The Wall Street Journal Special Report: SBF and His Destined Crypto Empire

Original Title: 《They Lived Together, Worked Together and Lost Billions Together: Inside Sam Bankman-Fried's Doomed FTX Empire》
Original Authors: Alexander Osipovich, Caitlin Ostroff, Patricia Kowsmann, Angel Au-Yeung and Matt Grossman
Original Translation: Leo, BlockBeats

Bahamas - Nassau, recently, SBF's $32 billion cryptocurrency trading empire has collapsed under public scrutiny, raising questions among investors, crypto enthusiasts, and Silicon Valley moguls about how a seemingly promising company could fall apart so quickly.

Recent developments indicate that FTX did not simply go bankrupt due to being outperformed by its rivals, poor trading, or the ongoing decline of the crypto market this year; rather, it is a culmination of long-standing chaos. Court documents, balance sheets, and interviews with employees and investors reveal that the early FTX was a "hard-to-define corporate entity, a collection of customer assets and SBF," and no one could accurately describe to whom it belonged. Prosecutors are currently investigating the issues surrounding FTX.

According to documents submitted to federal court by individuals attempting to help FTX through its troubles, SBF's company had neither accounting practices nor a functioning human resources department. Company funds were used to purchase real estate, but there were no records. There wasn't even an employee roster, let alone their employment terms. Bankruptcy filings show that one entity's outstanding loans included at least $1 billion to SBF personally and $543 million to an executive (Nishad).

The lives of executives running FTX and related companies were equally chaotic, as the ten of them lived and worked together in a $30 million luxury resort penthouse in the Bahamas, making it hard to distinguish between work and leisure. Former employees revealed that there were ambiguous relationships among SBF's inner circle, and the use of stimulants was common.

30-year-old SBF maintained an intense work schedule, switching between six screens and sleeping only a few hours a day. According to former employees, he often had a romantic relationship with 28-year-old Alameda CEO Caroline Ellison.

Ellison once wrote on Twitter: "Nothing makes you realize how stupid normal, non-drugged humans are like regularly using amphetamines." Ellison's lawyer declined to comment on this.

To the outside world, SBF was the mayor of "cryptoland," responsible for persuading lawmakers, investors, and crypto enthusiasts to establish a new financial system. He urged Congress and regulators to approve his crypto trading model, claiming that on FTX, computers would cross-check positions and risks, and algorithms would react within milliseconds to prevent bad trades from spilling over and harming other customers. On Twitter, he warned competitors that their actions were unsafe.

But behind the scenes, SBF was taking enormous risks. Despite publicly stating that Alameda was merely a regular user of the FTX trading platform, the company spent $8 billion to purchase shares in this "startup" and engaged in credit trading that other users could not access. Most of this money (mostly belonging to FTX's customers) has likely vanished.

FTX collapsed in just over a week, going from "industry exemplar" to "on the brink," raising renewed skepticism about the crypto world due to its unregulated status and the potential long-term misguidance of numerous investors. In recent years, investors have poured hundreds of billions of dollars into the crypto space, with many stable financial institutions eventually getting involved.

John Ray III, the executive attempting to handle the aftermath of FTX's bankruptcy, stated that FTX's condition was the worst he had seen in his ten-year career, which included the Enron accounting scandal. He noted that many of the company's digital asset records appeared to be missing or incomplete, and in many cases, relevant bank accounts could not be located.

In last week's bankruptcy filings, a remittance company based in Kenya was listed as an FTX corporate entity, leaving its CEO Elizabeth Rossiello shocked. In a financial report from 2021, FTX stated it had agreed to spend about $220 million to acquire the company but never did so. Rossiello stated that no agreement was reached, nor was any funding provided. "We were to become their exclusive partner in Africa," she said, "and that was it."

"From compromised system integrity and foreign regulatory oversight failures to control being concentrated in the hands of a few inexperienced, immature, and potentially harmful individuals, this situation is unprecedented." John J. Ray III stated in court documents.

