Castles Made of Sand Dollars: SBF, FTX, and other Three Letter Agents

How stablecoins and the unstable con, Sam Bankman-Fried, built a corrupt castle of sand and how it all washed out.

The story of Bitcoin has certainly had its fair share of nefarious characters, criminal activity, bad haircuts and worse wardrobes, and yet our anti-hero du jour has seemed to outdo them all. Sam Bankman-Fried, better known by the three letter acronym SBF, burst onto the scene at the peak of the 2017 bubble, founding Alameda Research that September, just four years after graduating from an internship into a full-time position at one of the world’s largest market makers, Jane Street Capital.

SBF is the son of Stanford Law professor and founder of left-wing super PAC Mind The Gap, Barbara Fried, and Stanford professor Joseph Bankman, an expert on tax shelter laws and government regulation. At the start of 2018, SBF had struck digital gold while taking advantage of the arbitrage opportunity presenting itself between a higher demand for bitcoin in the Asian market, colloquially known as the “kimchi premium”. By the end of the year, and after amassing a considerable fortune from this high-volume bitcoin/dollar spread, he officially moved to Hong Kong, formally founding the derivatives exchange FTX in the following spring.

The Bitcoin network that SBF rode from rags to riches and back again was partially launched in direct response to the fiat money experiment rearing its ugly head in the subprime mortgage, real estate and eurodollar crises that culminated into what is now known as the Great Financial Crisis of 2007 to 2009.

“??EThe Times 03/Jan/2009 Chancellor on brink of second bailout for banks%”

– Satoshi Nakamoto, January 3, 2009

This now infamous inscription in the genesis block made clear the inappropriate fractional reserve banking and predatory loan fiascos of our regulated banking industry was to be put to rest once and for all by this emergent monetary protocol; a completely transparent and decentralized ledger would de-incentivize fraud and prevent obfuscation of illicit activity. A new competitor to the dollar arose from the ashes of the meltdown, and with it, a new standard for financial fairness, complete with predictable issuance, controlled once and for all by the people for the people. Yet in any system made with good intentions, criminals like SBF and his bought-and-paid-for political and media allies manage to find a way to hurt innocent people for the advantage of an unknown few. Like most intriguing stories of fraudulent financial crimes, this one starts in the Bahamas, and ends with a tidal wave of asset liquidations and broken homes.

“If you think the Bahamas has ruined your global tax system, you have a pretty terrible global tax system.”

– Steven Dean, Summer 2020 [1]

Launching The Stablecoin, CBDC Race To The Bottom

The Bahamas seems innocuous enough, and yet there is a long history of U.S. tax avoidance, complete with rum-running bootleggers during the prohibition era. Continuing this tradition, the Caribbean banking centers, including the Bahamas and the Cayman Islands, as of August 2022, were the fourth-largest foreign holders of treasury securities, behind only Japan, China and the U.K. Shortly after the time of its founding, FTX was fully taking advantage of the free money era that began with the 2008 crash and was sustained by low-to-zero interest rates brought upon by the Trump administration.

These rate cuts were started by the Trump-nominated and Biden-renominated Jerome Powell and were further exacerbated by both of their administrations’ COVID responses. An unprecedented pumping of all things dollar denominated occurred, with real estate, stock indexes, bitcoin and a whole bunch of unregistered securities known as altcoins reaching new highs across the board. In June 2019, one month after the founding of FTX, Facebook’s Mark Zuckerberg announced Libra, a digital currency based on a basket of international currencies; a novel take on stablecoins. This launched the stablecoin and CBDC race in earnest, and coincidentally enough, the Central Bank of the Bahamas became the first such institution to announce its own CBDC, the sand dollar, in October 2020. The sand dollar itself was pegged to the Bahamian dollar, which is itself pegged to the United States dollar, and thus with its government-sanctioned launch, the birth of the first central bank-issued stablecoin dollar came to be on the sandy beaches of SBF’s new home.

“What is the reserve currency of the crypto economy going to be? Right now it's unambiguously the USD. And interestingly it's USD whether or not you're looking at the American crypto economy.”

– Sam Bankman-Fried, November 5, 2021

While the U.S. government feigned fear of systemic risk at the time, the Chinese government understood the Libra project to be a backdoor dollarization of the G7 currencies rumored to be included in its basket. A Metaverse-held take on the 1985 Plaza Accord, this plan of coordinated central banking would spread USD network users across the internet’s biggest network, sped up by the high velocity available in centralized digital payments and globalized by the borderless nature of the Facebook user base.

