In his testimony before Congress, Sam Bankman-Fried, the former head of the crypto trading firm Alameda Research and the cryptocurrency exchange FTX, openly admitted to a series of mistakes that occurred during his leadership. He candidly declared, “I messed up,” in response to the FTX collapse, which led to seven counts of fraud and conspiracy in his trial.
One of the most significant oversights Bankman-Fried highlighted was the absence of a dedicated risk management team at FTX. He confessed that FTX should have had one, but it didn’t. He also accepted responsibility for other lapses, such as failing to monitor an account that posed a systematic risk to the FTX system and its various platforms.
However, when questioned by his defense attorney, Mark Cohen, Bankman-Fried vehemently denied any wrongdoing related to fraud or misappropriation of customer funds.
According to Bankman-Fried, he believed that the funds spent on various ventures, marketing partnerships, Bahamian real estate acquisitions, and loan repayments were sourced from legitimate channels, primarily the profits of his multi-billion dollar companies and loans secured by Alameda Research, a company in which he held a 90% ownership stake.
It appears that Bankman-Fried’s belief was based on flawed information, as Alameda Research had accumulated a significant debt of $8 billion owed to FTX through a system referred to as “fiat@.” Surprisingly, Bankman-Fried claimed that he only became fully aware of this liability in October 2022, well after the spending had occurred.
The Origin of Fiat@ in Bankman-Fried’s Account
Bankman-Fried’s account of the fiat@ system’s origins aligns with the testimony of his former associates-turned-witnesses. At the inception of FTX, the exchange faced challenges in opening its own bank accounts and relied on several payment processors, including Alameda Research. Customers could deposit funds into an Alameda Research-affiliated bank account, which would then be credited to their FTX accounts.
Essentially, this meant that Alameda Research owed these funds to FTX, a liability tracked within a ledger entry known as “fiat@.” Bankman-Fried claimed that he was not fully informed about the specifics of this system or how the liability was tracked, even though it eventually grew to represent billions of dollars owed by Alameda to FTX.
Bankman-Fried stated that he believed the funds were either held in a bank account without use or were sent to FTX, possibly as stablecoins. He assumed that any borrowing by Alameda would be reflected in their main account, info@, used for trading on FTX.
In reality, the fiat@ liability was tracked separately from the info@ borrows but factored into Alameda Research’s Net Asset Value (NAV), representing the firm’s overall wealth. A bug in the fiat@ calculation in the summer of 2022 temporarily led to concerns about bankruptcy. Developers later identified and fixed the bug, with Bankman-Fried being informed about the issue related to bank deposits and withdrawals.
It wasn’t until October 2022 that Bankman-Fried stumbled upon the fiat@ entry in a new database meant for non-developers, revealing an $8 billion liability. This revelation had significant implications.
The Significance of Fiat@ to Bankman-Fried’s Defense
Fiat@ obscured the true nature of Alameda’s borrowing. Without considering this liability, Alameda’s NAV appeared to be $10 billion, including -$2 billion in borrows on info@ and $12 billion in net other assets. But factoring in the fiat@ liability, the topline NAV number remained the same at $10 billion. However, liabilities now totaled -$10 billion ($2 billion from info@ and $8 billion from fiat@), making Alameda vulnerable to a 50% crash in asset value, similar to what occurred in the crypto market in 2022.
Bankman-Fried highlighted that Alameda’s net asset value had fallen from over $40 billion in late 2021 to around $10 billion in June 2022. Since the liability represented a debt to FTX, it endangered not only his trading firm but his entire business empire.
With Alameda’s positive NAV, Bankman-Fried believed the debt could be repaid, offering to pledge his FTX equity to cover the liability. This perspective provides a defense against accusations of reckless spending and investment, as it suggests that Bankman-Fried may have believed his empire was significantly more financially stable than it actually was.
Challenges in Cross-Examination
Bankman-Fried is expected to face extensive cross-examination, especially regarding his knowledge of fiat@, which may conflict with the testimony of other witnesses. Nishad Singh, for instance, recalled discussions about fiat@ as early as December 2019, in contrast to Bankman-Fried’s account of learning about it in June 2022.
These inconsistencies will likely be a focal point during the trial, with cross-examination and potential rebuttal testimony from the prosecution to follow when the trial resumes.