By Eric Vandenbroeck and co-workers

The Crypto Fraud Collapse

As mentioned in Part One and Part Two, Before FTX's collapse, Bankman-Fried was ranked the 41st richest American in the Forbes 400 and the 60th richest person in the world by The World's Billionaires. His net worth peaked at $26 billion. In October 2022, he had an estimated net worth of $10.5 billion. By November 8, 2022, amid the bankruptcy of FTX, his net worth was estimated to have dropped 94 percent in a day to $991.5 million, according to the Bloomberg Billionaires Index, the most significant one-day drop in the index's history. On November 11, 2022, the Bloomberg Billionaires Index considered Bankman-Fried to have no material wealth.

Meanwhile, the Feds have launched an FTX task force to recover victim assets and continue probes as Bankman-Fried pleads not guilty.

The Manhattan U.S. Attorney’s Office said Tuesday it had created an FTX Task Force to trace and recover assets of victims of the cryptocurrency exchange firm’s collapse and to handle investigations and prosecutions related to the company and other entities.

The announcement came as FTX founder and former CEO Sam Bankman-Fried appeared in U.S. District Court in Manhattan to plead not guilty in his criminal case, where he is charged with multiple counts of financial fraud and campaign finance crimes.

As the story goes, Caroline Ellison and Sam Bankman-Fried worked together for four years to build a crypto empire. Ellison ran the hedge fund connected to FTX; the cryptocurrency exchange Bankman-Fried founded in 2019.

Beyond work, the pair had a lot in common: Both were children of accomplished academics, studied math at prestigious universities, and touted the importance of giving money away to make the world a better place. Both also lived with colleagues in a luxury penthouse in the Bahamas and were often reported to be romantically involved.

However, Ellison has split from Bankman-Fried in a big way: She’s cooperating with federal prosecutors who have accused him of orchestrating one of the biggest financial frauds in U.S. history.

Last month then, Ellison, 28, pleaded guilty to charges alleging that she, Bankman-Fried, and other FTX executives conspired to steal their customers’ money to invest in different companies, make political donations and buy expensive real estate, charges that carry a maximum sentence of 110 years in prison. At a Dec. 19 hearing, Ellison apologized to FTX customers and investors, saying she knew what she did was wrong.

Bankman-Fried “perpetrated a fraud of epic proportions,” Assistant U.S. Attorney Nicolas Roos said at his initial court appearance in New York on Thursday afternoon in front of a courtroom packed with about 100 spectators.

 

Federal prosecutors last week charged Bankman-Fried with multiple crimes, including fraud, conspiracy, money laundering, and campaign finance violations. They claim he defrauded investors and diverted billions of dollars in FTX customer money to his hedge fund, which he then tapped for substantial real estate purchases, risky investments, and political donations.

Roos described a “very strong” case with participation from several people in Bankman-Fried’s circle. At a trial, there would be testimony from “multiple cooperating witnesses,” he said, and over a dozen employees of FTX and Alameda Research, a cryptocurrency hedge fund that Bankman-Fried founded.

The case also involves “tens of thousands of records and documents.”

Bankman-Fried left the courthouse less than an hour after his afternoon appearance ended, surrounded by a mob of photographers in the rain. He and his parents were ushered into a black SUV after pretrial services staff affixed to his ankle a GPS monitoring device, which will help ensure he is only leaving his parents’ home for approved exercise.

Under the terms of the bond agreement, Bankman-Fried cannot open any businesses or lines of credit, and he cannot make any financial transactions over $1,000 except to pay his attorneys. If he wants to do any of those things, he will need approval from the judge or the U.S. attorney. His release conditions also require him to undergo mental health treatment. His attorneys have asked for him to be allowed to continue sessions with his private therapist and to be permitted to appear remotely for his next court proceeding. It is unclear if the judge overseeing the Jan. 3 court session will allow him to emerge from California.

U.S. Magistrate Judge Gabriel Gorenstein said he was comfortable that Bankman-Fried would not be able to conduct any new business because he’s such a known figure. It would also be hard for him to flee, Gorenstein said. He can leave his parents’ area only for court appearances in New York.

“It would be challenging for this defendant to hide without being identified,” Gorenstein said as he approved Bankman-Fried’s bond package.

