An exchange built on its own chips
Bankman-Fried launched FTX in 2019 and issued the FTT token on it. Holders got discounts on fees, and the exchange promised to buy back and burn part of the tokens out of its profits. Most of the FTT belonged to Bankman-Fried himself, to FTX and to his trading firm Alameda Research. Only a thin slice traded on the market, its price was easy to prop up, and then that price was multiplied by the whole remaining supply, which came to billions. In the book I compare it to the chips of a casino that prints them itself (chapter “The Box”).
In April 2022, on a Bloomberg podcast, Bankman-Fried explained yield farming to Matt Levine through a box that does nothing, whose token rises only because the box holds a lot of money. Levine replied that it sounded like “I’m in the Ponzi business” (same chapter). You can see how such a box works in the experiment “Build the box”.
One week in November 2022
On 2 November the journalist Ian Allison published Alameda’s balance sheet in CoinDesk. Of 14.5 billion dollars in assets, the largest item was FTT worth 3.66 billion, and more than 2 billion more was FTT posted as collateral (same chapter). On 6 November Changpeng Zhao, head of Binance, wrote that Binance was selling all its FTT. In three days FTX customers withdrew about 6 billion dollars, where on a normal day they withdrew tens of millions. On 8 November the exchange halted withdrawals, and on 11 November FTX and about 130 related companies filed for bankruptcy (same chapter).
That summer Bankman-Fried had looked like the industry’s rescuer, lending to the firms the Terra crash had hit. The lender BlockFi survived thanks to a credit line from FTX, and after FTX fell it filed for bankruptcy too, leaving more than a hundred thousand creditors (chapter “I Don't Debate the Poor”).
Where the customers’ money went
The bankruptcy was handed to John Ray III, who twenty years earlier had sorted through the remains of Enron. Within a week he told the court he had never in his career seen such a complete failure of corporate controls: no list of employees, no proper accounting, expenses approved with emoji in a chat (same chapter). At trial FTX co-founder Gary Wang explained that in the exchange’s code Alameda’s account had a special flag that let it go negative, with a credit line of 65 billion dollars. There was plenty to borrow, because the exchange held everyone else’s money (same chapter).
On 2 November 2023 a jury found Bankman-Fried guilty on all seven counts, and in March 2024 he was sentenced to 25 years. The court found that customers had lost 8 billion dollars (same chapter).
Why 119% was less than it sounds
Ray’s team sold off what was left of the empire, and there was enough to pay customers 119 percent of their claims. But the claims were calculated in dollars at November 2022 prices, when bitcoin was worth about 16,000. A customer with one bitcoin on FTX received about 20,000 dollars, although by the time of the payouts bitcoin was worth more than 80,000 (same chapter). Part of the money came from the stake in Anthropic, where Alameda had put 500 million in 2021: in 2024 it was sold for about 1.3 billion (same chapter). The customers of a crypto exchange were repaid partly by its founder’s least crypto bet.
