The founder of failed crypto exchange FTX has written to his former employees apologizing for their role in its collapse and continues to insist his downfall can be explained solely by a misplaced $8bn (£6.7bn).
In the letter, first published by industry news site CoinDesk, Sam Bankman-Fried wrote: “I am deeply sorry for my failure to supervise. In retrospect, I wish I had done a lot of things differently… I’m going to do what I can to make it up to you, and the customers, even if it takes the rest of my life.”
Despite the mea culpa, however, Bankman-Fried said the company was salvageable and had he not been pressured into bankruptcy in mid-November, he could have saved it.
“We probably could have raised significant funding,” he wrote. “The potential interest in billions of dollars of financing came about eight minutes after I signed the chapter 11 documents. Among those funds, the billions of dollars of collateral the company still had and the interest we had received from other parties, I think we probably could have returned a lot of value to customers and saved the business.
“There was an extreme amount of coordinated pressure, out of desperation, to declare bankruptcy for all of FTX, even the entities that were solvent, and despite claims from other jurisdictions…I reluctantly caved in to that pressure, even though I should have. done. known better; I wish I had listened to those of you who saw and still see the value of the platform, which was and is my belief as well.”
In the letter, Bankman Fried reiterated claims that FTX was a fundamentally healthy businesspresenting a narrative of his downfall that showed him with assets of $60 billion, versus just $2 billion of liabilities, as recently as this spring.
Since then, he says, two crashes in the crypto markets led to the value of his assets falling, even as more clients fled to the platform. By November, his assets had fallen to $17 billion, before “a run on the bank” resulted in withdrawals of $8 billion in a few days.
The coup de grace, he said, was discovering another $8 billion of liabilities due to old cash deposits from “before FTX had bank accounts.” Bankman-Fried had previously explained in messages to Vox journalist Kelsey Piper that those debts had been forgotten for years.
They existed because the company used to ask users to transfer funds to the bank account of the group’s hedge fund, Alameda Research, where deep-seated mismanagement resulted in billions of dollars in cash being siphoned off.
Bankman-Fried did not directly address Alameda’s involvement in its note to employees, ignored the source of the confusion, and failed to mention the inciting incident in the November bank run: the discovery that Alameda’s creditworthiness was based on thousands of millions of dollars of a token, FTT, that FTX printed itself, and which had no deeper value beyond FTX’s promise to effectively pay dividends to holders.
“I never intended for this to happen,” Bankman-Fried wrote. “I did not realize the full extent of the margin position, nor did I realize the magnitude of the risk that a hypercorrelated shock represents.”
However, the exculpatory account put forth by the former chief executive, who was succeeded in mid-November by John J Ray III, the bankruptcy specialist who oversaw Enron’s liquidation 20 years ago and he has said that FTX is the worst case he has ever seen – has been criticized by observers.
Bankman-Fried presents the company’s financials as “marking everything to the market, regardless of liquidity,” assuming that FTX’s huge deposits of crypto assets can be sold at near market prices.
For large markets like bitcoin or ethereum, that markets assumption may be true. However, FTX has denominated billions of dollars of its assets in tokens, such as FTT and serum, which it controls. According to a balance sheet compiled by Bankman-Fried shortly before FTX’s bankruptcy, $2.5 billion of the company’s assets were in tokens that FTX had created, which had a total market capitalization of a fraction of that amount.
The Delaware bankruptcy court heard Tuesday how former CEO he had run FTX as his “personal fiefdom”. Lawyers for the company told the court that 8% of the FTX group’s clients were based in the UK and represented some 80,000 unsecured creditors.
The majority of those clients are believed to be corporate and investment professionals, who use the loosely regulated client exchange FTX International to place risky leveraged bets on cryptocurrency securities.
Following the collapse of FTX, online bank Starling announced a seven-month suspension of all customer deposits to cryptocurrency exchanges, citing risk to consumers. The suspension would be reviewed in June 2023, the bank said.
