SBF’s first interview after FTX’s collapse: Only 4 people knew about the misappropriation of user funds

Original text: "How Sam Bankman-Fried's Crypto Empire Collapsed" by David Yaffe-Bellany @nytimes

Compiled by: Peter Pan @BlockBeats

The FTX crypto empire collapses

In less than a week, cryptocurrency billionaire Sam Bankman-Fried went from industry leader to industry villain and lost most of his fortune , watching his $32 billion company fall into bankruptcy and becoming the subject of investigations by the U.S. Securities and Exchange Commission and the Department of Justice.

Previously, the former crypto tycoon was compared to financial giants such as American investment bankers J.P. Morgan and Warren Buffett for building a huge crypto empire, but eventually a run on deposits caused a $8 billion gap in his cryptocurrency trading platform FTX, forcing the company to close and file for bankruptcy. Moreover, this damage spread to the entire industry, shaking the stability of other cryptocurrency companies and generating widespread distrust in the technology.

Aside from a few Twitter posts, messages to employees and the occasional text message to reporters, SBF, 30, has said little publicly over the past week.

But SBF also sounded surprisingly calm in an interview just after midnight on Sunday: "You would think I wouldn't be able to sleep right now, but I got some sleep, otherwise this could have been worse," SBF said.

Failure comes from expanding too quickly

At the same time, SBF also expressed numerous regrets about the collapse of FTX, but he only provided limited details to explain the problems surrounding his relationship with FTX. The Department of Justice and the SEC are reviewing whether FTX improperly used billions of dollars of customer funds to support Alameda Research, a quantitative trading company he founded.

SBF said, "Alameda has accumulated a large margin position on FTX. It is much larger than I thought. The position size is billions of dollars, but in fact the downside risk is also very large." This actually means that it borrowed funds from the trading platform, but SBF refused to provide more details.

However, SBF does agree with critics in the crypto community that he expanded his business footprint too quickly across the industry, and said that some of his other commitments blinded him to signs that FTX was in trouble.

“If I could focus more on what I was doing, I could be more thorough, and that would allow me to understand the risk side of things,” SBF added.

SBF moved three times

SBF, who currently lives in the Bahamas, declined to comment on his current location, citing security concerns, and FTX’s lawyers did not respond to requests for comment.

The collapse of FTX shocked the crypto world. But in recent months, signs emerged that his empire was in danger and his ambitions were out of his control, according to interviews with nine of his colleagues and business partners and internal information obtained by The New York Times.

And the relationship between Alameda and FTX was the root of SBF’s downfall. He founded the quantitative trading firm in 2017 and rented offices in Berkeley, California, not far from Stanford, where he grew up. Soon, the company was making millions of dollars through arbitrage in the Bitcoin market.

In 2019, SBF relocated the company to Hong Kong, which has a more friendly regulatory environment. He relocated with a group of traders — including Caroline Ellison, a former trader colleague at financial firm Jane Street — and went on to found FTX, a platform for cryptocurrency investors to buy, sell and store digital assets.

In 2021, attracted by regulators, SBF moved FTX to the Bahamas, where regulators allowed him to offer risky trading options that are illegal in the United States. At FTX, investors will be able to borrow money to bet on the future value of cryptocurrencies.

Furthermore, FTX and Alameda have close ties, with the latter trading heavily on the FTX platform, meaning it sometimes benefits when other FTX clients lose money. In the past, SBF has defended this practice, saying that Alameda provides vital liquidity, injecting capital to enable other clients to complete trades on the exchange.

15-member FTX core group

Alameda is run by Ms. Caroline Ellison, and SBF is involved, contributing to decisions on large trades, but sometimes there appears to be little firewall between the businesses, according to a person familiar with the company’s inner workings. Alameda was supposed to operate out of a separate office, but a customer visiting the FTX building in recent months saw Ms. Ellison sitting at a computer displaying the trading platform’s trading data.

On the other hand, despite the billions of dollars that venture capital firms have poured into the company, FTX does not have any outside investors on its board. In addition to SBF and Ellison, FTX's executive circle in the Bahamas includes engineering director Nishad Singh, chief technology officer Gary Wang and product head Ramnik Arora.

In the Bahamas, SBF sometimes lived in isolation, surrounded by a small group of colleagues, living with Caroline Ellison, Nishad Singh, Gary Wang and six others in a five-bedroom penthouse in the Orchid Tower at Albany Resort, a 600-acre oceanfront resort on New Providence Island in the Bahamas. Two people said SBF and Caroline Ellison were sometimes romantically involved.

However, at present, SBF said that he and Ms. Ellison are no longer in a romantic relationship, but declined to comment further, and Ellison did not respond to this.

