What happened to Sam Bankman-Fried, and was FTX a crypto scam?

Sam Bankman-Fried, entrepreneur, investor, founder and controversial CEO of failed cryptocurrency exchange FTX, was arrested this week in the Bahamas and it has now emerged that the US Securities and Exchange Commission (SEC) is charging him with orchestrating a scheme to defraud his investors. In light of the allegations of fraudulent activity being levied at Mr Bankman-Fried, many former users of the FTX platform and others involved in the cryptocurrency space are left wondering whether the platform itself was some sort of crypto scam, or whether it was solely the platforms investors who were allegedly defrauded of their money.

What happened to FTX?

Samuel Bankman-Fried, also known in the crypto world by his initials ‘SBF’, set up the FTX crypto trading platform in 2019, alongside sister company Alameda Research – a cryptocurrency based hedge fund that he privately owned as an investment vehicle. In 2022, FTX fell into severe financial difficulty when it emerged that a large proportion of Alameda Research’s owned assets were held as FTX’s own native cryptocurrency token, named FTT. Rival exchange platform Binance subsequently announced that they were selling all of their own FTT tokens, prompting mass consumer panic and a huge influx of users with FTT tokens trying to cash out. Whilst this would inevitably crash the value of the token, it shoudn’t necessarily have brought down the platform itself, and it has since emerged that the reason for FTX filing for bankruptcy was alleged severe financial mismanagement. In what is being dubbed by experts as an “unprecedented situation”, the company is being accused of having “a complete absence of trustworthy financial information”. After initially announcing their intention to buy FTX upon the crash caused by users offloading FTT en-masse, Binance withdrew their offer the following day when the due diligence process began and discrepancies came to light, citing U.S agency investigations into the platform’s mishandling of customer and investor funds. It is now alleged that these investigations had been ongoing for some time before their interest had been registered.

What did SBF supposedly do?

Mr Bankman-Fried has been arrested in the Bahamas and his extradition to the US is pending, where he faces trial for eight charges that are all related to unscrupulous activities around the handling of company funds. The charges he’s facing include multiple counts and variants of wire fraud, conspiracy and fraud, including misuse of investors and customers funds. He faces an eye-watering 115 years in prison if he is convicted of all counts brought by the Southern District of New York. A spokesperson for the Southern District of New York issued a statement regarding the charges against Mr Bankman-Fried, in which he stated that the allegations of fraud in the case of SBF are amongst the largest in US history. He is also accused of syphoning customer funds from FTX to his privately owned Alameda Research, and subsequently using this money to illegally fund election campaigns. It is claimed that this was done in a bid to buy influence over policy making within the US government.

Is FTX a scam?

The accusations of fraud levied against Mr Bankman-Fried appear to centre on the misuse of customer and investor funds, however it appears that the platform itself was legitimate, at least for a time. SBF’s side of the story states that he never knowingly committed fraud at all, and he is claiming naivety rather than intentional mismanagement. The extent of evidence in the pending trial will allow customers and investors alike to understand the full extent of whether FTX was indeed a scam.

If you have been affected by the collapse of FTX or suspect you may have been scammed by another cryptocurrency exchange, you may want to consider enlisting the help of professional investment fraud lawyers who can assist you with investigations.