Recent revelations have shed light on how the problems that Sam Bankman-Fried “SBF”’s crypto trading firm Alameda has been having began a long time before the difficult year that we all experienced in 2021; in part due to its sister company FTX’s meltdown.
Looking more closely, we see that Alameda was never great at investing and that SBF’s involvement in the company remained substantial even after his departure as CEO in October 2021.
The trading company risked a lot of money and won part of it back, but it also lost a lot. And SBF sought over and over to borrow money and cryptocurrency to fuel those wagers, even offering double-digit interest rates to its lenders.
Uncovering It All
Alameda, as it expanded, invested billions of dollars into bets on the future success of the cryptocurrency industry, billions that federal prosecutors have just said were stolen from FTX clients. It placed wagers on obscure cryptocurrency exchanges and a slew of blockchain technology companies, and it also made political contributions and real estate purchases.
When it finally collapsed in 2022, it was a massive event. Both firms filed for bankruptcy protection in November, leaving their consumers owed billions of dollars and weakening trust in the cryptocurrency sector as a whole.
SBF claims that poor record keeping and a banking problem led to the theft of client monies and enabled Alameda to cover huge losses with funds intended for FTX. It was reported last week by The Wall Street Journal that during a hearing on January 3 he would most likely enter a not guilty plea to fraud charges.
The disgraced crypto figure seems to have established Alameda with the intention of donating a portion of its income to effective altruism, a movement whose stated goal is to channel charitable contributions to causes that will have the greatest impact.
He borrowed money from affluent people who were already involved in the trade sector in order to expand his business. The co-founder of Skype, Jaan Tallinn, lent him a substantial amount of Ethereum, over $100 million, and he returned with a stash of cryptocurrency.
Binance Blockchain Week kicked up in January 2019 with around 1,500 attendees in Singapore. The symposium, which Alameda sponsored for $150,000, was meant to be a forum for planning the development of the emerging crypto sector. Attendees stated SBF’s goal during the meeting was to network with potential new lenders for Alameda.
The firm handed out pamphlets to potential lenders claiming it had $55 million in assets under management; nevertheless, the vast majority of those funds were borrowed in order to finance the company’s operations.
For SBF, Alameda was a means to expand FTX. The company was the principal market maker at the exchange, meaning it was always willing to buy and sell at any time. People familiar with the hedge fund’s tactics say it sometimes took the losing side of a transaction in order to draw clients to the exchange.
Recent complaints filed by the Securities and Exchange Commission and the Commodity Futures Trading Commission, the nation’s leading market regulators, allege that SBF hatched a scheme for Alameda to borrow cash from the exchange.
He instructed his co-CEO, Gary Wang, to create programming that would enable the firm to maintain a negative balance on FTX regardless of the amount of collateral it posted with the exchange.
In addition, SBF prevented the sale of Alameda’s FTX collateral in the event that its value dropped below a certain threshold. That amounted to a line of credit extended by FTX to the hedge fund.
The criminal also directed his former flame Caroline Ellison to inflate the value of a cryptocurrency used by Alameda as collateral by increasing its purchases of that asset.
Note that SBF has said in an interview that,
“FTX was a full-time job. I didn’t have enough brain cycles left to understand everything going on at Alameda if I wanted to.”
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