The digital yuan was trialed in April 2021 with great haste in reaction to this development, and by the Winter Olympics 2022, had launched for foreign attendees in Beijing. Not to be outdone by these new-look, same-shit fiat cryptocurrencies, Bitcoin made its own financial history when President Nayib Bukele of El Salvador took to the stage at Bitcoin 2021 to announce the legal tender aspirations of his small but dollarized nation. On March 9, 2022 President Joe Biden signed Executive Order #14067–”Ensuring Responsible Development of Digital Assets”, which included aspirations for mitigation of financial risks in digital asset markets, as well as a clause stating that within 210 days, the attorney general, in consultation with the secretary of the treasury and the chairman of the Federal Reserve, must provide a formal proposal for a government-issued CBDC.

By this point, the Bitcoin financial system had been utterly and properly dollar-ified, with billions of dollars in liquidity of dollar-denominated trading pairs making up the lion’s share of market activity. The same can be said for the Ethereum network, which has seen its compliance-driven perversion by non-native assets taking the wheel from its token Ether, as stablecoin and other dollar derivatives now uphold the majority of economic weight of the system. Both stablecoin giants Circle, issuer of USDC, and Tether came out in support of the merge, further ossifying their stake in the now-nearly-70%-OFAC-compliant blockchain. [2] As of this article’s writing, over 15.5 million ether are currently staked without active withdrawals in the Ethereum 2.0 beacon chain, worth nearly $18 billion dollars.[3] Fortunately for Bitcoin, the consensus weight of its system is not manipulated by user stake, and thus the Bitcoin market has been seemingly unaffected – negatively anyway – by this decade-long development. At least until scammer Do Kwon and his ponzi-scheme Luna wreaked havoc on investors at the start of May of 2022.

“[Crypto is] obviously serious…you want to do right by it in the regulatory space.”

– President Bill Clinton, April 27, 2022 (Allegedly) [4]

Contagion Spreads

Only a few weeks after SBF hosted a keynote with former U.K. Prime Minister Tony Blair and President Bill Clinton at the FTX-organized Crypto Bahamas conference, one of the largest-ever over-the-counter bitcoin purchases was announced by the LUNA team.

Terraform Labs and the non-profit Luna Foundation Guard, two entities headed by Do Kwon, had begun a campaign to purchase bitcoin as a reserve asset in the event that their algorithmic stablecoin, UST, deviated from its $1 peg. Shortly before their collapse, the plan had ballooned to the lofty goal of stacking over $10 billion in the hardest known digital commodity known to man. This purchase was financed with Three Arrows Capital, or 3AC, and was facilitated by cryptocurrency broker Genesis.

“Terra's remarkable growth has continuously reshaped crypto markets over the last two years”, said Joshua Lim, head of derivatives at Genesis. “Genesis is excited to be a liquidity partner to the Terra ecosystem, connecting it to a broader audience of institutional market participants.”

With the bitcoin reserves of Luna Foundation Guard totalling 80,394 BTC, valued at over $3.1 billion on May 5, 2022, this purchase placed LFG among the top-10 bitcoin holders in the world. [5] But only for a moment, for while it might feel like a lifetime ago, what happened next should look awfully familiar; the peg was attacked, the recently-purchased bitcoin fortune was liquidated, Binance, led by CEO Changpeng Zhao (CZ), aptly halted all trading on LUNA and UST pairs – with notable exceptions to their own stablecoin BUSD – and Kwon seemingly fled to outside of U.S. jurisdiction to Asia. [6]

Thus begins our first of many repeatable points of inquiry; where exactly did this bitcoin go? According to an audit released in November 2022, over 33,000 bitcoin were transferred to Binance on May 10, 2022, and sold along with other assets while failing to defend the peg. [7] The same day the nearly $1 billion dollars worth of bitcoin hit Binance’s order books, bitcoin’s USD price broke below $30,000, falling from $40,000 just a week before.

