FTX Developments of the Week
Many on Crypto Twitter (CT) were speculating that somehow FTX founder and former CEO Sam Bankman-Fried (SBF) would be protected from prosecution because of his numerous political donations to politicians.
But this week, on Monday, SBF was finally arrested by the Royal Bahamas Police Force after the local government received a formal notice from the U.S. that it had filed charges against him and likely would seek his extradition.
The U.S. Attorney's Office for the Southern District of New York charged SBF with eight criminal counts: money laundering, conspiracy to commit wire fraud and securities fraud, individual charges of securities fraud and wire fraud, and conspiracy to avoid campaign finance regulations.
The arrest of the 30-year-old came about a month after SBF's crypto exchange declared bankruptcy, and he resigned as CEO.
According to local reports, SBF is in “good spirits” and is being kept in the maximum security unit in the sick bay. He is currently being held in custody at the Bahamas Department of Correctional Services (BDOCS), a jail called Fox Hill that is known for being overcrowded and filthy, and was accused of prison maltreatment last year.
Acting commissioner of The Bahamas Corrections, Doan Cleare, said that SBF is in a dorm-style cell with roughly five other inmates. SBF will be held in custody at Fox Hill until February 8th, 2023, unless he's extradited to the U.S. first.
FTX executive turned whistleblower before the collapse
The court filings released on Wednesday revealed that a top FTX executive alerted authorities in the Bahamas about potential wrongdoing at the crypto exchange just two days before its bankruptcy, helping speed up SBF's downfall.
It was FTX Bahamas co-CEO Ryan Salame who told the country's security commission that customer funds were being used to cover losses at sister trading firm Alameda Research on November 9th, according to court records released Wednesday.
A day before this, at the House Financial Services Committee hearing on Tuesday that lasted 4 hours, the new CEO John J. Ray told lawmakers the company had “no record-keeping whatsoever” and that it's “really just old fashioned embezzlement” — taking money from customers and using it for their own purpose.
Salame said that SBF, FTX co-founder Zixiao “Gary” Wang, and engineer Nishad Singh were the only employees that could have transferred assets held by the exchange to Alameda. The allegation drove the launch of the police investigation that led to SBF's arrest.
Before joining the exchange's Bahamas division, FTX Digital Markets, Salame worked for Alameda between 2019 and 2021. Much like SBF's political donations, Salame also donated $23 million to candidates' campaigns, with the majority of his contributions heading toward Republicans.
Looking to auction off various subsidiaries
On Thursday, FTX petitioned a federal court for permission to sell several of its subsidiaries, including FTX Japan, FTX Europe, U.S.-based derivatives wing LedgerX, which also did business as FTX US Derivatives, and Embed Business. In its bankruptcy filing last month, FTX said it had over $10 billion in liabilities.
In a document filed to the U.S. Bankruptcy Court of Delaware, attorneys for FTX said it was a priority for the company's current management to “explore” the sale of certain subsidiaries.
“Based on their preliminary review, the Debtors own or control several subsidiaries and assets that are regulated, licensed, and/or largely not integrated into the Debtors' operations, within and outside of the United States,” the filing said. “The Debtors believe a number of these entities have solvent balance sheets, independent management, and valuable franchises.”
Most of these entities were acquired by FTX relatively recently, and they operate largely independently of their parent company. As such, their assets and funds remain segregated from the now-defunct exchange, unlike some of its other subsidiaries.
In his congressional testimony, FTX's new CEO, John Ray III, said that even companies purportedly segregated from the exchange, like FTX US, were not actually independent.
Since FTX filed for bankruptcy, many of these entities, which FTX wants to sell quickly, have suspended their operating licenses. While FTX Japan is subject to business suspension and improvement orders, FTX Europe's license and operations have been suspended.
“The longer operations are suspended, the greater the risk to the value of the assets and the risk of a permanent revocation of licenses,” said the document.
FTX has actually received “dozens of unsolicited” – more than 100 – bids for the companies, the filing added, and possible bid dates for the various entities could range from February to March. This would benefit FTX's creditors, the filing said.