A more detailed analysis of FTX's issues may take months, but attempting to manage risk and restore its image after such a failure in company and operational outcomes is a pipe dream.

SBF attributed the misuse of customer funds to poor asset records and a large number of unexpected customer withdrawals.

"I'm sorry, this is the most important thing," he wrote on Twitter on November 10. "I messed up, I should have done better."

The "Golden" Boy

SBF's combination of bravado and humility attracted numerous crypto and financial firms, with investors pouring billions into the company "run by a League of Legends fan with an afro," as he wore tattered T-shirts and slept in beanbag chairs, raised by two well-known professors at Stanford University who were fluent in the language of educated individuals.

Unlike most startups, FTX seemed to generate billions in profits from daily trading, and SBF was not like other crypto founders; he claimed that the only purpose of accumulating wealth was to donate it, as part of a movement known as "effective altruism," where he lobbied lawmakers to regulate the "sneaky" crypto market.

SBF's company appeared stable, as FTX raised about $2 billion from investors like Sequoia Capital and the Ontario Teachers' Pension Plan, seemingly flush with cash.

However, by the end of last year, the company began making an unusual offer to Bahamian banks: according to the banks, depositing cash into FTX could yield interest rates as high as 12%.

Then in May, the crypto market crashed, and several crypto companies went bankrupt, with SBF playing the role of the white knight.

FTX and Alameda provided hundreds of millions in credit to support a struggling lending institution, BlockFi, and attempted to save Voyager Digital from bankruptcy.

People compared SBF's heroic deeds to John Pierpont Morgan's solo bailout during the 1907 banking crisis.

He told The Wall Street Journal in July: "Some struggling small companies did take on significant and unreliable risks."

No Boundaries

Behind the scenes, the entanglement between Alameda and FTX was far more complex than the outside world imagined.

Alex Pack first met SBF in December 2018 at Cafe Gray Deluxe on the 49th floor of the Upper House hotel in Hong Kong, where this potential investor was concerned about the apparent lack of barriers between the two companies.

At the time, as a managing partner of the crypto-focused venture capital firm Dragonfly Capital, Pack was considering investing in Alameda and was captivated by the disheveled founder, who arrived 20 minutes late to the meeting wearing shorts and a T-shirt.

During a month-long due diligence process, a trading error from April 2018 was discovered, resulting in Alameda losing over $10 million. Dragonfly learned of this after chatting with Alameda's traders, and Pack noted that the financial data provided by the company did not reflect this trade. When asked about the loss, SBF seemed indifferent, saying, "We thought at the time that it was a very reckless gamble." Pack is now a managing partner at Hack VC.

When SBF revealed that Alameda was developing a crypto trading platform—what would become FTX—he only hoped Dragonfly would fund Alameda, not the new project. Pack said, "The proposal to use our money to fund his new business would jeopardize the business we were investing in, which made me uncomfortable."

In July, SBF told The Wall Street Journal that Alameda followed the same rules as other traders at FTX, stating, "No team can have privileges."

For a long time, he praised the merits of FTX's "risk engine," a system that monitored traders betting on a series of chaotic crypto trades. If someone's bets deteriorated, the system would require more collateral, and if the trader failed to add margin in time, FTX could liquidate the trader's assets.

However, according to bankruptcy court documents, Alameda had a "secret exemption" that allowed it to avoid liquidation in certain circumstances, with no details provided in the documents.

Alameda's special status allowed it to easily withdraw $8 billion directly from FTX. According to a financial document written by FTX on November 7, most of these funds were used to purchase shares in startups and illiquid tokens.

The documents show that Alameda spent $1.1 billion to acquire shares in Genesis Digital between August 2021 and April 2022. Companies like Genesis Digital have seen their values plummet in recent months.

Alameda also invested in the AI startup Anthropic, founded last year by supporters of the effective altruism movement. Anthropic stated in a press release that SBF and FTX executives led a $580 million investment in the company. The documents indicate that this funding was actually made using the company's money.