On May 13, SBF purchased a 7.6% stake in Robinhood, the trading platform that came under scrutiny for halting trading during the GameStop fiasco in early 2021. Bloomberg had reported that around 40% of Robinhood’s revenue came directly from selling customers orders to firms such as Two Sigma Securities, and Citadel Securities. [8] Citadel had been fined $700,000 in July 2020 for front running trades placed by customers orders, and in September of that same year, Robinhood itself was questioned by the U.S. Securities and Exchange Commission (SEC) for improperly informing clients of selling stock trades to known high-frequency trading firms.

Previously in December 2020, Robinhood had agreed to pay $65 million to settle charges of repeated misstatements for failure to disclose their receipts of payments from said trading firms. [9] When newly-nominated Treasury Secretary Janet Yellen briefed newly-elected President Joe Biden on this conflict of interest in February 2021, she herself had to acquire an ethics waiver due to having received at least $700,000 in speaker fees from Citadel LLC the year prior. [10] SBF had disclosed this purchase via a filed Schedule 13-D form with the SEC, costing $648.3 billion dollars and giving him 2.8% voting power in their dual-class share structure, under the entity Emergent Fidelity Technologies; a name said to be randomly generated. [11]

“On July 13, Coinbase Exchange will be unifying USD and USDC order books. As part of the unification process, USDC order books will be merged under USD order books to create a better, more seamless trading experience with deeper liquidity for USD and USDC.”

– Coinbase Exchange Twitter, June 29, 2022 [12]

Circle, the entity behind the increasingly utilized USDC stablecoin, had previously expanded their international offerings with a subsidiary operation based in Bermuda with an announcement made on July 22, 2019. [13] This entity, filed under the Digital Assets Business Act of 2018 (“DABA”) meant that Circle was the first major stablecoin issuer to receive a Class F (“Full”) DABA license that covered their operation of custody, payment services, exchange, trading and more financial services within the digital asset realm. Circle’s other banking partners, Signet, Signature Bank and Silvergate Capital had made USD loans to Celsius, Voyager, Block Fi, Three Arrows Capital and Alameda Research. By the time this article was written, all had filed for bankruptcy. Two of their other business affiliates, Galaxy Digital and Genesis, have also reported massive losses in the FTX collapse, with rumors of further contagion effects coming. Coinbase, a publicly-traded exchange under the ticker $COIN, announced in its Q2 2022 shareholder letter that nearly one third of total revenue was derived from interest on USD-denominated holdings, including a large USDC position:

“Interest income was $33 million, up 211% compared to Q1. The increase was primarily driven by our USDC activity, as well as higher interest rates as we generate interest on fiat customer custodial funds… at the end of Q2, we had $6.2 billion in total $USD resources. In addition, we had $428 million of crypto assets.” [14]

When the letter was released in late August 2022, interest on USDC holdings for 12 months was up to 4.7%, while one-month yields were an even 4%. By November 16, 2022, USDC yields were down to 0% across all time frames.[15]

“1) Binance converts USDC –> BUSD, and we see the change in supplies. Thus begins the Second Great Stablecoin War.”

– @SBF, October 23, 2022 [16]

On September 4, 2022, Binance announced that it would be auto-converting all USDC, USDP and TUSD, three major dollar stablecoins, into its self-issued BUSD, effective in just 25 days. [17] This led to continued concerns about Binance’s solvency with the preceding few months, especially July 2022, seeing the largest known outflows of bitcoin in the exchange’s history, eclipsing even March 2020’s black swan bottom.

On October 11, 216 days after Biden’s executive order with the aforementioned 210-day clause, BNY Mellon, the world’s largest custodian bank with over $43 trillion on the books, and coincidentally, the custodian of Circle’s reserves backing USDC, announced the launch of its digital asset custody program. [18] Involved with more than 20% of the world’s investable assets, the bank founded by the first secretary of the treasury, Alexander Hamilton, was also listed as a partner in the FedNow pilot. [19]

Despite these institutional developments, a continued bear market weighed heavily on the now-plummeting bitcoin price. Paradoxically, more and more Bitcoin hash rate poured onto the network. These concurrent movements saw Bitcoin’s hash price plummet to an all-time low, spurring a massive liquidation of bitcoin liabilities off mining operators books. On October 26, Core Scientific, then the largest Bitcoin mining operation in the world, filed for bankruptcy with millions of dollars in debt liabilities, thousands of ASICs, and yet in their filings, held only 24 bitcoin total when the circus came to town. [20] Where exactly did all this bitcoin go? On that same day, barely two weeks before the FTX collapse, Binance saw its largest single day outflow, with 71,579 coins, totalling over $1.1 billion in dollar terms. [21] This pushed net outflows to nearly 95,000 coins from the world’s largest exchange since just that July. Again, where exactly did all this bitcoin go? The very next day, October 27, 2022, SBF appeared on The Big Whale and announced future plans for FTX to launch its very own stablecoin. [22]