Asked if he relies too much on that small group of people, SBF said his tight circle of colleagues is about 15. “To be precise, I don’t think anybody can maintain close contact and communication with more than 15 people,” he explained.

Altruism and Autocracy

All along, SBF and his circle of colleagues claim to be committed to effective "altruism", a charitable movement that urges followers to donate their wealth in an effective and logical way. However, a person familiar with the matter said that it is sometimes difficult for colleagues outside the group to find time to talk to SBF, who is proud that FTX has only about 300 employees, which is much smaller than its main competitors Binance and Coinbase.

While SBF was laying off employees, it also invested in dozens of other cryptocurrency companies, bought shares in stock brokerage firm Robinhood, donated to political campaigns, gave media interviews, and wanted to provide Elon Musk with billions of dollars to help finance his Twitter acquisition.

When he began his acquisition spree this year, investing in troubled crypto companies, he didn’t share that information with key employees. When he was told he was overexpanding and encouraged to hire more employees, he rejected the advice.

In Washington, SBF was pushing an ambitious regulatory agenda while criticizing Changpeng Zhao, CEO of rival trading platform Binance, but Zhao ultimately mobilized his extensive Twitter following to spark an exodus from the FTX platform.

Later, SBF said that "given the issues these raise, venture capital may not really be worthwhile, specifically investing in other companies."

The love-hate relationship with Changpeng Zhao

Perhaps SBF’s most ambitious goal is to shape crypto regulation in Washington, where he has testified before Congress and met with regulators. He has also used his growing influence in Washington to criticize his biggest rival, Changpeng Zhao, in private meetings, people familiar with the matter said.

 SBF appears before a Senate committee in February. Image source: AFP: Getty Images

Recently, SBF said, "Criticizing Zhao was not a good strategic move for me. I was very frustrated about this. I should have known that expressing this was not a good decision for me."

As a former investor in FTX, Zhao Changpeng still owns a large amount of FTT, a cryptocurrency launched by FTX to facilitate transactions on its platform. On November 6, Zhao announced the sale of FTT on Twitter, triggering many FTX platform customers to quickly withdraw their deposits.

Meanwhile, Zhao wrote on Twitter: "We will not pretend to remain close after the 'divorce', and we will not support those who lobby against other industry players behind the scenes."

Furthermore, when FTX collapsed, Zhao Changpeng initially agreed to acquire the exchange, amounting to a bailout, but the deal soon fell through after Binance discovered FTX’s financial problems.

In a Signal group chat that included SBF and other FTX representatives, Zhao posted a brief comment: "Sam, I'm sorry, we can't go ahead with this transaction. There are too many problems with FTX."

Why did Alameda embezzle FTX customer funds?

After that, SBF hurriedly prepared new financing and mentioned in an internal letter to employees: "I shouldn't laugh at them. They may never really plan to complete this transaction."

Meanwhile, in a meeting with Alameda employees on Wednesday, Ms. Ellison explained the collapse, her voice trembling and apologizing for letting them down, according to a person familiar with the matter.

Caroline Ellison said: "Alameda has obtained loans in recent months, but used the money for venture capital and other expenses, but around the time the crypto market collapsed this spring, lenders began to recover these loans. The funds spent by Alameda are no longer easily accessible, so the company used FTX customer funds for payment." At the same time, in addition to her and SBF, there are two other people who know about this arrangement: Nishad Singh and Gary Wang.

The Wall Street Journal previously reported on the meeting, but Singh did not respond to requests for comment and Wang could not be reached. According to people familiar with FTX’s finances, the exchange provided Alameda with a loan of up to $10 billion.

Improvisation

As FTX collapsed, SBF said on Sunday that he had been working constructively with regulators, bankruptcy officials and the company to try to do what was best for consumers.

But he is now the subject of an investigation by federal prosecutors in New York, who have begun contacting possible witnesses. Several people familiar with the matter said that others associated with FTX have also begun contacting lawyers for possible representation, with Sullivan & Cromwell law firm representing FTX in the bankruptcy investigation, while Paul Weiss's lawyers are representing SBF.

Also in the interview, SBF refused to discuss the possibility of jail time.

“People can say all the mean things they want about me online, but what matters to me is what I did and what I can do,” SBF said.

In addition, he has found other ways to pass the time in recent days, such as playing the video game Storybook Brawl, although he plays it less than usual. "But it helps me relax a little bit, it clears my mind," SBF explained.

As for the recent series of mysterious tweets: "1) What, 2) H..." SBF said, "I don't know, I'm just improvising, I think it's time. The next step will be to release the letter A first, and then P. This is not just a word, I'm making it up as I go along."