The documents also show that Alameda invested in venture capital funds supporting FTX, including a $200 million fund operated by Sequoia Capital and a $20 million fund operated by Paradigm. Before its collapse, Alameda and FTX had a combined valuation of over $5 billion for their venture capital and crypto investments.

What is the Value of FTT?

The fates of FTX and Alameda were intertwined in another significant way. Financial documents reviewed by The Wall Street Journal show that Alameda was highly reliant on its holdings of FTT.

Throughout history, humans have attributed value to entities. After all, a dollar bill is just a piece of paper, but its value comes from centuries of traditions, agreements, laws, and practices. Crypto has capitalized on this well: create a type of token with code, give it a name, and convince others that it is worth $10. If you hold 100,000 of these tokens, then theoretically, you now possess assets worth $1 million.

Crypto investors believed that FTT was similar to FTX's stock, and as FTX grew into one of the world's largest digital currency trading platforms, its value rose accordingly.

Alameda held the largest share of existing FTT. Documents show that before the bankruptcy, its FTT was valued at $5.5 billion.

These tokens provided Alameda with a sort of superpower: the company could use its reserves of FTT as collateral and borrow other currencies to fund its trading strategies.

But this strategy had a significant flaw: if the price of FTT plummeted, Alameda's funding sources would dry up.

The documents also listed $5 billion in SRM and $1.7 billion in SOL, tokens sometimes referred to as "Sam coins," due to SBF's role in promoting them. Alameda created SRM in 2020, while SOL was launched by a startup supported by Alameda. FTX listed the tokens on its platform, enhancing their credibility in the crypto market and helping to boost their prices, while Alameda counted them as assets on its balance sheet.

SBF's most proud transaction was "saving his own company in a time of crisis." According to insiders, this summer, BlockFi held hundreds of millions of dollars worth of FTT as collateral for loans. If the lender failed, the liquidation of these tokens would cause FTT to crash, prompting FTX to provide a $400 million revolving credit line to keep it afloat.

A spokesperson stated, "BlockFi was unaware of or involved in any improper business conduct by FTX or its counterparties."

On June 6, as a wave of layoffs swept through the crypto industry, SBF tweeted that FTX would "continue to grow while others are laying off." Insiders said that later that month, FTX laid off about 20 employees, most of whom were in the Bahamas, without public notice, and FTX required some to sign non-disclosure agreements.

Gaming Enthusiast

After leaving MIT, SBF began his career at Jane Street. For fun, he and some colleagues played intelligence-testing games like Bughouse chess, a version of chess played by four players on two boards.

He founded Alameda in 2017 and launched FTX two years later. The trading platform specialized in investments such as perpetual futures, leverage, and options, markets that U.S. regulators prohibited Americans from entering, allowing traders to engage in massive debt investments.

After working in Hong Kong for a time, SBF and FTX moved to the Bahamas in 2021 to take advantage of the crypto-friendly regulatory environment there.

According to island residents, there is an 80-square-mile oasis on New Providence Island that financial elites feel is like a small club, and FTX arrived and quickly acquired property, making a splash on the island.

Locals expressed their excitement at being part of a new wave of industry. Bahamian Prime Minister Philip Davis stated in several public speeches that he hoped FTX would help the Bahamas become a hub for the crypto world. Earlier this year, when a Bahamian FTX employee had the opportunity to purchase equity in FTX, they stated that each employee essentially spent thousands of dollars to make the purchase.

According to insiders, FTX spent tens of millions of dollars building residences, transforming part of a beachfront resort into an extension of FTX territory, and the resort opened a 24-hour restaurant for FTX employees.

Fundraising Ability

In 2021, Silicon Valley experienced a crypto boom. The direct listing of Coinbase Global Inc. gave the company a massive market capitalization of $65 billion after its first day of trading. According to PitchBook data, venture capitalists invested over $9 billion in crypto and blockchain startups in the first half of 2021, nearly triple the total investment for all of 2020.

