FTX founder gamed markets, crypto rivals say
Sam Bankman-Fried speaks at the Crypto Bahamas conference in Nassau on April 27, 2022.
By EMILY FLITTER and DAVID YAFFE-BELLANY
In Sam Bankman-Fried’s quest to keep his cryptocurrency empire looking profitable, the disgraced founder of FTX often promoted newfangled digital currencies that crypto aficionados came to call “Samcoins.”
Bankman-Fried wooed the developers of these new coins with names like Serum and Maps, insisting that they make their trading debuts on the FTX exchange. Then his hedge fund, Alameda Research, would buy some of these newly listed Samcoins to prop up their value, while Bankman-Fried used FTX’s influence in the crypto industry to drum up interest in those coins and convince other investors to also buy significant amounts.
Bankman-Fried was thus able to inflate the coins’ value artificially, making Alameda look healthier than it was and papering over problems at his companies until they imploded in November.
The collapse of FTX and Alameda triggered criminal charges against Bankman-Fried over his mismanagement of the two firms, and has spotlighted his broader crypto dealings, including the aggressive trading practices he orchestrated for Alameda’s benefit.
His promotion of so-called Samcoins was a big part of those practices.
Graham Friedman, director at Republic Crypto, a digital asset strategy company, said it was easy to identify which coins were Samcoins. “It was any project whose value proposition was reliant on FTX and their success.”
Court records, reviews of social media posts and interviews with crypto investors, show how the trades worked.
Sometimes, Bankman-Fried appeared to be pushing up the prices of coins — including FTT, a coin that he had created — that FTX and Alameda would later use as collateral for loans, according to court records and interviews with crypto executives. Many of those executives also accused Bankman-Fried of trying to turn a quick profit by betting that a new coin would fail, or pumping up a coin’s value and then suddenly selling it, with the apparent goal of bolstering Alameda’s balance sheet.
The Justice Department has investigated whether Bankman-Fried and Alameda manipulated markets in a way that led to the collapse of two cryptocurrencies, Luna and TerraUSD, in May. Although they were not Samcoins, they were popular in the crypto world, and their collapse destabilized the entire industry.
Since his company imploded, Bankman-Fried has repeatedly denied accusations that he tried to manipulate cryptocurrency markets. In a text message, he compared his company’s efforts to bolster the price of FTT — by publicly announcing that it would buy large quantities — to share buyback schemes at public companies. And he said that his firm’s trading of FTT was designed to keep the market running smoothly by buying coins when people wanted to sell, and selling when they wanted to buy.
“Neither I, nor to my knowledge Alameda, ever intended to manipulate markets,” he wrote.
Signs that Bankman-Fried was orchestrating trades to his firms’ benefit weren’t all that hard to see in the crypto world, according to crypto developers who shared their stories on public forums and investors interviewed by The New York Times. The trades at the center of many of these schemes were openly visible on the blockchain, the digital ledger that records every transaction made in the public sphere of cryptocurrencies.
Bankman-Fried also created FTT to facilitate the trading of other coins on FTX. But according to fraud charges filed by the Commodity Futures Trading Commission on Dec. 13, Bankman-Fried kept FTT’s value artificially high, and then used it as collateral to borrow funds from lending firms. In the 40-page complaint, the CFTC said Alameda borrowed as much as $10 billion from various digital lenders against FTT and other holdings.
At one point, Bankman-Fried became concerned about the “the psychological effect of the price of FTT dropping below a specific threshold” and ordered Alameda to buy FTT to push the price back up, according to separate fraud charges filed by the Securities and Exchange Commission.
“The question always was: How does FTX have so much money?” said Haseeb Qureshi, a managing partner at Dragonfly, a San Francisco-based venture capital firm to which Bankman-Fried and his team pitched investment deals, including new coin launches.
Qureshi wasn’t the only one with doubts.
While Bankman-Fried was raising funds to start FTT in mid-2019, there were rumors that Alameda was struggling. Ryan Salame, a top FTX executive, told an industry participant that Alameda was losing money, according to screenshots of text messages viewed by the Times; the industry participant did not want to be named because he considered Salame a friend. (A spokesperson for Bankman-Fried said in a statement that the FTX founder was “fairly confident” that Alameda made money in 2019.)
