Hello and welcome to the latest edition of the FT’s Cryptofinance newsletter. A note to start with: A special thanks goes to my colleague Nikou Asgari, who held the fort with two fascinating newsletters while I was away.
America’s criminal trial of the year is finally here: in about five weeks we will learn the fate of former FTX boss Sam Bankman-Fried.
This case is about whether he told investors and customers the truth about FTX when promoting the cryptocurrency exchange and where the billions of dollars entrusted to him went. He is answering several criminal charges in the United States, including fraud, money laundering and violations of campaign finance laws, which collectively carry a sentence of life in prison.
A trial carries risks for those affected and not just for those who lose their freedom. The reputations of other FTX executives, Bankman-Fried’s parents and District Attorney Damian Williams for the Southern District of New York are also being tested.
The crypto industry itself is also on trial. “If he is found guilty, there will be more cases like this [SEC chair] Gary Gensler and [Senator] “Elizabeth Warren will be banging her fists on the desk and saying they told us all along that these crypto guys were bad guys,” Charley Cooper, a former chief of staff at the Commodity Futures Trading Commission, told me.
“He spent time in Washington and became a darling of regulators. . . “It’s a wild situation where the once supposed best in the industry are on trial for fraud,” Cooper added. “You can imagine how the rest of the industry is viewed now because of this.”
The jury does not need to understand the nuances of the crypto world, such as permissionless blockchains, yield farming or cold wallets. Prosecutors want to prove that he – along with his inner circle of associates – funneled billions of dollars in client money into real estate, speculative ventures, political donations and high-profile marketing, and concealed the scheme through a series of loans to Alameda Research, FTX’s sister trading firm.
This week’s opening skirmishes reveal where the crux of the case will lie.
The government has four former senior executives, all of whom have pleaded guilty and are now cooperating with the government. They are Caroline Ellison, Alameda’s chief executive; FTX co-founder Gary Wang and Nishad Singh, former technical director; and Ryan Salame, former managing director of the Bahamas-based FTX business. Together they form the basis of the prosecutor’s case, detailing the flow of money and the question of who knew what and when.
Adam Yedidia – the first witness called by the government and a former FTX employee – took direct aim at SBF, claiming that as CEO he was “responsible for everything”:
“He handled marketing and big strategy and made decisions for what was important.”
Wang also took a stand and described features that gave Alameda special privileges compared to other users. These included the ability to transfer or withdraw funds from FTX regardless of account balance, a disproportionately large credit limit, and the ability to trade on the exchange faster than others.
He added that some of these funds would end up in Alameda’s bank account when customer deposits were sent to FTX.
When asked on whose instructions he implemented some of these features, he replied: “On Sam’s.”
SBF’s defense team, led by Mark Cohen of Cohen and Gresser LLP, said Bankman-Fried’s team believed an attack was the best form of defense when dealing with the government’s long list of witnesses to deal with.
“ . . .[Bankman-Fried] will attack the credibility of cooperating defendants who present themselves as valuable witnesses for the government in exchange for credit,” said Adam Kamenstein, a former federal prosecutor and now a partner at Adams, Duerk & Kamenstein.
Cohen criticized Ellison for her role as Alameda’s chief executive after Bankman-Fried handed over the reins, claiming she did not adequately protect the company from a crypto market crisis despite Bankman-Fried’s instructions as the company’s majority shareholder.
“She didn’t do that then, and that will be a problem later on when the storm hits.” He added that Bankman-Fried was able to rely on and trust Ellison as Alameda’s boss.
“Bankman-Fried will allege that he improperly relied on the guidance and advice of his colleagues – primarily those who cooperated with prosecutors – to ensure that he and the companies complied with the law,” Kamenstein added.
Elsewhere in Cohen’s opening statement, he told jurors that in the coming weeks they would ensure that Bankman-Fried did not pass on customers and instead assumed that the loans being moved between FTX and Alameda were adequately secured.
“ . . . “The evidence will show that Sam reasonably believed that there were no laws or provisions in the terms of service that prohibited FTX from lending these deposits,” he said.
As a former prosecutor told me, ignorance is almost always part of the defense in fraud cases: “The prosecution must prove not only that a false statement was made, but also that the false statement was made with the specific intent to defraud.”
Instead, Cohen told the jury that Bankman-Fried and FTX were simply unlucky: an enterprising startup bitten by relentless market forces beyond their control.
FTX didn’t have some things that more mature or older companies would have had: “. . .[FTX] There was no chief risk officer, which later became a problem when the storm hit.”
Whether or not this defense convinces the jury remains to be seen. When Cooper spoke to me by phone late Thursday, he offered an interesting analogy:
“Even if you honestly don’t know what traffic lights are, you should know the laws in the world in which you operate.”
How about the defense? Email me at [email protected]
Weekly highlights
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Singapore has been at the center of some of the biggest crypto scandals, and names like Do Kwon, Su Zhu and Kyle Davies are now synonymous with the city-state. But that hasn’t stopped other crypto firms from flocking there: This week, Ripple’s local subsidiary secured a license from Singaporean regulators.
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Blockchain analytics firm Elliptic has found that cross-chain crypto crime (where illicit assets are “bridged” from one blockchain to another) is on the rise. It is estimated that $7 billion worth of illicit or high-risk funds were laundered through cross-chain or cross-asset services this year through the end of July. North Korea’s notorious crime syndicate Lazarus Group is responsible for nearly $1 billion of that sum.
Soundbite of the week: Michael Lewis on Sam Bankman-Fried
Author Michael Lewis has promoted his book Behind the Scenes through SBF. It is called “Going Infinite” and is timed to coincide with the process. There are many sound bites, but this one is my favorite, from CBS News’ “60 Minutes.”
“And in [FTX’s] In this case, they actually had a great, real deal. If no one had ever vilified the company and there had been no rush on customer deposits, they would still be sitting there making lots of money.”
Data Mining: Spot trading continues to decline
Cryptocurrency spot trading is still declining, at least on centralized exchanges like Binance and Coinbase. According to data provider CCData, they fell by almost 30 percent to $3.3 billion last month and now represent the lowest monthly volume since March 2019.
FT Cryptofinance is published by Philip Stafford. Please send your thoughts or feedback to [email protected].
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