UNITED STATES – Sam Bankman-Fried’s FTX crypto empire collapsed in November 2022, and about a month later he was arrested in the Bahamas and accused of fraud and bilking investors and customers out of billions of dollars – allegations he’s denied. Bankman-Fried has portrayed himself as a well-intentioned if hapless chief executive; someone who made calamitous mistakes but never knowingly committed fraud. Prosecutors don’t buy it. Now, it’s up to a New York jury to decide what’s next for SBF.

1. What was FTX?

What started out as a trading venture focused on digital assets grew into a sprawling crypto empire. More than 100 entities were included when FTX filed for bankruptcy, and of these, only two really mattered. The first was Alameda Research, an arbitrage-focused trading business that Bankman-Fried co-founded in 2017. The second was FTX Trading Ltd., a crypto exchange based in the Bahamas and founded in 2019. At its peak in early 2022, FTX was valued at US$32 billion.

2. How did Alameda and FTX get started?

Before everything collapsed, Alameda said it made its profit by applying traditional techniques of arbitrage to the Bitcoin market. Bankman-Fried and his co-founder Gary Wang found ways to buy the world’s biggest cryptocurrency on Asian exchanges where it was selling for slightly less, and sell it on exchanges where it fetched slightly more, pocketing the difference. Bankman-Fried had previously been a trader at Jane Street, a mainstream hedge fund. When he founded FTX, he promoted it as a trading platform for sophisticated investors and touted its automated risk-management engine to Congress as superior to those used by traditional market makers. 

3. How did FTX get into trouble?

The SEC alleges that Bankman-Fried had “from the start” improperly diverted assets that customers had deposited with FTX over to Alameda to fund its trading positions and venture investments. That was in addition to what the SEC said were “lavish real estate purchases and large political donations.” As the broader crypto market declined in value through 2022, other lenders began to seek repayment from Alameda. Even though FTX had allegedly already given Alameda billions of dollars in customer funds, Bankman-Fried began to give Alameda even more money to cover those positions, the SEC contends. 

4. What led to FTX’s collapse? 

FTX issued its own token known as FTT. Alameda began using FTT, along with tokens issued by entities that FTX either owned or invested in, as collateral for its borrowing activities – while also using FTX customer funds to trade with. But like most crypto tokens, FTT isn’t backed by substantial reserves of assets. That meant its value was tied closely to the fortunes of FTX itself, making it worthless as collateral if FTX or Alameda ran into trouble and urgently needed funds. When the chief executive of rival exchange Binance raised questions about FTT, clients started to worry about the safety of their holdings. Weak oversight and risk management at FTX compounded the problem. As clients began to withdraw funds from FTX, it didn’t know where all of its pots of money were or how much of its assets it could liquidate in a hurry, and so struggled to honor requests. Panicked customers dashed for the exits. 

5. What exactly are the allegations against Bankman-Fried?

According to SEC Chair Gary Gensler, Bankman-Fried built a “house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto.” Additionally, as the majority owner of Alameda, Bankman-Fried may have had more insight into the state of its affairs than he has let on. The SEC said Bankman-Fried hid the extent of the ties between the two entities from investors, and personally directed that FTX’s “risk engine” shouldn’t be applied to Alameda. This in effect amounted to what the SEC called an unlimited line of credit funded by FTX customers. Bankman-Fried is charged with seven counts of fraud and money laundering, and could face more than 100 years in prison if found guilty on all counts. In August, the government dropped an accusation that he violated campaign finance laws. Bankman-Fried, 31, has pleaded not guilty to all the charges against him.

6. What is happening with Bankman-Fried’s co-founders?

Several co-founders and senior executives from FTX and Alameda were instrumental in charges being brought against Bankman-Fried. Gary Wang and former Alameda CEO Caroline Ellison were among those who turned on Bankman-Fried almost immediately, agreeing to cooperate with federal prosecutors and pleading guilty to a raft of charges. Former FTX engineering chief Nishad Singh followed suit a few months later. And as the date for Bankman-Fried’s trial neared, Ryan Salame, who co-led FTX’s business in the Bahamas, similarly pleaded guilty. BLOOMBERG