“A sound business purpose for the sale of a debtor's assets outside the ordinary course of business exists where such sale is necessary to maximize and preserve the value of the estate for the benefit of creditors and interest holders,” the filing added.
Bahamian regulators in a war of words with FTX liquidators
Amidst all this, the Securities Commission is taking issue with statements made by new FTX CEO Ray, stating that he appears intent only on making headlines and advancing “questionable agendas.”
The Bahamas regulator accused Ray of referring to redacted email correspondence between Bahamian officials and SBF in a bid to cast aspersions on local proceedings.
“Those redactions were designed to create a false impression of communications between Mr. Bankman-Fried and the Commission,” said the regulator, who called the redactions “disturbing” as Ray is aware that the full email reveals SBF's “acknowledgment that he had not briefed the Securities Commission.”
The Commission then went on to point out that it was the first regulator in the world to take “strong, decisive action” to protect the customers and creditors of FTX. The SCB further stated that every action taken by the regulator, including securing the transfer of potentially commingled digital assets to a secure location, was “in strict accordance with our country's legislation and with orders made by the Supreme Court of The Bahamas.”
The Commission also addressed the improper distributions to Bahamian citizens and reaffirmed that “such distributions will be subject to the appropriate clawback actions under the law.”
The SCB continued to conduct a comprehensive and diligent investigation into the causes of FTX's failure, and those “found to have engaged in misconduct will be held accountable in accordance with Bahamian law.”
The Block was secretly funded by SBF
This week, another big story that came into the open was that the crypto media company The Block was secretly funded for over a year by SBF's trading firm through Michael McCaffrey.
The Block was founded in 2018, and then two years later, McCaffrey became its CEO. In April 2021, he led a buyout of The Block's investors, making the firm 100% owned by its employees, with McCaffrey holding a majority stake. The same year, McCaffrey began talks with SBF about a loan to finance the buyout, and LLCs controlled by him received a total of three loans from Alameda.
The 1st loan was for $12 million in April 2021, which was used to fund the buyout of the Block. The 2nd was for $15 million in Jan. 2022, which provided capital for the Block. And the 3rd was for $16 million in the spring of 2022 that was used, in part, to buy a Bahamas apartment for McCaffrey, according to an Axios report.
Since then, McCaffrey has resigned as CEO and is leaving the company. McCaffrey, who has been the company's sole board member since early 2021, has also stepped down from its board. The Block's chief revenue officer Bobby Moran will now take over as CEO and looks to restructure the company to buy out McCaffrey's stake in the company. Moran will also join The Block's board and add two more seats.
Now, let's take a look at the market, which was affected by Terra's collapse in the first half of the year and then FTX's bankruptcy in the second half.
Amber Group, which was exposed to the FTX implosion, has closed a $300 million Series C funding round. Fenbushi Capital US is the lead investor in Amber's latest round, which also backed Amber's $100 million Series B round in June 2021. The Sequoia-and Temasek-backed crypto trading firm lost less than 10% of its total trading capital with FTX and had “to rebalance some positions.”
The firm recently axed 40% of its staff amid market turmoil. “Unfortunately, difficult but decisive adjustments were needed, and this included an organizational realignment to an estimated 300 staff as well as the prudent decision to cut management salaries, organization-wide annual bonuses, and marketing expenses. This is so that we remain resilient amidst the current market environment,” Amber said in a statement regarding the layoff.
On the price front, the crypto market continues to experience sell-off, with Bitcoin down 65% and Ethereum 69% in 2022. The total crypto market cap is currently under $840 bln after surpassing $3 trillion at the peak of the 2021 bull market.
FTT, the native coin of FTX, is worth only about $1, down nearly 99% from its all-time high (ATH) a year ago.
Besides the macroeconomic condition, FTX collapse is the primary driver of the sell-off. While the prices have been going down since late 2021, it is still too early to say whether this sell-off will continue or if the market will find a bottom. However, one thing is for sure: the crypto market remains in a very delicate state and is at risk of further declines in the near future.