According to financial statements reviewed by The Wall Street Journal, FTX never truly went through the typical loss phase common for startups; the trading platform reported $89.9 million in revenue and $14.4 million in operating profit in 2020, its first full year of operations. Ray, the new CEO tasked with helping FTX, expressed skepticism about the company's past profitability.

Insiders stated that SBF could decide any transaction terms, even as one investment firm recommended by SBF was told—it had less than a week to decide whether to join. When that firm requested more information about FTX's balance sheet, FTX refused to provide it.

Potential investors noted that unlike typical founders who seek to raise funds, SBF seemed uninterested in money; he often heeded the advice of another executive, Ramnik Arora, before moving on to other tasks.

In September, a post about FTX published on Sequoia's website mentioned that SBF was playing League of Legends while on a call with Sequoia Capital, a post that was later deleted.

In summary, within just seven months, dozens of investors poured about $2 billion into his company, flocking to bet on one of the hottest startups in the world.

Large Expenditures

SBF made millions of dollars in donations to the Democratic Party and funded various causes, including combating climate change and treating tropical diseases, deeply immersed in the effective altruism movement.

FTX spent heavily to attract new customers, agreeing last year to pay $135 million over 19 years to have its logo emblazoned on the Miami Heat's home basketball court.

This deal seemed to elevate FTX into the upper echelons of American business, followed by other sponsorships, including F1 racing, prestigious chess tournaments, esports organizations, and other NBA teams.

Its advertisements featured sports stars, including Tom Brady and Stephen Curry, suggesting that understanding and joining the crypto world was not important; what mattered was the FTX app.

In one advertisement, retired Boston Red Sox slugger David Ortiz received a call while watching a game.

"Are you interested in crypto? Join FTX? Stephen and Tom are in it too?" Ortiz said, "I'm in, brother."

Cracks Begin to Show

This year's downturn in the crypto market sent a chill through Silicon Valley, but SBF needed more money; he hoped to raise another $1 billion to acquire struggling crypto startups and consolidate control over the industry.

According to two investors who spoke with SBF, he painted a grand vision to potential investors, proposing the acquisition of Robinhood Markets Inc.

But having made a name for himself in Silicon Valley, SBF turned to wealthy Middle Eastern sovereign wealth funds. At last month's Saudi Future Investment Initiative, he met with officials from the Public Investment Fund and introduced them to FTX, flying from there to Abu Dhabi to seek investments from the emirate's wealth fund.

But he returned empty-handed.

On November 2, CoinDesk published an article detailing a copy of Alameda's financial report, marking the first "crack" in SBF's empire, revealing that Alameda's balance sheet was filled with billions of dollars worth of FTT and various "Sam coins."

Ellison tweeted that the leaked balance sheet only reflected "a portion of our corporate entities," but the damage had already been done.

CoinDesk's report caught the attention of Binance CEO CZ. Binance was a major holder of FTT, with over $500 million in FTT.

On November 6, CZ tweeted that Binance would sell its holdings of FTT, a move that could lead to a price crash. While many observers attributed this move to his long-standing rivalry with Bankman-Fried, CZ stated he was protecting Binance from the risks of holding illiquid tokens.

Subsequently, Ellison tweeted that Alameda would "be happy" to buy all of Binance's FTT at $22 each. Insiders noted that Binance had reached out to her about this proposal but never received a response.

CZ's tweets sparked customer doubts about FTX. On November 7, FTX faced withdrawals worth about $5 billion.

If FTX had managed customer funds like traditional financial institutions, it would have separated customer funds from other businesses.

But insiders stated that FTX had lent billions of dollars of customer funds to Alameda to pay off its debts.

Reports indicated that FTX intended to lend customer funds to Alameda, which FTX questioned. In a statement released by Vox on Wednesday, he accused "chaotic accounting," adding, "I only realized the full scale of it a few weeks ago."

