
On January 14, 2022, former crypto mogul Sam Bankman-Fried announced that FTX Ventures would be launching a $2 billion venture capital fund, named FTX Ventures. As a founder, it's crucial to support other founders who are creating great companies. Hopefully this will allow us to do that a lot more.
To be certain, to be certain, is a noble goal. But instead of raising capital for the fund from external investors, Bankman-Fried used money from third party lenders like Genesis Global Capital that had gone to Alameda Research, Bankman-Fried's cryptocurrency trading firm, according to testimony from Caroline Ellison, former CEO of Alameda Research.
Ellison testified on Tuesday as the fifth witness for the prosecution in Sam Bankman-Fried's six-week trial. In a statement, she claimed that her former FTX CEO directed her to commit fraud and money laundering crimes.
Alameda had already made some venture investments by the time Bankman-Fried posted that tweet, but the CEO wanted to up the ante significantly. In the'summer or fall of 2021,' Bankman-Fried sent Ellison a potential bad scenario situation for FTX and Alameda, detailing a world in which the crypto market was down, Alameda's investments fell and the company became worthless. Bankman-Fried had put that reality into the 10th percentile, Ellison said, which is still fairly risky in the trading world.
Bankman-Fried had been thinking about investing another $3 billion into early stage companies and wanted to know how that would affect Alameda's finances if the shit hit the fan. Not surprisingly, Ellison found that it would put Alameda in a riskier position than it was already in - when Alameda's net asset value was negative $2.7 billion at the time, and make it unlikely or impossible to pay off its loans if they were called all at once.
So if Alameda was operating under the assumption that it would take FTX customer funds for repaying any loans, that would mean FTX would lose a significant amount of money in this scenario.
Ellison testified that she shared these concerns with Bankman-Fried and played out alternative scenarios to take out more loans for investments, such as raising more equity, investing less in ventures and selling more FTT. Bankman-Fried asked her to run the numbers again, assuming that all Alameda's loans from Genesis were fixed, rather than open-term. Most of Alameda's loans were open-term, which is more risky because it allows the loan to be repaid at any time.
Then you would have to repay it even if you don't necessarily have the funds available, Ellison said.
In a scenario where Alameda's loans could be changed to fixed-term, Ellison estimated that the company was down to a 30% chance of not being able to pay off its loans in a bad market scenario.
Bankman-Fried urged her to try to change Alameda's loans to fixed-term. Some of the amendments were able to change some, but the majority remained open-term. She had run a scenario for that reality as well.
If Alameda's mostly open-term loan structure were to go down, Ellison found that if Alameda made $3 billion in investments, the probability of Genesis recalling its loans would be 25 percent. The probability that the company would not be able to make those loan payments would go from 30% to 100%.
Ellison's testimony and cross-examination will continue on Wednesday.