Sam Bankman-Fried, the founder of the now-collapsed crypto exchange FTX, is facing difficulties defending himself in court against allegations of criminal fraud and money laundering. Bankman-Fried claims that his crypto hedge fund, Alameda Research, was treated the same as all other users on FTX. However, the nature of the relationship between FTX and Alameda Research was questionable and hard to explain. As he testifies on the witness stand, Bankman-Fried is struggling to reconcile a key contradiction in his defense.
Prosecutors allege that Bankman-Fried stole money from FTX customers and funneled it into Alameda Research. The funds were reportedly used for lavish advertising and personal investments for himself and other executives. The shortage of customer funds became apparent in November 2022, when customers attempted to withdraw their money en masse and FTX lacked the necessary funds to fulfill the withdrawals.
Bankman-Fried has taken the risky step of testifying in his own defense. He argues that the majority of FTX users were engaged in the risky spot margin trading system, which allowed for highly leveraged cryptocurrency trades. He claims that the combination of illiquidity, mass withdrawals, and a crypto market crash resulted in the depletion of FTX customer accounts. Bankman-Fried leaves it up to the jury to decide which narrative is true. However, it is evident that Alameda Research received preferential treatment compared to other entities trading on FTX.
Bankman-Fried’s defense hinges on convincing the jury that Alameda was no different from any other account on FTX. However, he also admits that Alameda had multiple roles on the exchange, including as a market maker, liquidity provider, and stablecoin converter. His lawyers argue that if Alameda had these multiple roles, there was nothing wrong with it. Nevertheless, it is clear that Alameda was unique and received special treatment.
During cross-examination, it was revealed that Bankman-Fried owned 90% of Alameda and had a substantial stake in FTX. He profited from all of Alameda’s functions on the exchange. Alameda’s relationship with FTX dates back to the early days of the exchange, as customer deposits were initially wired to an account owned Alameda. Alameda’s main sub-account had a $65 billion line of credit, allowing it to borrow unlimited amounts of money. Other entities on FTX did not have access to such credit.
Furthermore, documents presented during the trial showed that Alameda’s main account was not involved in the spot margin trading program, meaning its losses should not have affected other accounts on FTX. Bankman-Fried downplayed Alameda’s importance and claimed that he was not involved in its day-to-day trading. He placed blame on his associates, who testified earlier in the trial about Alameda’s unique role and preferential treatment.
Bankman-Fried tried to emphasize that the market conditions in November 2022 were abnormal, with significantly higher withdrawal amounts than usual. He argued that FTX could not fulfill the withdrawals due to the overwhelming demand for liquid cash. However, his memory was called into question, as he frequently responded with “I don’t recall” during cross-examination.
Prosecutors also brought up Bankman-Fried’s past statements to Congress and interviews with journalists, where he boasted about FTX’s high standards for protecting customer assets. Bankman-Fried countered that these statements were taken out of context, and he disagreed with the articles written about FTX at the time.
The trial continues as the jury determines the truth behind the allegations and Bankman-Fried’s defense.