Federal prosecutors are investigating whether FTX founder Sam Bankman-Fried rigged the market for two cryptocurrencies last spring, leading to their collapse and creating a domino effect that ultimately led to the implosion of his own cryptocurrency exchange. month, according to two people with knowledge of the matter.
US prosecutors in Manhattan are investigating the possibility that Mr. Bankman-Fried steered the prices of two interlinked currencies, TerraUSD and Luna, to benefit entities he controlled, including FTX and Alameda Research, a hedge fund he co-founded and owned, the people said.
The investigation is still in its early stages, and it’s not clear if prosecutors found any misconduct by Mr. Bankman-Fried, or when they began looking into the TerraUSD and Luna transactions. The case is part of a wider investigation into the collapse of Mr Bankman-Fried’s Bahamas-based cryptocurrency empire and the possible embezzlement of billions of dollars in client funds.
Federal prosecutors and the Securities and Exchange Commission are investigating whether FTX broke the law by transferring money from its customers to Alameda. Last month, a run on deposits revealed an $8 billion hole in the exchange’s accounts, causing the company to collapse. Mr. Bankman-Fried stepped down as CEO of FTX when the company filed for bankruptcy on November 11.
FTX is also under investigation for violating U.S. money laundering laws that require money transfer companies to know who their customers are and to report possible illegal activity to law enforcement, three people familiar with the investigation said. That investigation, first reported by Bloomberg News, began several months before FTX’s bankruptcy. Researchers are also investigating the activities of other offshore cryptocurrency trading platforms.
The aftermath of FTX’s demise
The sudden collapse of the crypto exchange has stunned the industry.
- A spectacular rise and fall: Who is Sam Bankman-Fried and how did he become the face of crypto? The Daily charted the spectacular rise and fall of the man behind FTX.
- Holding on to power: Emails and text messages show how FTX lawyers and executives struggled to convince Mr. Bankman-Fried to relinquish control of his collapsing company.
- Collateral damage: BlockFi, a cryptocurrency lender that catered to ordinary investors eager to be a part of the crypto frenzy, filed for bankruptcy on Nov. 28, struck down by its financial ties to FTX.
- A symbiotic relationship: Mr. Bankman-Fried’s built FTX in part to support the trading activities of Alameda Research, its first company. The ties between the two entities are now coming under scrutiny.
In a statement, Mr. Bankman Fried that he was “not aware of any market manipulation and certainly never intended to engage in market manipulation”.
“As far as I know, all transactions were for investment or for hedging,” he added.
Representatives for the U.S. Attorney for the Southern District of New York declined to comment. FTX representatives did not immediately respond to requests for comment.
The focus on possible market manipulation adds to the legal storm brewing around Mr. Bankman-Fried. It is illegal for an individual to knowingly organize market activities designed to move the price of an asset up or down.
TerraUSD was a so-called stablecoin, but unlike other stablecoins, its value was not directly backed by the US dollar. Rather, it kept its value from a second coin called Luna through a complex set of algorithms. Merchants within the digital ecosystem could mint these coins, whose prices would fluctuate based on how many were in circulation. Whenever the price of TerraUSD fell, the supply of Luna would increase as traders created more Luna to try and profit from the difference.
In May, major cryptocurrency market makers — exchanges or individuals who ensure that buyers and sellers are matched — noticed a deluge of “sell” orders for TerraUSD, a person with knowledge of the market activity said. The orders were in small denominations, but they were placed very quickly, the person said.
The sudden surge in sell orders for TerraUSD overwhelmed the system, making it difficult to find matching “buy” orders for them. Under normal circumstances, sell orders that went unfulfilled for too long would be matched with buy orders at a lower price. The longer the orders hung around without being matched, the more they forced the price of TerraUSD and caused a corresponding drop in Luna prices due to how the two coins were paired.
The exact causes of the collapse of the two cryptocurrencies remain unclear. However, the bulk of sell orders for TerraUSD seemed to come from one place: Sam Bankman-Fried’s cryptocurrency trading firm, which also placed a big bet on Luna’s price drop, according to the person with knowledge of the market activity.
If trading had gone as expected, the price drops in Luna could have yielded a hefty profit. Instead, the bottom fell out of the entire TerraUSD-Luna ecosystem. The collapse caused more trouble in the cryptocurrency industry, bankrupting several prominent companies and erasing about $1 trillion worth of the crypto market.
The ripple effects of the Luna crash ultimately contributed to the collapse of Mr. Bankman-Fried’s business empire. In November, Caroline Ellison, Alameda’s CEO, told staff that loans to Alameda had been recovered as a result of the market chaos unleashed by the crash, according to a person familiar with the matter. But the money Alameda had borrowed was no longer readily available, Ms. Ellison told staff, so the company used FTX client funds to make the payments.
An attorney for Ms. Ellison has not returned requests for comment.