Bankman-Fried’s parents could lose their home and may have to forfeit other assets if their son breaks the terms of release Gorenstein set. The bond amount does not signify the couple is worth $250 million. The value of any other assets they may have was not discussed in court.

The Securities Exchange Commission and the Commodity Futures Trading Commission have also brought civil charges against Bankman-Fried, saying that he orchestrated a scheme to siphon off FTX customer funds he had pledged to safeguard, using them for personal matters instead.

Bankman-Fried’s effort to pitch cryptocurrency as a mainstream tool for everyday investors to build wealth — a campaign backed by hundreds of millions of dollars in marketing by FTX — has similarly boomeranged. The value of the global crypto market has shed roughly a quarter of its value, or about $250 billion, since the company imploded last month, according to data from CoinMarketCap. And its failure is continuing to reverberate through the crypto economy, with other companies that had exposure to FTX filing for bankruptcy or teetering.

 

A Tech Is Born

Bitcoin started being used — for shadiness. An untraceable “dark net” called Silk Road launches. And for the next few years of its existence, the platform accepts only bitcoin for its black market items.

As more are moved and mined, the coin’s value begins to fluctuate, suggesting an asset that itself can be traded. Starting at 30 cents, bitcoin’s value hit $1 early in 2011, rose to above $30 by June, and then crashed to $2 by the fall. It was the first bitcoin-price roller-coaster. It wouldn’t be the last.

Litecoin, one of the first alternatives to bitcoin, is created.

Also, Electrum, one of the first and most popular bitcoin wallets, is launched.

The first halving — a measure to limit the supply of bitcoins — takes place.

Treasury issues guidance saying that “virtual currency” is not legal tender

 

 

 

Enter Ethereum

A Russian Canadian teenager, Vitalik Buterin, writes a white paper titled “A Next Generation Smart Contract & Decentralized Application Platform,” which kick-starts a revolution. Building on Nakamoto’s work, the report lays out the underpinning of a new kind of blockchain, or digital ledger, that will allow for all sorts of new trades such as NFTs — and further facilitate a libertarian monetary system beyond the reach of government.

Meanwhile, bitcoin trading is picking up, and Bloomberg gives it a ticker symbol. As the New York State Department of Financial Services issues a report warning of potential criminal activity, regulators start to notice.

Vitalik Buterin was a teenager when he wrote a paper that would change the crypto world.

A bitcoin ATM was installed in a Waves Coffee House in Vancouver, British Columbia, in 2013 as a cryptocurrency wave began to build.

Treasury issues guidance saying that “virtual currency” is not legal tender.

Bitcoin investor GameKyuubi launches a phrase for the ages when in a colorful post, he says he is "HODLING” his crypto.

As a result, Cryptocurrencies gained a lot of traction since the launch of Bitcoin in 2009, especially in December 2018 when the prices of cryptocurrencies hit the roof, and the media vehemently picked up on the topic. Digital currencies are a phenomenon and a perfect fit for the digital age.

 

The Gox Scam

Jed McCaleb created the website that became the Mt. Gox exchange. It was initially a way for the card game "Magic: The Gathering" enthusiasts to trade cards online.

The name Mt. Gox was created as an acronym for "Magic: The Gathering Online Exchange." The site was transferred to Mark Karpeles in 2011 in exchange for six months worth of revenue. Karpeles became the largest shareholder and CEO.

But who cares? Mt. Gox’s victims will never get their bitcoin back because, along with renouncing governments, fiat, banks, and regulators, they offered oversight, protections, and recourse. That is not to say that those who made that choice were stupid or naive. Many made an informed decision, took a risk, and accepted the consequences when it turned out badly. Others were gazing moonward and failed to see there was a trade-off.

So are bitcoin’s Wild West days coming to an end? Did the cuffs go click on Karpelès’ wrists mark the beginning of a new era ? Will the community accept a modicum of oversight, compromising their fierce independence in exchange for safeguards? Japanese finance minister Taro Aso is talking about regulating exchanges . What will come of it remains to be seen.