More Sand Than Dollars

“CIA and Mossad and pedo elite are running some kind of sex trafficking entrapment blackmail ring out of Puerto Rico and caribbean islands. They are going to frame me with a laptop planted by my ex gf who was a spy. They will torture me to death.”

– Nikolai Muchgian, October 28, 2022 [23]

On October 24, 2022, the MakerDAO approved a community proposal to custody nearly $1.6 billion USDC with Coinbase Prime. [24] Four days later, Nikolai Muchigan, the co-founder of MakerDAO and inventor of Rai, a DAI-fork stablecoin, tweeted that his life was in danger due to a Caribbean island blackmail ring, supposedly backed by Israeli and U.S. intelligence agents. Three days later, on Halloween, the 29-year-old coder Muchigan was found dead, having drowned in the sea off Condado Beach in Puerto Rico. [25]

Two days later, on November 2, 2022, CoinDesk reporter Ian Allison released findings that over a third of all assets – around $5.8 billion of $14.6 billion – on the balance sheet of SBF’s Alameda Research was intrinsically, and soon to be fatally, linked to FTX’s exchange token FTT. A “bank” run commenced, and after three days of nearly $6 billion in withdrawals, FTX was left with literally one single bitcoin. Where exactly did all this bitcoin go? The next day in an interview with Fortune, Coinbase founder and CEO Brian Armstrong made note that USDC will become the de facto central bank digital currency in the U.S. [26]

“The policymakers in the U.S. will set the framework that need to be followed so that the private market will actually create the solutions, and USD coin has been on a really rapid rise… the regulatory environment is one of the biggest unlocks we’re going to have in terms of growing this industry and perhaps even getting the prices to go back up in the right direction”

– Brian Armstrong, November 3, 2022

On November 6, CZ announced Binance would liquidate a remaining portion of FTT it had acquired from exiting FTX’s equity, having received around $2.1 billion in BUSD and FTT. Minutes after his announcement, Caroline Ellison, SBF’s partner and the CEO of Alameda Research, offered to purchase the tokens at $22 each, in an over-the-counter fashion. [27] By November 8, CZ and SBF had a phone call and seemingly came to a tentative deal for acquisition, reserving the right to back out of the deal at any time, while interestingly also leaving both U.S.-based proprietary exchanges, Binance.us and FTX.us, outside the scope of the deal.

“Things have come full circle, and FTX.com’s first, and last, investors are the same: we have come to an agreement on a strategic transaction with Binance for FTX.com (pending DD etc)”, SBF tweeted. [28]

Later that evening, FTX officially suspended all asset withdrawals. As part of the conditions of the acquisition, SBF was forced to open the FTX books and show the bottom of his pockets; seeing more sand than dollars, CZ backed out of the deal. A few important statements were made in the 48 hours or so that led up to this sudden cataclysm, including from the awfully-quiet U.S. Securities and Exchange Commission itself.

“Liquidating our FTT is just post-exit risk management, learning from LUNA. We gave support before, but we won't pretend to make love after divorce. We are not against anyone. But we won't support people who lobby against other industry players behind their backs. Onwards.”

– CZ, November 6, 2022 [29]

On November 7, 2022, the SEC officially deemed LBRY, or Library Coin, an unregistered security offering, setting a devastating precedent throughout the extended cryptocurrency market. [30] In the United States District Court for the District of New Hampshire, the memorandum and order read, “The Securities and Exchange Commission (SEC) contends that LBRY, Inc. offered and sold unregistered securities in violation of Section 5 of the Securities Act of 1933”, the act colloquially known as The Howey Test.

Due to LBRY reserving a pre-mine of nearly 400 million LBC tokens, and the knowledge that the company to date had spent approximately half of its pre-mined LBC, the SEC determined common enterprise complete with a lack of disclosure and proper filing of its now alleged security offering through required channels in the Gary Gensler-chaired SEC. The implications of this filing sent shockwaves across the pre-mined token industry, including exchanges listing these tokens as well as the entities behind their issuance. Conveniently, the next day was November 8, the United States’ midterm elections, with the balance of the senate and the house — and perhaps the regulatory path of the digital asset industry — once again at stake.