With hidden loans in place, the massive withdrawals became a fatal blow. On November 7, SBF tweeted, "FTX is fine. Assets are good." However, behind the scenes, he was busy seeking a wealthy investor to fill the gap; that tweet has since been deleted. Insiders revealed he had spoken with rivals Coinbase and Kraken but made no progress.

Ultimately, SBF was forced to turn to his nemesis: Binance.

An insider stated that on the evening of November 7, while CZ was preparing notes for an upcoming meeting in his Dubai office, he received a message from SBF via Signal, congratulating CZ and stating that Binance was the perfect buyer for FTX.

On the morning of November 8, SBF sent a message to his team apologizing for the chaotic situation and thanking them for their efforts.

FTX's senior marketing officer Nathaniel Whittemore stated, "It's clear the game is over."

That morning, Binance announced a non-binding agreement to acquire FTX, shocking investors who believed in SBF's empire and astonishing his employees, most of whom were unaware of FTX's problems.

An insider noted that when Binance executives carefully reviewed the terms related to FTX, they faced a confusing mess. Additionally, the gap that needed to be filled was continuously expanding: FTX initially set it at $2 billion, then $5 billion, and finally over $8 billion.

Reportedly, most of FTX's lawyers resigned during the negotiations, contributing to the mass exodus of company employees.

On November 9, SBF messaged Binance inquiring about the latest developments: "Hello everyone, we are still very happy to be working with you on this matter. Clearly, we've seen a lot of public articles claiming leaks, but we don't know if that's true. We would love for you to clarify this."

Three minutes later, CZ replied to FTX. "Sam, I'm sorry," he said, "we can't proceed with this deal. Too many issues. CZ."

Aftermath of the Explosion

SBF attempted to raise funds from other investors, who inquired about the whereabouts of customer funds. In a conference call on November 9, he told potential investors that FTX accepted $16 billion in customer assets valued in various cryptocurrencies and lent more than half of that to Alameda.

According to a recording of the call heard by The Wall Street Journal, SBF told potential investors, "There is a… a margin position of about $8 billion that will soon lead us to not have enough liquid assets to meet withdrawals."

According to an insider, during a video conference with Alameda employees on November 9, CEO Ellison apologized, expressing disappointment to her staff.

Insiders stated that Ellison indicated that she, SBF, and two other FTX executives were aware of the decision to send customer funds to Alameda, leaving many Alameda employees stunned the next day when the news broke.

A former colleague noted that Ellison, known for her large-framed glasses and ability to connect with like-minded individuals, often became taciturn in high-pressure trading environments, potentially overshadowed by louder, more confident peers, especially SBF.

On November 10, The Wall Street Journal reported that FTX had used customer funds to support Alameda. The crypto community launched a fierce backlash against SBF, who was labeled "Scam Bankrun-Fraud" on social media.

"I am really struggling to contain my anger," Kraken CEO Powell tweeted. "This is not a case of overreaching and poor decision-making; this is reckless, greedy, selfish, arrogant, and antisocial behavior that has wagered decades of hard-won progress in this industry for personal gain, even though he was already wealthy."

The next day, FTX filed for bankruptcy.

FTX's collapse shook the crypto world. BlockFi halted withdrawals on November 10 and prepared to file for bankruptcy. On November 16, the crypto lending platform Genesis, which had suspended withdrawals, tweeted that it had hired advisors and was exploring all possible solutions.

Shortly before filing for bankruptcy, FTX hired a Bahamian security firm to guard its headquarters. After the news broke, most non-local FTX employees left the island, and security found themselves protecting an empty shell.

SBF and the remaining employees attempted to raise funds over the weekend to fill FTX's $8 billion gap and repay customers.

Restaurant staff noted that before the company's collapse, FTX employees frequently visited Island Brothers, a high-end French bistro particularly close to FTX. The owner recognized SBF when his father visited Nassau to see his son—Stanford tax law scholar Joseph Bankman.

Last week, at the height of FTX's collapse, a dejected SBF arrived at Island Brothers, exchanged a few pleasantries, and then broke down in tears.