After attracting scores of customers, a shiny new cryptocurrency platform, Mt. Gox, abruptly pauses users’ ability to withdraw money so it can “obtain a clear technical view of the currency processes.” Untold millions are suddenly unavailable from the platform, which had been whimsically named for the “Magic: The Gathering” card game. The company declares bankruptcy, among the first such events in crypto. It won’t be the last.

After he and his wife created Quantum, McCoy wanted to develop a way to sell the piece digitally. The problem? He didn’t have a way of establishing the provenance of a digital work of art.

For the uninitiated, “provenance” is the documentation that authenticates the creator, ownership history, and appraisal value of a particular piece of art. Unfortunately, provenance documents for digital art didn’t exist at the time. In other words, there was no way to verify digital works' creator and ownership history. After mulling over his options, McCoy joined tech entrepreneur Anil Dash to solve the problem. Eventually, the duo started to explore blockchain technology to see if it might provide a viable path forward.

In the early 2010s, blockchain technology was still a niche field. Bitcoin was only valued at $630 (its price at the time of writing is just over $16,500), Ethereum had just launched, and coin creators regularly overpromised, underdelivered, and got sued into oblivion. But McCoy and Dash weren’t dissuaded, and the decision paid off — to put it lightly.

 

The Ignatova Scam

The name Ruja Ignatova doesn't mean much even to most crypto-traders. But anyone who’s ever been hit by a scam feels, indirectly, the handiwork of the so-called “Cryptoqueen.” The Bulgarian German legal Ph.D. starts selling one coin, a currency she says will one day replace bitcoin, giving grand presentations worldwide. There’s only one problem — it’s a total sham. As much as $4 billion of consumers’ money goes missing.

Ignatova goes on the lam in 2017 and eventually is placed on the FBI’s Ten Most Wanted List. She hasn’t been seen in years. But every crypto scam owes a spiritual debt to the person who first realized that an obscure technology, a cult of personality, and reflexive greed could separate people from their life savings.

 

Binance Is Born

Seeing bitcoin and other cryptocurrencies start attracting everyday investors, Changpeng Zhao, a China-born, Canada-raised financial tech executive, launches Binance. This online exchange allows people to buy and sell crypto. The company will eventually become the biggest exchange in the world.

Meanwhile, new coins are introduced nearly daily — some 800 by mid-2017. Innovations like a tether — a currency whose value is designed to move in tandem with the U.S. dollar — emerge to facilitate trading. Venture capital money is pouring in. Noisy mining operations running crypto’s complex calculations sprout up around the world. Overnight, crypto millionaires known as “whales” proliferate. This looks less like a cutting-edge way to conduct transactions — too time-consuming — and more like an old-fashioned investment frenzy. And Binance is at the center of it.

0, and many other coins are riding high. At the same time, a year later, it has fallen to barely $3,000, and many coins have gone away, along with their investors.

There are many reasons for the crash: Global hacks, regulation in Asia, and bans on certain coin ads by Facebook and Google. Crypto will never be the same again. A House Financial Services subcommittee conducts a hearing on the risks of crypto. But with the crash, they don’t need to step in.

Russian crypto entrepreneur Alexander Vinnik stands trial in Paris, where he will be convicted of money laundering.

 

Gloom Descends

The froth of 2017 is followed by the frost of 2018. Before Christmas 2017, bitcoin is worth nearly $20,000, and many other coins are riding high. At the same time, a year later, it has fallen to barely $3,000, and many coins have gone away, along with their investors.

There are many reasons for the crash: Global hacks, regulation in Asia, and bans on certain coin ads by Facebook and Google. Crypto will never be the same again. A House Financial Services subcommittee conducts a hearing on the risks of crypto. But with the crash, they don’t need to step in.

Russian crypto entrepreneur Alexander Vinnik stands trial in Paris, where he will be convicted of money laundering.

 

Sam Bankman-Fried Found sFTX

A pandemic strikes, the world shuts down, and people are suddenly stuck at home with nothing to do. But they have an infusion of cash — buoyed by stimulus checks and all the income they’re not spending elsewhere. Crypto starts looking pretty good again. Forget transactional uses — this is about making a fast investment buck.

