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The trial of SBF, the co-founder of FTX, has commenced, shedding light on the events leading up to the company's downfall. FTX, once the third-largest cryptocurrency exchange with a peak valuation of $32 billion, is now in the process of recovering funds to compensate creditors.
Prior to FTX, SBF had co-founded Alameda Research, a crypto-trading firm, in 2017. In 2019, he established FTX as a means to generate revenue and liquidity for Alameda's trading arm. Within a short span of two years, FTX attracted over 80 investors who injected around $2 billion in capital, allowing SBF to turn his vision into reality. The company's valuation skyrocketed to $32 billion after a successful Series C funding round in January 2022, marking its final public funding.
FTX garnered attention through branding partnerships, such as securing naming rights for the Miami Heat's arena, featuring its name on Major League Baseball umpires' polos, and collaborating with renowned figures like Tom Brady, Gisele Bündchen, Steph Curry, and Shaquille O'Neal. However, its liquidity significantly increased when an Alameda balance sheet leaked, revealing the firm's possession of $14.6 billion assets and $8 billion liabilities as of June 30, 2022.
The leaked balance sheet highlighted a problem, showing that Alameda owned $5.82 billion in FTT tokens, which exceeded the total FTT market cap of $3 billion. This discrepancy indicated that Alameda supposedly held more FTT tokens than physically existed. Around the same time, Binance, the largest crypto exchange globally, withdrew its remaining $2.1 billion equivalent in BUSD and FTT, instigating a bank run on FTX.
Consequently, FTX and Alameda filed for Chapter 11 bankruptcy in November 2022. SBF stepped down, and the company appointed Enron turnaround expert John J. Ray III as the new CEO. Following his arrest in December 2022 in the Bahamas, where FTX was headquartered, SBF was extradited to the United States to face multiple criminal charges. He was released on a $250 million bail bond but was put under house arrest at his parents' residence in Palo Alto. However, the house arrest was later revoked after allegations of intimidating Alameda's former CEO, Caroline Ellison, by leaking her private diary.
During a House Financial Services Committee hearing, Ray, representing FTX, acknowledged the inadequate internal controls and lack of risk management systems within the organization. U.S. Attorney Damian Williams referred to Bankman-Fried's alleged crimes as one of the most significant financial frauds in U.S. history.
In December 2022, FTX co-founder Gary Wang and Alameda Research's former CEO, Caroline Ellison, pleaded guilty to federal criminal charges related to the collapse of FTX. Additionally, they are facing civil penalties from the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission. Both Wang and Ellison intend to cooperate with prosecutors and serve as key witnesses in the upcoming trial, given their close associations with SBF, FTX, and Alameda.
SBF pleaded not guilty to all charges, including wire fraud, conspiracy to commit money laundering, and conspiracy to misuse customer funds, in January. If convicted on all counts, he could face a maximum sentence of 115 years in prison. The collapse of FTX had a profound impact on the broader crypto industry, with subsequent bankruptcy filings by BlockFi and Genesis Global Trading.
As the trial unfolds, the fate of investors and creditors affected by the collapse remains uncertain. Moreover, the legal proceedings raise questions about the fate of billions of dollars' worth of crypto assets embroiled in the case.