reasons why not every player at the roulette wheel starts their own casino. It is more complex than it first appears.
For both Bankman-Fried and the more than one million customers at FTX, things would have been better had he stayed an ordinary trader — anonymous and understated, making good money in quiet. Instead, he bought Super Bowl advertising and luxury villas in the Bahamas. Just as with individual roulette bets, it does not always end well — even when you own the casino.
Sam Bankman-Fried maintains that he is not guilty. Now it is up to the court in New York to decide the matter.
