How SBF’s Philosophy Led FTX to Bankruptcy
In the whirlwind world of cryptocurrency, the stakes are often lofty. Fortunes can be made and dissolved in the blink of an eye, and navigating this tempest requires a particular kind of finesse.
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However, Sam Bankman-Fried, the co-founder of both FTX and Alameda Research, has embraced a set of philosophical beliefs that sometimes seem to veer away from conventional wisdom.
Prioritizing Quick Gains Over Mitigating Risks
Bankman-Fried's approach was straightforward: faced with a choice between speed and security, he invariably leaned towards the former. This disposition is narrated by an anonymous Alameda engineer, Adi.
Adi reveals that Alameda’s trading operations could broadly be classified into two categories. More often than not, traders would devote their time to crafting algorithms designed to enhance the automated trading system, rather than engaging in the manual execution of trades. Such a strategy generally enabled quicker and more accurate responses to the incessant ebbs and flows characterizing the crypto markets. However, there was a nominal aspect of trading that was conducted manually, typically activated when the automated systems faltered, either due to market instability or during arbitrage opportunities.
Protocols ensuring transactional safety were embedded within the automated mechanism, ensuring algorithmic trades were in alignment with prevailing market scenarios. But, this safety net was conspicuously absent in manual trading.
A peril of crypto trading is the unseen hazards lurking beneath its surface, often revealed only in the face of calamity.
Well, on October 21 2021, an Alameda trader's finger slipped. The trader was trying to sell a block of BTC in response to news, and sent out the order via our manual trading system. What they missed was the decimal point was off by a few spaces,
— Adi recounts.
This seemingly minor oversight had major repercussions. The trader inadvertently offloaded a hefty sum of bitcoins at a fraction of their actual worth. This anomaly saw BTC's price nosedive on certain platforms, plunging from a robust $65,000 to a meager $8,000.
Sensational story quickly garnered media attention Source: Blomberg
Alameda's financial blow from this fiasco was colossal, running into tens of millions. It was in the aftermath of this debacle that SBF greenlit extra safeguards for manual trade closures.
An ex-employee of Alameda highlights that such safety measures should have been implemented from the get-go. Without them, most conventional trading entities would think twice before even starting their operations.
That's usually how things worked at Alameda – we would wait until something broke, and then rush to fix it,
says Adi.
Double or Nothing: Playing with Fire
Crypto trading is a sphere where high-stakes gamblers are not a rarity. However, Sam Bankman-Fried (SBF) embodies the risk-taking mentality more fervently than most. With little regard for risks stemming from human error or hardware failures, SBF’s business orbited around a philosophy aptly described as “Double or Nothing.” This daring approach initially ushered him into unparalleled wealth but eventually thrust him into a financial chasm.
During a podcast interview with Tyler Cowen, when faced with a hypothetical scenario, SBF was thrown a challenging question. “Okay, but let’s say there’s a game: 51 percent, you double the Earth out somewhere else; 49 percent, it all disappears. Would you play that game? And would you keep on playing that, double or nothing?”
While the average person would unequivocally reject such a proposition, fearing the potential obliteration of their accumulated wealth or, even worse, the demise of civilization itself, this high-stakes approach was SBF's norm. Without hesitation, he declared he'd willingly enter this game, continuing as long as the opportunity existed. This brazen attitude paved Bankman-Fried's roller-coaster financial path.
Long before his downfall, SBF was open about his risk-taking passion Source: conversationswithtyler.com
By 2021, he had accumulated a staggering $26 billion. However, despite its size, his fortune was precariously unstable. SBF's relentless pursuit of risk finally caught up with him, causing the fragile house of cards he built, comprising FTX exchange and a conglomerate of 130 companies, to collapse.
Blame-the-lawyers: A Defense Strategy
Now, with looming legal battles ahead, SBF has no alternative but to prepare for court appearances and strategize to avoid a lengthy incarceration.
It appears his defense will revolve around the claim that his decisions were heavily influenced by legal counsel, including advice from Fenwick & West, a California law firm known for consulting tech startups.
The “shift-the-blame-to-lawyers” defense strategy aims to suggest that external legal advice, rather than his intentional fraudulent endeavors, influenced Bankman-Fried’s actions. SBF portrays himself as a green, inexperienced entrepreneur, incapable of orchestrating intricate fraudulent schemes. This depiction is expected to counter federal fraud charges, including allegations of wire fraud, commodity fraud, and securities fraud.
Sam is gearing up for legal battles with influential lawyers from California Source: Bloomberg
In many white-collar cases, the strategy of pinning responsibility on one's counsel isn't uncommon and might even be effective. However, it doesn’t come without its clear set of risks. Against Sam's hopes, the court might force Fenwick & West, along with other legal representatives of the company, to unveil confidential information given by FTX and Alameda. Should these seasoned attorneys turn into prosecution witnesses, SBF might indeed appear as a foolish boy who lost an uneven battle against legal sharks.
At this point, Fenwick & West maintains their stance: they provided typical legal services to FTX and were blindsided by any alleged improprieties associated with the crypto exchange.
As the case unfolds, the legal fraternity in the US will be watching intently, alongside the defrauded investors. The gravity of the case, bearing implications for both the realm of cryptocurrency and legal practices, is undeniable.
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