The undoing of crypto billionaire Sam Bankman-Fried happened on Twitter.
Over the past two years, the 30-year-old entrepreneur has built a reputation as one of the smartest, most trusted figures in crypto. He built his cryptocurrency exchange FTX into a $32 billion company. He spent hundreds of millions of dollars to keep other struggling crypto firms afloat. And he became a major political donor to Joseph R. Biden Jr.’s presidential campaign, as well as a frequent, welcome presence in the halls of Congress.
Then, within a few days, his fledgling empire collapsed, and it was Mr. Bankman-Fried who needed the rescue.
In a shocking implosion that was a hammer blow to the credibility of the crypto market, Mr. Bankman-Fried said on Tuesday that he plans to sell his suddenly struggling company to an arch-rival.
Bankman-Fried fell into the hands of Changpeng Zhao, the chief executive of Binance, the only crypto exchange larger than FTX. After reports circulated that one of Mr. Bankman-Fried’s other companies was on shaky financial footing, a Twitter post from Mr. Zhao, known online as CZ, essentially started a bank run that crippled FTX. Binance announced on Tuesday that it had agreed in principle to acquire its largest competitor, although it remains unclear whether the deal will go through.
“CZ performed a pincer movement,” said Lee Reiners, a crypto expert who teaches at Duke University Law School. “He surprised us all.”
Many of crypto’s fundamental myths have already been shattered this year, and Mr. Bankman-Fried’s rapid fall suggests that no company in this free-running, loosely regulated industry is safe from extreme volatility. As news spread of FTX’s collapse, crypto markets took a beating, with Bitcoin and Ether both falling more than 15 percent since Tuesday.
On Tuesday, Mr. Bankman-Fried framed the Binance acquisition as a measure to ensure FTX customers would not lose their money. But the deal has not been finalized and the exact terms remain uncertain, leaving open the possibility that FTX’s hundreds of thousands of customers could lose their money and cause another crash in crypto prices.
“This episode highlights the vulnerability of the entire crypto building,” said Eswar Prasad, a professor of economics at Cornell University. “Even large and seemingly financially sound institutions have a fragile and shaky foundation that crumbles at the slightest hint of trouble.”
An FTX spokesperson declined to comment. A Binance spokeswoman did not respond to a request for comment.
Unlike some of the other crypto companies that imploded this year, FTX was almost mainstream. Mr. Bankman-Fried ran a commercial during the Super Bowl and bought the naming rights to the Miami Heat basketball arena. He was profiled on virtually every major news channel, including The New York Times, and had nearly a million followers on Twitter.
“It’s as if the person you thought was Hermione turned out to be Voldemort,” crypto journalist Laura Shin tweeted on Wednesday.
When the company collapsed, FTX’s venture capitalists were in the dark about Mr. Bankman-Fried’s plans and employees had little guidance. Other companies rushed to distance themselves. “There can be no run on the bank at Coinbase,” Alesia Haas, the chief financial officer of the US crypto exchange, wrote in a blog post. “We hold client assets 1:1.”
In a note to Binance employees posted on Twitter, Mr. Zhao . said said that the demise of FTX “isn’t good for everyone in the industry.”
“Regulators will investigate the exchanges even more,” he wrote. “Licenses around the world will be harder to get.”
Until this week, Mr. Bankman-Fried, known by his initials SBF, was widely regarded as one of the most astute and formidable leaders in the industry.
In 2017, he founded Alameda Research, a crypto trading company, which made a fortune exploiting arbitrage opportunities in the Bitcoin market. He translated that success into founding FTX, which was based in Hong Kong before moving to the Bahamas last year.
FTX’s business is built on a type of high-risk trading – where investors borrow money to place large bets on the future value of cryptocurrencies – that remains illegal in the United States. But Mr. Bankman-Fried started a smaller US affiliate offering more conservative trading options while lobbying US regulators to approve the riskier model. As the company grew, he became a prolific political donor, contributing more than $5 million to Mr. Biden’s 2020 election efforts.
He also embarked on a marketing blitz. In April, Mr. Bankman-Fried hosted a dazzling conference in the Bahamas, where he took the stage with former President Bill Clinton and former British Prime Minister Tony Blair. At one point, according to Forbes, he was worth an estimated $24 billion, making him the second richest crypto businessman behind Mr. zhao. mr. Bankman-Fried vowed one day to give away his entire fortune.
When the crypto market crashed in May, Mr. Bankman-Fried hailed as a savior. He loaned troubled crypto firm Voyager Digital $485 million and rescued BlockFi, a crypto lending company, with a $400 million credit line.
But in recent weeks, he has faced a setback in the industry. He was criticized by crypto enthusiasts for supporting regulatory proposals that they viewed as an affront to the philosophical principles of the technology.
Last week, the crypto publication CoinDesk reported on a leaked balance sheet showing that a large portion of Alameda’s assets consisted of FTT, a token invented by FTX to facilitate trading on its platform. The news sparked fears that a plunge in FTT’s value could cripple both FTX and Alameda, which are closely intertwined.
Mr. Zhao, a former FTX investor, still owned a large amount of FTT, which Mr. Bankman-Fried had given him to buy back shares in FTX. Mr. Zhao also seemed to be dissatisfied with his colleague. In October, Mr. Bankman-Fried had joked on Twitter suggesting that Mr. Zhao should not be allowed to enter Washington, a clear reference to the scrutiny Binance has undergone by US regulators.
Over the weekend, Mr. Zhao announced on Twitter that Binance would sell its holdings of FTT. He insisted he was not involved in any “action against a competitor.” But he later compared the FTT token to Luna, a cryptocurrency that crashed in May and sparked a broader crisis.
“We will not support people who lobby behind their backs against other players in the industry,” he says added on Twitter.
The impact was immediate. In three days, customers withdrew more than $6 billion from FTX. Mr Bankman-Fried said on Twitter that “a competitor is chasing us with false rumours.”
Around the same time, Mr. Bankman-Fried called potential investors while trying to raise money, according to two people familiar with the conversations. But it wasn’t clear how much he would need, one person said. However, the stakes were clearly high: Mr. Bankman-Fried explained that according to the other person, FTX was in an emergency situation.
On Tuesday, Mr. Bankman-Fried signed the agreement with Mr. Zhao. “Binance has shown time and again that they are committed to a more decentralized global economy,” he wrote. “We are in the best hands.”
In his letter to employees, Mr. Zhao that he was just as shocked as everyone else. “I had very little knowledge of the internal state of affairs at FTX,” he wrote. “I was surprised when he wanted to talk.”
But the takeover is far from a foregone conclusion. In a series of tweets, Mr Zhao emphasized that “Binance has the freedom to withdraw from the deal at any time,” he said.
The companies have yet to go through a due diligence process. Both FTX and Binance are based outside of the United States, but regulators in other countries may try to intervene. “Every regulator is looking for a way to exercise jurisdiction over this deal,” said Joseph Castelluccio, a lawyer specializing in digital assets.
Confusion reigns among FTX employees. Mr Bankman-Fried announced the deal to staff around the same time the news was posted on Twitter. Workers in the United States and beyond were caught off guard, according to two acquaintances with the case.
“I owe you all an enormous debt for following me, and I will do what I can to make it right,” Bankman-Fried wrote in a letter to staff on Tuesday, obtained by The Times. “My apologies.”
The fall from grace was also reflected in the magnitude of his fortune. According to a Bloomberg wealth index, Mr. Bankman-Fried, now worth $991.5 million, is no longer a billionaire.