Hello and welcome to the latest edition of the FT’s Cryptofinance newsletter. A note to kick things off: a special thanks to my colleague Nikou Asgari for holding the fort with two fascinating newsletters while I’ve been away.
America’s Criminal Trial of the Year is finally here: in about five weeks we will discover the fate of former FTX kingpin Sam Bankman-Fried.
This case is about whether he told the truth about FTX to investors and customers when promoting the cryptocurrency exchange, and where the billions of dollars entrusted to his custody went. He is answering multiple US criminal charges, including fraud, money laundering, and violations of campaign finance laws that collectively carry a lifetime in prison.
A trial brings risks for people drawn in, and not just those who lose their liberty. The reputations of other FTX senior executives, Bankman-Fried’s parents, and prosecuting attorney Damian Williams for the Southern District of New York will also be put to the test.
Also on trial is the crypto industry itself. “If he’s found guilty, it will further involve the likes of [SEC chair] Gary Gensler and [Senator] Elizabeth Warren who will slam their fists on the desk and claim they told us all along that these crypto guys are bad guys,” Charley Cooper, a former chief of staff at the Commodity Futures Trading Commission, told me. “He spent time in Washington, he became the darling good guy for regulators…it’s a wild circumstance where the once-perceived best of the industry is on trial for fraud,” Cooper added. “You can imagine how the rest of the industry is now looked at because of it.”
The jury will not have to understand the nuances of the crypto world, like permissionless blockchains, yield farming, or cold wallets. Prosecutors are seeking to prove he — along with his innermost circle of associates — spent billions of dollars of customer funds that went into real estate, speculative ventures, political donations, and high-profile marketing, and hiding the scheme via a series of loans to Alameda Research, FTX’s sister trading firm. The opening skirmishes this week point to where the nub of the case will lie.
The government has four former senior executives who have all pleaded guilty to criminal charges and are now co-operating with the government. They are Caroline Ellison, who was the chief executive of Alameda; FTX co-founder Gary Wang and Nishad Singh, its former director of engineering; and Ryan Salame, former chief executive of FTX’s Bahamas-based business. Together, they will provide the bedrock of the prosecutor’s case, detailing the flow of money, as well as who knew what and when.
Adam Yedidia — the first witness called by the government and a former FTX employee — took aim at SBF directly, claiming as chief executive he was “in charge of everything”: “He did marketing and grand strategy, and he would make decisions for what was important.”
Wang also took the stand and described features that gave Alameda special privileges compared with other users. They included the ability to transfer or withdraw funds from FTX regardless of what was in its account, a disproportionately large line of credit, and the ability to trade on the exchange faster than others. He added when customer deposits were sent to FTX some of those funds would wind up in Alameda’s bank account. When asked on whose direction he implemented some of these features, he replied: “On Sam’s.”
SBF’s defence team, led by Mark Cohen of Cohen and Gresser LLP, indicated that Bankman-Fried’s team believes attack is the best form of defence when it comes to dealing with the government’s long list of witnesses. “[Bankman-Fried] will attack the co-operating defendants’ credibility, who are presenting themselves as valuable witnesses for the government in order to receive credit for doing so,” said Adam Kamenstein, a former federal prosecutor-turned partner at Adams, Duerk & Kamenstein.
Cohen criticised Ellison for her role as chief executive of Alameda after Bankman-Fried handed over the reins, claiming she did not adequately protect the company against a crypto market crisis despite Bankman-Fried’s instructions as majority shareholder of the firm. “She didn’t do so at the time, and this also becomes an issue later on when the storm hits.” He added that Bankman-Fried relied on and trusted Ellison to act as Alameda’s chief. “Bankman-Fried will claim misplaced reliance on guidance and counsel from his colleagues — mostly the ones co-operating with prosecutors — to ensure he, and the businesses, were legally compliant,” added Kamenstein.
Elsewhere in Cohen’s opening statement, he told the jury that in the coming weeks they would see that Bankman-Fried did not steal from customers and instead believe the loans which moved between FTX and Alameda were appropriately backed. “…The evidence will show that Sam reasonably believed that there were no laws or provisions in the terms of service that prohibited FTX from loaning out these deposits,” he said. As one former prosecutor told me, ignorance is almost always part of the defence in fraud cases: “The prosecution has to prove not only that a false statement was made but that the false statement was made with the specific intent to defraud.” Instead, Cohen told the jury that Bankman-Fried and FTX were just unlucky: an enterprising start-up bitten by unforgiving market forces outside their control. FTX did not have some things more mature or older companies would have had: “…[FTX] didn’t have a chief risk officer, which became an issue later on when the storm hit.” Whether that defence convinces the jury or not remains to be seen. Speaking to me over the phone late on Thursday, Cooper provided an interesting analogy: “Even if you honestly don’t know what traffic lights are, you’re supposed to know the laws in the world you operate in.”
What’s the case for the defence? Email me at [email protected]
Weekly highlights
Singapore has been front and centre for some of the biggest crypto scandals, with names such as Do Kwon, Su Zhu, and Kyle Davies now synonymous with the city-state. But that hasn’t stopped other crypto firms flocking there: this week Ripple’s local subsidiary secured a licence from Singaporean regulators.
Blockchain analytics firm Elliptic found that cross-chain crypto crime (where illicit assets are “bridged” from one blockchain to another) is accelerating. It estimates $7bn of illicit or high-risk funds have been laundered through cross-chain or cross-asset services this year to the end of July. North Korea’s infamous criminal syndicate Lazarus Group is responsible for almost $1bn of that total.
Soundbite of the week: Michael Lewis on Sam Bankman-Fried
Writer Michael Lewis has been promoting his behind-the-scenes book on SBF. Called Going Infinite, it has been timed to coincide with the trial. There are plenty of soundbites but this is my favourite, from CBS News’s 60 Minutes.
“And in [FTX’s] case, they actually had — a great real business. If no one had ever cast aspersions on the business, if there hadn’t been a run on customer deposits, they’d still be sitting there making tons of money.”
Data mining: Spot trading still on the decline
Spot trading of crypto is still falling, at least on centralized exchanges such as Binance and Coinbase. According to data provider CCData, they dropped almost 30 per cent in the last month to $3.3bn and is now the lowest monthly volume since March 2019.
FT Cryptofinance is edited by Philip Stafford. Please send any thoughts or feedback to [email protected].
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