FTX: How Sam Bankman-Fried built a house of cards

Lawyers for fallen crypto exchange FTX argued at the company’s bankruptcy hearing on Tuesday that the company served as the personal “fiefdom” of founder Sam Bankman-Fried and hit a $40 billion market cap in January before falling in recent weeks crashed to its current valuation of around $422 million.

Those who looked under the hood in the wake of the crash, including new FTX CEO John J. Ray III, have expressed dismay at the company’s lack of basic accounting and compliance logs and raised questions about how bankman- Fried was able to build such an enormous, uncontrolled operation that gave him incredible influence and political power.

Sam Bankman-Fried, Founder and Chief Executive Officer of FTX, speaks during an interview on “Bloomberg Wealth with David Rubenstein” on August 17, 2022 in New York. (Jeenah Moon/Bloomberg via Getty Images/Getty Images)

So how did Bankman-Fried do it? Ben McMillan, co-founder of IDX Digital Assets, puts it with a simple analogy:

In a hypothetical scenario, imagine that someone owns every house in a 100-house neighborhood and forces the sale of a house for $1 million, and then uses that sale to show that they have $100 million in “equity.” . But then the owner is forced to sell all of the remaining 99 homes, and the homes are only selling for $100,000 each — meaning $90 million of their so-called equity disappears.


But that justice never existed at all.

McMillan told FOX Business that Bankman-Fried did just that with his FTT tokens since he controlled the float.

FTX logo seen in Miami

The FTX logo is seen at the entrance of FTX Arena in Miami on November 12, 2022. (Reuters/Marco Bello/File / Reuters photos)

According to McMillan, FTX would secure and trade a small portion of FTT and other coins like serum at a cheap enough dollar price to create the “equity” reflected on the balance sheet. Then Bankman-Fried would borrow a lot of money against what is essentially a very large — and very bogus — asset number.

This, in turn, allowed FTX and its hedge fund Alameda Research to artificially inflate assets.


“By the way, this isn’t new or unique to crypto,” McMillan explained. “It was done by more than a few hedge funds during the 2008 crash – particularly in the distressed debt space.”

FTX and Alameda accelerated the scenario by using the inflated asset number to incur very real liabilities, according to McMillan. It also appears that Bankman-Fried was acquiring companies and forcing them to be “custodial” at FTX so he could supposedly continue the cycle with client assets.

Caroline Ellison, CEO of Alameda Research

Caroline Ellison, CEO of Alameda Research, via Twitter (Twitter @carolinecapital)

McMillan says a key clue came when Changpeng Zhao, founder and CEO of major crypto exchange Binance, announced on Nov. 6 that his firm was selling a large batch of FTTs on the open market, and Caroline Ellison, CEO of Alameda, quickly responded by offering to buy all the tokens for $22 each.


Many are now speculating that this amount was the crucial figure above which FTT had to trade against FTX and Alameda to stay solvent.

“After the FTT traded sharply lower on Nov. 8,” notes McMillan, “the house of cards collapsed.”

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