Searching for FTX on FEC.gov brings up 456 individual campaign contributions from SBF, CEO Ryan Salame, and others. [31] Salame’s contributions total over $14 million towards GOP candidates, while SBF’s “effective altruism” contributed over $20 million in donations to DNC politicians. Having been the second leading donor to the Biden campaign, by the time the final tallies from election night rolled in, SBF’s bankroll had finally caught up with his morals, and he found himself nearly completely bankrupt.

By November 9, the day after the elections, SBF had reportedly lost 94% of his net worth, down to $1 billion from more than $15 billion, leaving him with the largest single-day loss by a person according to the Bloomberg Billionaire Index. [32] Early in the morning of November 10, SBF took to Twitter to explain what happened, writing “I'm sorry. That's the biggest thing. I fucked up, and should have done better”, before making a specific note that “THIS IS ALL ABOUT FTX INTERNATIONAL, THE NON-US EXCHANGE. FTX US USERS ARE FINE!” [33]

Chapter 11

“The administration […] has consistently maintained that without proper oversight, cryptocurrencies risk harming everyday Americans…The most recent news further underscores these concerns and highlights why prudent regulation of cryptocurrencies is indeed needed.”

– White House Press Secretary Karine Jean-Pierre, November 10, 2022 [34]

On the eleventh day of the eleventh month, FTX and Alameda Research officially filed for Chapter 11 bankruptcy protection, and SBF stepped down as CEO. In addition, 130 affiliated companies connected or associated with FTX also commenced voluntary proceedings under Chapter 11. [35] The tide had gone out, and nearly everyone involved got caught swimming naked, as a near-endless tidal wave of dollar-denominated liquidations made quick work of SBF’s Caribbean empire.

While the first trickles of a dollar CBDC may have started in the Bahamas, the monsoon of coming regulation and contagion of the Second Great Stablecoin War is far from over. The dollar, having fallen 10% off 35-year DXY highs since September, looks for new ways to innovate and further dollarize markets across the globe.

On November 15, just four days after the SBF tsunami crashed to shore, BNY Mellon, as well as a dozen or so other banking institutions, announced the start of a twelve-week digital dollar pilot program with the Federal Reserve Bank of New York. [36] On the very same day, BlockFi announced plans for bankruptcy filings, only five months after taking a $250 million loan from FTX, and Circle announced users would now be able to settle payments by accepting Apple Pay. [37,38] With a significant 43% discount now showing on the highly-regulated Grayscale Bitcoin Trust, further community requests for proof of reserves are growing around Genesis and Grayscale, both owned by the Digital Currency Group, and even their custodian, Coinbase Custody. [39,40] As of this writing, these requests have so far been denied for security reasons.

While appearing to be riding the wave of the booming digital asset revolution, gathering celebrity endorsements and political allies alike, it turns out SBF was drowning in debt and capital misallocation amongst the loud, mainstream praise. Later that month, on November 30, SBF was set to appear in person at a New York Times event, sponsored by Accenture, alongside Secretary Yellen, Meta CEO Mark Zuckerberg, Ukraine President Volodymyr Zelensky, BlackRock CEO Larry Fink, TikTok CEO Shou Chew, former Vice President Michael Pence, Amazon CEO Andy Jassy, Netflix co-founder and CEO Reed Hastings, New York City Mayor Eric Adams, and others; tickets for the event were listed at $2,499 per attendee.[41] The interview between SBF and Andrew Ross Sorkin was streamed as advertised, albeit with both parties shooting remotely.

Bitcoin tends to be a ballast of truth, bringing all sorts of ballooning fraud rushing to the surface. FTX and Alameda Research will take their place amongst the seemingly too-big-to-sink players that ended up doing just that. They will certainly not be the last. However the following weeks, months, and years play out, it is clear that SBF was but a small fish in an ocean-sized, dollarized pond. And as he quickly found out, there is always a bigger fish.

“At some point I might have more to say about a particular sparring partner, so to speak. But you know, glass houses. So for now, all I’ll say is: well played; you won.” [42]

– Sam Bankman-Fried, November 10, 2022