After the collapse of major cryptocurrency exchange FTX in November 2022, former CEO Sam “SBF” Bankman-Fried was arrested by Bahaman authorities on Dec. 12. Just a day later, the United States Securities and Exchange Commission and Commodity Futures Trading Commission filed charges against him for allegedly defrauding investors and violating securities laws.
On Dec. 22, Bankman-Fried was granted bail on a $250 million bond paid by his parents against the equity in their house. The bail order added that he would require “strict pretrial supervision,” including mental health treatment and evaluation. The former CEO faces eight criminal counts in the United States, which could result in 115 years in prison if convicted.
Bankman-Fried had been under house arrest at his parent’s home in California since Dec. 22 but returned to New York for the plea hearing. Later, in a Jan. 3 court hearing, he pleaded not guilty to all criminal charges related to the collapse of the crypto exchange. The charges included wire fraud, securities fraud, and violations of campaign finance laws.
Sam Bankman-Fried has arrived in court for his arraignment. We’re told he will plead not guilty to all the charges against him. pic.twitter.com/yakSLkOus8
— Connell McShane (@connellmcshane) January 3, 2023
Apart from Bankman-Fried, Caroline Ellison — the former CEO of FTX’s bankrupt sister company, Alameda Research — and former FTX co-founder Gary Wang were slapped with fraud charges. The SEC alleged that Ellison manipulated the price of FTX Token (FTT), which is described as a crypto security token in the document. The said manipulation was conducted by “purchasing large quantities on the open market to prop up its price,” which took effect between 2019 and 2022.
Both Ellison and Wang later pleaded guilty to the fraud charges and were cooperating in the Justice Department’s investigation into Bankman-Fried. Ellison also took a plea deal under which she would only be prosecuted for criminal tax violations.
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Doug Brooks, senior adviser at XinFin, told Cointelegraph that Ellison has already provided evidence to prosecutors, apparently indicating she will be a powerful witness in the case against Bankman-Fried. Brooks added:
“It is a common strategy for U.S. prosecutors in high-profile cases to build the case from the bottom up. This includes netting smaller fish and offering deals where they must, to make the strongest possible case against the primary target. Given that Ellison has already pleaded guilty and offered to cooperate after saying that she is ‘truly sorry,’ it will be no surprise if she escapes relatively unscathed with a lesser punishment for lesser charges — even more likely if the evidence she provides against SBF is as explosive as we already expect.”
With the involvement of U.S. authorities and the arrest of Bankman-Fried, many FTX users and investors were hopeful there would be concrete actions and a plan to get some of their funds back. However, the turn of events involving Bankman-Fried’s bail, his not-guilty plea and the plea deal for Ellison has cast doubt in the minds of many. However, Richard Mico, chief legal officer of crypto infrastructure service provider Banxa, told Cointelegraph that prosecutors are very serious about Bankman-Fried:
“The amount of bail he had to post — a staggering $250 million — alone would indicate the degree of seriousness that prosecutors are taking in this case. Moreover, regulators are not shielding Sam from potential consequences. Despite SBF getting cozy with regulators prior to his fall from grace, both the CFTC and SEC have since filed civil complaints against him.”
Mico noted that there is a mountain of evidence that SBF mismanaged customer funds, and while “it’s disheartening to see SBF out on bail now, I firmly believe that the crypto community will ultimately see justice.”
The crypto community is baffled by the movement of funds
Investors’ uncertainty grew greater when Alameda-linked wallets started to funnel millions of dollars just days after Bankman-Fried was released on bail. A total of $1.7 million was moved, but it was more so how these transactions were made that raised many eyebrows. The funds were routed using decentralized exchanges and mixer services to obscure the origin of the transactions.
A portion of these funds was reportedly later traced back to Bankman-Fried himself. He allegedly cashed out $684,000 in crypto to exchange in Seychelles while under house arrest, according to an on-chain investigation by decentralized finance educator BowTiedIguana.
When SBF agreed to take over control of the Sushiswap exchange from anonymous founder Chef Nomi in August 2020, he asked for ownership to be transferred to his Ethereum address pic.twitter.com/vask9WqSHd
— BowTiedIguana (@BowTiedIguana) December 30, 2022
On Dec. 28, according to BowTiedIguana’s analysis, Bankman-Fried’s public Ethereum address sent all its remaining Ether (ETH) to a newly created address. BowTiedIguana claimed SBF agreed to take over the address, owned initially by SushiSwap creator Chef Nomi, in August 2020.
Within hours, the new address received transfers totaling $367,000 from 32 addresses identified as Alameda Research wallets, with an additional $322,000 coming from other wallets. All funds were sent to a crypto exchange in Seychelles and the crypto bridge RenBridge.
Richard Gardner, CEO of fintech infrastructure firm Modulus, told Cointelegraph that the events after the bail should have been taken into consideration, explaining:
“He is the very definition of a flight risk, and bail should’ve been a non-starter. You have to consider that given his political donations, there are a number of important people whose fates are closely tied to that of SBF. I think there is an overwhelming sense that the public wants justice for the FTX debacle. However, his friends in politics may well help him put his thumb on the scale.”
Amid the growing rumors that Bankman-Fried was behind the movement of funds, the former CEO tweeted that he had nothing to do with it.
None of these are me. I’m not and couldn’t be moving any of those funds; I don’t have access to them anymore.https://t.co/5Gkin30Ny5
— SBF (@SBF_FTX) December 30, 2022
Will the FTX case set a precedent for the crypto ecosystem?
Bankman-Fried is set to face a four-week trial starting Oct. 2, the outcome of which could have a lasting impact on the crypto ecosystem. A trial focused on one of the biggest crypto exchanges of its time could become a defining moment, at least for centralized entities and service providers.
Some observers believe Bankman-Fried’s desire to help himself instead of prioritizing the goals of the crypto community, combined with the leverage against him, makes him the perfect puppet for prosecutors.
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Ari Redbord, head of legal and government affairs at digital asset risk management firm TRM Labs, told Cointelegraph that FTX represented the failure of centralized institutions rather than of crypto, explaining:
“It’s important to remember that in the case of FTX, this is about corporate fraud and corporate malfeasance, not about crypto. What happened with FTX is more akin to Enron, Lehman Brothers or WorldCom. The fraud here did not take place on blockchains, but rather on opaque centralized financial institutions, and it’s important to separate the technology from the business.”
Talking about the possible impact of Bankman-Fried’s prosecution, R. A. Wilson, chief technology officer at crypto exchange 1GCX, told Cointelegraph that the FTX fallout would most likely only impact centralized entities but would set off a slippery slope of setting precedents for future regulations:
“In the best-case scenario, regulation is staved off for as long as possible in favor of the free market and is only applied to truly protect investors. I anticipate that scenario is probably not the case, in reality, considering the ways that regulators have been searching for avenues to gain jurisdiction and regulatory power over these innovative technologies.”