In just three years, Sam Bankman-Fried grew FTX into a massive $32 billion crypto exchange backed by reputable investors. It only took a few days for all of this to implode into a sprawling bankruptcy filing.
Sheila Bair, a top regulator during the 2008 financial crisis, told CNN there were uncanny similarities between the dramatic rise and fall of Bankman-Fried and FTX and that of infamous Ponzi scheme mastermind Bernie Madoff.
Bair notes that, like Madoff, the 30-year-old Bankman-Fried has proven adept at using his background and connections to tempt discerning investors and regulators to overlook “red flags” looming ahead of everyone hide eyes.
“Charming regulators and investors can be distracting [them] from digging in and seeing what’s really going on,” said Bair, chairman of the Federal Deposit Insurance Corp from 2006 to 2011. was, on Monday in a telephone interview. “It felt a lot like Bernie Madoff in that way.”
FTX filed for bankruptcy on Friday, throwing the cryptocurrency industry into chaos and raising the specter of huge losses for the crypto exchange’s clients.
Long before his Ponzi scheme collapsed, Madoff was known on Wall Street as a magician. He was the former chairman of the Nasdaq Stock Market, served on advisory boards to the Securities and Exchange Commission, and managed money for the rich and famous.
For his part, Bankman-Fried was a top campaigner for the Democrats in the 2022 election cycle. He hired several former US regulators for senior positions at FTX, and his parents are both professors at Stanford Law School. By the time it filed for bankruptcy, FTX even had a filing pending with federal authorities for derivatives clearing, the Wall Street Journal reported.
Dennis Kelleher, CEO of Better Markets, said in a statement Monday that FTX has a “revolving door hiring” strategy from the Commodities Futures Trading Commission (CFTC) and elsewhere “to increase their knowledge, influence and access with the agency and.” in Washington to move the FTX agenda.”
“People feel cheated,” Brian Armstrong, the CEO of rival crypto exchange Coinbase, told CNN in a phone interview on Friday. “On the surface, FTX was able to attract a lot of attention. But when people looked into it, the basics weren’t there.”
FTX received its $32 billion valuation with the blessing of investments from BlackRock, SoftBank, Sequoia and other top investors.
“You get this herd mentality where if all your peers and big names are investing in venture capital, you have to do it too. And that increases credibility with policymakers in Washington. It all feeds on itself,” said Bair, who sits on the board of directors of Paxos, a blockchain infrastructure company (Bair said she speaks for herself, not Paxos).
Now authorities in the Bahamas are investigating possible criminal wrongdoing related to the FTX blast.
Neither FTX nor an attorney representing Bankman-Fried responded to requests for comment.
Madoff offered investors amazing returns that were remarkably consistent and an unlikely track record that later proved possible through an elaborate system that involved repaying existing customers with new customer deposits.
Given the speed of its decline and media reports, serious questions have been raised about the accuracy and strength of FTX’s balance sheet. FTX’s bankruptcy filing shows that it had between $10 billion and $50 billion in liabilities at the time it was filed.
Bankman-Fried secretly transferred about $10 billion in client funds from FTX to his trading firm Alameda Research, using a “backdoor” to avoid triggering accounting red flags, sources told Reuters.
Bankman-Fried denied secretly transferring funds to Reuters, instead accusing “confusing internal labeling”.
Bair urged investors to exercise caution and be skeptical. “If it sounds too good to be true, it probably is,” she said.
The good news is that the former FDIC chairman isn’t worried about the FTX implosion threatening the entire financial system like Lehman Brothers did in 2008. Crypto is still a relatively small part of the broader economy and financial market.
“There is no systemic impact on the real economy,” Bair said, adding that this is all just “fun money on the airwaves with speculation.”
But the bad news is that the crypto market remains largely unregulated, making it the Wild Wild West of finance. And that makes investors vulnerable if something goes wrong.
“It’s time to commit to a regulatory regime for crypto and clarify who regulates what,” Bair said, “because people are getting hurt.”
– If you are an FTX customer and would like to discuss how the bankruptcy has impacted you, please contact Matt.Egan@CNN.com