An exchange founded the previous year, FTX, starts to gain traction. New crypto banks like Celsius take off, offering seemingly magical 25 percent returns for depositors who leave their money with it. Bitcoin goes from $6,000 to $60,000, creating more whales. The rush also seeps into weirder provinces. The value of dogecoin, a dog-based coin launched as a satiric commentary on the crypto enterprise, skyrockets thanks to Elon Musk, then crashes. “Rug-pulls”— scams where newly launched coins are hyped by founders who quickly sell them and disappear — multiply. So make crypto-friendly ransomware attacks.

The People’s Bank of China bans all cryptocurrency transactions.

The Justice Department announces the launch of the National Cryptocurrency Enforcement Team (NCET).

Super Bowl commercials storm the airwaves, and crypto’s cultural moment is here. Pew Research several months earlier reported that 16 percent of Americans have traded or transacted in cryptocurrency, and the industry wants to grow it further. Bitcoin is now frequently above $40,000. Crypto companies are rolling in digital dough — enough to pay Matt Damon, LeBron James, Larry David, and others to tout their products. Two NBA arenas are renamed for crypto exchanges.

A growing group of critics — mainly tech figures, academics, and a handful of lawmakers — raise alarms. But the tech is going mainstream, with legacy entities like Fidelity encouraging more crypto investment. A crypto summer arrives only three years from the end of the crypto winter.

FTX Arena in downtown Miami used to be named American Airlines.

Super Bowl commercials storm the airwaves, and crypto’s cultural moment is here. Pew Research several months earlier reported that 16 percent of Americans have traded or transacted in cryptocurrency, and the industry wants to grow it further. Bitcoin is now frequently above $40,000. Crypto companies are rolling in digital dough — enough to pay Matt Damon, LeBron James, Larry David, and others to tout their products. Two NBA arenas are renamed for crypto exchanges.

Russia invades Ukraine, which quickly begins soliciting donations in cryptocurrency.

New York couple Heather Morgan and Ilya Lichtenstein are arrested for allegedly scheming to launder billions in crypto.

Over a few weeks beginning in May, crypto collapses. It starts with terra — a hot stablecoin and a companion token — falling apart. Whales and institutions sell it frantically, wiping out the wealth of hundreds of thousands of investors.

The erosion of something so hot has a negative effect throughout the industry. Crypto-banks Celsius and BlockFi, hedge fund Three Arrows Capital and broker Voyager face liquidity and other issues, with investors often unable to get their money back. Celsius, Three Arrows, and Voyager file for bankruptcy. FTX and Sam Bankman-Fried step in to provide a credit facility to BlockFi, for instance, but the long-term solvency of many of these entities is questionable. Trading platform Coinbase lays off 18 percent of its staff, with additional cuts in the fall. Bitcoin hovers in the low 20s for much of the summer, less than half its value from the comparatively go-go days of March.

Ethereum switches to a new transaction system, hoping to reduce crypto’s environmental toll. Bitcoin again dips below $19,000, wiping out the summer’s gains.

Over a few dramatic days in November, FTX faced a liquidity crisis and is nearly rescued by Binance. But after reviewing FTX’s books, Binance reneges, forcing FTX to file for bankruptcy. Bankman-Fried resigns as chief executive. Meanwhile, many customers can’t get their money — withdrawals are frozen.

Crypto investment is plunged as bitcoin dropped to its lowest point in nearly two years. The industry, and world, are left to wonder whether crypto can survive another crisis.

Over a few weeks beginning in May, crypto collapses. It starts with terra — a hot stablecoin and a companion token — falling apart. Whales and institutions sell it frantically, wiping out the wealth of hundreds of thousands of investors.

The erosion of something so hot has a negative effect throughout the industry. Crypto-banks Celsius and BlockFi, hedge fund Three Arrows Capital and broker Voyager face liquidity and other issues, with investors often unable to get their money back. Celsius, Three Arrows, and Voyager file for bankruptcy. FTX and Sam Bankman-Fried step in to provide a credit facility to BlockFi, for instance, but the long-term solvency of many of these entities needs to be improved. Trading platform Coinbase lays off 18 percent of its staff, with additional cuts in the fall. Bitcoin hovers in the low 20s for much of the summer, less than half its value from the comparatively go-go days of March.

 

Part One, Part Two, Part Three, Part Five

 

 

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