“The Greatest Pyramid Scheme in History”

Senator Sherrod Brown, D-Ohio, and senior member of the Senate Banking Committee, speaks at a hearing in Washington, DC on July 16, 2019.

Andreas Harrer | Bloomberg | Getty Images

The Senate Banking Committee is holding a second day of hearings this week on the demise of cryptocurrency exchange FTX, examining how the company’s implosion could affect the burgeoning industry.

On Tuesday, FTX’s new CEO, John J. Ray, testified before the House Financial Services Committee, where he accused former executives, including founder and former CEO Sam Bankman-Fried, of embezzling client funds.

“It’s really just old-fashioned embezzlement. This is just taking money from customers and using it for your own purposes. Not sophisticated at all,” Ray said in a four-hour glowing testimony before the House Financial Services Committee. “Sophisticated, maybe in the way they hide something right in front of their eyes. This is just an old embezzlement. Old school, old school.”

U.S. prosecutors, securities and commodity regulators say Bankman-Fried used billions of dollars in FTX client funds for his personal use to invest in other ventures, donate to politicians and PACs, and repay billions of dollars in loans that Alameda Research, the cryptocurrency hedge fund he also founded.

“That’s the main breakdown here. Funds from FTX.com, the exchange for non-US citizens, these funds were used at Alameda for investments and other payouts,” said Ray of House Financial Services Chair Maxine Waters, D-Calif. Bankman-Fried, who was supposed to testify, was instead arrested on Monday night in the Bahamas. FTX filed for Chapter 11 bankruptcy last month.

Bankman-Fried has been charged by federal prosecutors in the Southern District of New York with a variety of felonies, including wire fraud, securities fraud and violation of campaign finance regulations. The Securities and Exchange Commission separately accused Bankman-Fried of operating nothing short of a “brazen,” year-long scam on its now-bankrupt crypto exchange FTX “from the start,” which allowed it to sell billions of dollars in client funds diverting his own hands to grow his sprawling empire.

“This was not a case of mismanagement or poor oversight, but of willful fraud, pure and simple,” US Attorney Damian Williams said in a statement unsealing the indictment.

Though Ray and Bankman-Fried will not be attending Wednesday’s Senate banking sector hearing, four cryptocurrency experts will testify instead, including Kevin O’Leary, a longtime paid FTX spokesman.

The witnesses’ pre-release opening remarks indicate that the hearing will not only focus on FTX, but also how the company’s collapse could affect the industry at large.

“We need to get to the bottom of what happened at FTX, but we must not allow its collapse to cause us to abandon crypto’s great promise and potential,” O’Leary said in his opening statement.

Ben McKenzie Schenkkan, an actor who regularly speaks about crypto, says in his prepared testimony that the industry is a “massive speculative bubble.”

“I am assuming to you today that the entire cryptocurrency industry resembles nothing more than a massive speculative bubble built on fraud,” Schenkkan said. “In my opinion, it’s by orders of magnitude the largest Ponzi scheme in history.”

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