The first problem with FTX, and the big reason why SBF went to jail, is that it was a plain ole Ponzi scheme.
SBF owned two companies:
- Alameda Research — A standard hedge fund (that traded in crypto)
- FTX — The crypto exchange (place to buy and sell crypto)
Although two separate companies, they didn’t keep a robust enough financial separation between the two. In fact, they didn’t separate them, which ultimately led to the collapse.
If you opened an account on FTX and dropped some money into it, your dollars were physically held inside of Alameda rather than FTX. The old shell game. They did this because when FTX first opened, no bank would supply it with a bank account. Therefore, they found a pragmatic solution in using Alameda’s bank account. That, in and of itself, is fishy, but maybe not illegal (depends on who you ask) because if you do the accounting correctly and keep those funds separate, it shouldn’t be a big deal.
But they didn’t do that.
When Alameda needed extra funds, they just used the money (“borrowed”) in the FTX user accounts. That’s illegal. That’s a Ponzi scheme.
They could’ve gotten away with it without the other two problems: the volatile asset class and no adults in the room.
So we’ll talk about why it went bad next…
