After major cryptocurrency exchange FTX collapsed in November 2022, former CEO Sam “SBF” Bankman-Fried was arrested by Bahamian authorities on December 12. Just a day later, the United States Securities and Exchange Commission and the Commodity Futures Trading Commission filed charges against him for allegedly defrauding investors and violating securities laws.
On December 22, Bankman-Fried was released on bail from $250 million bond paid by his parents out of the equity in their home. The bail order added that he would require “strict pre-trial supervision”, including treatment and a mental health assessment. The former CEO faces eight charges in the United States, which could result in 115 years in prison if convicted.
Bankman-Fried had been under house arrest at his parents’ home in California since Dec. 22, but returned to New York for the plea hearing. Later, in a court hearing on January 3, 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 are told he will plead not guilty to all charges against him. pic.twitter.com/yakSLkOus8
— Connell McShane (@connellmcshane) January 3, 2023
Besides Bankman-Fried, Caroline Ellison – the former CEO of FTX’s bankrupt sister company Alameda Research – and former FTX co-founder Gary Wang were charged with fraud. The SEC alleged that Ellison manipulated the price of the FTX token (FTT), which is described as a cryptographic security token in the document. Said manipulation was carried out by “buying large quantities on the open market to support its price”, which took effect between 2019 and 2022.
Ellison and Wang later pleaded guilty to fraud charges and were cooperating with the Justice Department’s investigation of Bankman-Fried. Ellison also entered into a plea agreement under which she be prosecuted solely for criminal tax offenses.
Doug Brooks, a senior adviser at XinFin, told Cointelegraph that Ellison had already provided evidence to prosecutors, apparently indicating she would be a powerful witness in the case against Bankman-Fried. Brooks added:
“It’s a common strategy for US prosecutors in high-profile cases to build the case from the bottom up. This includes catching smaller fish and making deals where they need to, to make the strongest case possible against the primary target. Considering Ellison has already pleaded guilty and offered to cooperate after saying she was “really sorry,” it won’t be surprising if she walks away relatively unscathed with a lesser sentence for lesser charges – again. more likely if the evidence she provides against SBF is as explosive as we already expect.
With the involvement of US authorities and the arrest of Bankman-Fried, many FTX users and investors hoped that there would be concrete actions and a plan to recover some of their funds. However, the turn of events involving Bankman-Fried’s release on bail, his not guilty plea, and the plea deal for Ellison 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 – would alone indicate how serious prosecutors are taking this case. Also, regulators don’t protect Sam from potential consequences. Although SBF approached regulators before his fall from grace, the CFTC and SEC have since filed civil complaints against him.
Mico noted that there is a mountain of evidence that SBF mishandled client funds, and while “it is disheartening to see SBF out on bail now, I firmly believe the crypto community will finally see justice.”
The crypto community baffled by the movement of funds
Investor uncertainty grew when Alameda-linked wallets started funneling millions of dollars just days after Bankman-Fried was released on bail. A total of $1.7 million was transferred, but it is above all the way in which these transactions were carried out that raised many eyebrows. The funds were routed using decentralized exchanges and mixing services to hide the origin of the transactions.
A portion of those funds would then have gone to Bankman-Fried himself. He allegedly cashed in $684,000 in crypto from an exchange in Seychelles while under house arrest, according to an on-chain investigation by decentralized finance educator BowTiedIguana.
When SBF agreed to take control of anonymous founder Chef Nomi’s Sushiswap exchange in August 2020, he requested that ownership be transferred to his Ethereum address.https://t.co/nE9z9tLd2n pic.twitter.com/vask9WqSHd
— BowTiedIguana (@BowTiedIguana) December 30, 2022
On December 28, according to analysis by BowTiedIguana, Bankman-Fried’s public Ethereum address sent all of its remaining Ether (ETH) to a newly created address. BowTiedIguana claimed SBF agreed to take over the address, originally owned 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 to the RenBridge crypto bridge.
Richard Gardner, CEO of fintech infrastructure company Modulus, told Cointelegraph that events after bail should have been taken into consideration, explaining:
“He is the very definition of a flight risk, and the bail should have been a failure. It should be considered that given his political gifts, there are a number of important personalities whose fate is closely linked to that of SBF. I think there is an overwhelming feeling that the public wants justice for the FTX debacle. However, his friends in politics may well help put his thumb on the scales.
Amid growing rumors that Bankman-Fried was behind the fund move, the former CEO tweeted that he had nothing to do with it.
None of these are me. I am not and could not move these funds; I no longer have access to it.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 watershed moment, at least for centralized entities and service providers.
Some observers believe that 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.
Ari Redbord, head of legal and government affairs at digital asset risk management firm TRM Labs, told Cointelegraph that FTX represents the failure of centralized institutions rather than crypto, explaining:
“It’s important to remember that in the case of FTX, it’s about corporate fraud and corporate misdeeds, not crypto. What happened with FTX is more like Enron, Lehman Brothers or WorldCom The fraud here did not take place on blockchains, but rather on opaque centralized financial institutions, and it is important to separate the technology from the business.
Speaking about the possible impact of the lawsuits against Bankman-Fried, RA Wilson, Chief Technology Officer at Crypto Exchange 1GCX, told Cointelegraph that the fallout from FTX would most likely only affect centralized entities, but would trigger a slippery slope in creating precedents for future regulations:
“At best, regulation is avoided for as long as possible in favor of the free market and only enforced to truly protect investors. how regulators have sought ways to gain jurisdiction and regulatory power over these innovative technologies.