With Bankman-Fried behind bars, the entire crypto sector is in the crosshairs of the authorities

It was very hot on Tuesday in the courtroom in Nassau, Bahamas, where Sam Bankman-Fried had to appear in court. The former CEO and founder of the fallen crypto exchange FTX, who was arrested on Monday in the archipelago, had just this day put on a suit – while he usually always appears in public in a shabby T-shirt.

This is stated in a report from the Reuters news agency about a six-hour session in which Bankman-Fried’s lawyers failed to get him released on bail. The judge, who the report said forgot “Samuel’s” last name on several occasions, was sensitive to the prosecutor’s argument that Bankman-Fried would try to flee.

During the hearing, the defense had suggested that Bankman-Fried should pay $250,000 in cash as surety. And he would wear an anklet. To no avail: ‘SBF’ remains behind bars on the archipelago where the head office of FTX was located and where Bankman-Fried owned several apartments. In February, the judge will consider Bankman-Fried’s possible extradition to the United States.

“I never tried to commit fraud,” Sam Bankman-Fried said in early December.
Photo Dante Carrer/Reuters

Bankman-Fried’s arrest on Monday kicked off a week of blows for the 30-year-old billionaire: personally for FTX (now run by restructuring specialist John Ray III) and for the crypto industry as a whole.

The turmoil surrounding FTX started last month. On November 2, reports from the crypto news site showed Coindesk that FTX was very closely linked to Alameda, a trading house founded by e.g. Bankman Fried. Bankman-Fried is said to have funneled about $10 billion to Alameda through a built-in system. Customers tried to withdraw their money from FTX in droves, but the company lacked the liquidity to make withdrawals. Binance, a competitor to FTX, said it was considering buying FTX to protect users, but backed out. On November 11, Bankman-Fried FTX filed for bankruptcy.

What had happened here? Bankman-Fried denied in the weeks between the bankruptcy and the arrest that there had been any ill will. “I never tried to commit fraud,” he said at a Dec. 1 conference New York Times. Bankman-Fried emphasized that while he had made mistakes, he said he had not done it on purpose. “I had a duty and I neglected it. But I have not committed any fraud.” When asked whether he deliberately mixed different cash flows, he replied in the negative. “We underestimated the risks.”

Charges of fraud

The American authorities see it very differently, it turned out on Tuesday. The US attorney general and the US financial market regulators SEC and CFTC all charged him with fraud. He allegedly used money from customers of FTX for Alameda and misled investors and customers about the financial health of FTX and Alameda. He also allegedly laundered the proceeds and would have violated US campaign finance laws. New York City attorney Damian Williams said Tuesday that Bankman-Fried made illegal campaign donations to both Democrats and Republicans using “stolen money from clients.” He spoke of “one of the biggest frauds in American history”.

Politicians from both parties are now quite upset about the donations originating from Bankman-Fried and therefore tainted, the AP news agency reported this week. Some say they are now transferring the money to charities. If they do, Bankman-Fried’s cryptodollars will soon end up in unexpected places: California food banks, the Planned Parenthood organization that promotes safe abortion, and Storyknife, an Alaskan retreat for women writers.

Also read this profile of Changpeng Zhao: The mastermind of crypto

Meanwhile, this week it appeared that the turmoil in the crypto world has not just subsided. Customers of Binance, the competitor of FTX, withdrew about $ 1 billion from the crypto exchange. In a Twitter conversation, owner and founder Changpeng Zhao – or “CZ” as he is known – felt compelled to reassure customers and investors about the raised amounts, the business paper reported. Financial Times. Binance is financially sound, Zhao assured. The withdrawal of money from Binance was only a logical response to Bankman-Fried’s arrest, Zhao wrote (“human behavior”, in his words).

Zhao, knowingly or not, did not respond to the Reuters report that US authorities now also have Binance in their sights. There are indications that money has been laundered.

Legislation against money laundering

Authorities in both the US and Europe are clearly losing patience with the crypto world. During a hearing in the US Senate, Democratic Senator Elizabeth Warren announced bills against the use of cryptocurrencies for money laundering. The proposals are co-sponsored by Republican Roger Marshall. “Crypto has become the tool of choice for terrorists, ransom-demanding cyber gangs, drug traffickers and rogue countries seeking to launder money,” Warren said at the hearing, quoted by the AP.

The chairman of German financial watchdog BaFin, Mark Branson, called for accelerated global regulation of the largely unregulated crypto world just hours after the US charges against Bankman-Fried. The idea of ​​growing the industry “like a grown-up playground” has proven to be the wrong approach, Branson said. “We have now seen the world of self-regulation. It’s not going to work.” Now is the time for “serious regulation,” the BaFin chief said.

At the beginning of this year, an important international supervisory body, the Financial Stability Board (FSB), also sounded the alarm about crypto investments. The crypto world is becoming increasingly intertwined with the ‘traditional’ financial system. For example, banks invest in cryptocurrencies or derivative financial products. Risks to financial stability could therefore “escalate rapidly”, according to the Basel-based FSB, a body headed by Klaas Knot, the president of De Nederlandsche Bank.

At the end of June, EU member states agreed on new rules to protect investors in crypto products, also known as the Markets in Crypto Assets Regulation (MiCA). Christine Lagarde, the president of the European Central Bank, called this “not enough” during a press conference on Thursday, although she said she hoped this EU legislation would “inspire others around the world to develop such a framework”.

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