Still, FTT was lucrative for early investors. The coin’s price skyrocketed to nearly $80 in late 2021, about 40 times what it was worth two years earlier. As the broader crypto market surged, Bankman-Fried cultivated a public persona as a wunderkind entrepreneur who intended to donate all his wealth to charity.
Alameda benefited from its close association with FTX, and ran a venture capital operation seeding other startups, expanding Bankman-Fried’s influence.
For developers who had designed a new coin and wanted a prominent platform for its first-ever sale, Bankman-Fried’s offer to have FTX be the launching pad was hard to resist. It was a winning proposition for both parties: Developers could use FTX and Alameda’s names to ensure strong demand for their new coins. Alameda, which bought and kept coins for itself, would benefit from having the price of a new coin driven up by frenzied demand from investors, who were reliably lured by its backing.
Soon Bankman-Fried’s reach extended across the crypto industry. He heavily promoted the cryptocurrency Solana, which Alameda used as collateral for loans, according to financial documents viewed by the Times and a person with knowledge of the arrangement. And he also promoted obscure cryptocurrencies such as Bonfida, Oxygen and Maps.
One strategy was clear, according to Qureshi: Bankman-Fried would offer coins created by developers on FTX and give a select group of investors the chance to buy in early at low prices, with a wink and a nod that the price would certainly go higher.
Bankman-Fried’s involvement in starting the coin Serum, which was supposed to support decentralized transactions made directly between users, shows how it worked.
Toward the end of 2020, Bankman-Fried offered Dragonfly and other investors a chance to put $1 million into Serum at a certain value, Qureshi said. The FTX founder then gave them 24 hours to decide whether to accept the offer. He limited the number of investors who could sign up for the offer, passing around a spreadsheet and warning potential investors that once it was full, the price of investing would rise.
Qureshi had never seen a pitch like it. He had many questions about how the new product to which the coin was attached would work, but felt that Bankman-Fried had left no time to inquire.
Qureshi and his team passed, but other investors bought into Serum, figuring it was a safe bet. Bankman-Fried had promised a seven-year lockup on the coins, meaning their value was practically guaranteed to stay high because none of the investors would be allowed to sell them.
At the same time, Alameda was earning a reputation for aggressive trading that caused friction with other crypto projects.
In March 2021, Alameda agreed to buy up to $80 million worth of digital tokens issued by Reef Finance, a crypto developer, with the understanding that the hedge fund would be a long-term investor, according to an account of the deal published on Reef’s website. But Alameda would not sign a legal contract for the transaction, instead asking Reef to operate “based on ‘trust,’” the Reef post said.
Reef’s price surged once the deal was announced. But shortly after the first $20 million of tokens was delivered, Alameda sent a portion of them to an account at the giant crypto exchange Binance, according to blockchain records, suggesting that the firm intended to sell them at a profit.
On Twitter, Alameda’s CEO at the time, Sam Trabucco, defended the company’s conduct, saying it had no official relationship with Reef but had still held onto “the great majority” of the tokens.
In response, Reef suggested that Alameda had engaged in market manipulation. “We could not understand why Alameda, our long-term strategic investor, would offload their tokens,” the blog post explained. “This action hurt retail investors and should be a cautionary tale.”
In a brief interview this month, Denko Mancheski, the founder of Reef, declined to discuss the incident in detail. “Their practices were widely known,” he said. “We were just one team that decided to say it out loud.”
But it was another branch of Bankman-Fried’s crypto trading strategy that ultimately became his undoing.
As the crypto market foundered in 2022, Bankman-Fried’s reliance on Samcoins started attracting criticism. In November, the crypto publication CoinDesk reported on a leaked Alameda balance sheet that showed the company’s assets consisted largely of FTT, Serum, Maps, Oxygen and other cryptocurrencies that would be difficult to convert into cash.
The disclosure helped set off a run on deposits at FTX that exposed an $8 billion hole in its accounts, eventually forcing the exchange and Alameda to file for bankruptcy.