Welcome to The Nonlinear Library, where we use Text-to-Speech software to convert the best writing from the Rationalist and EA communities into audio. This is: Understanding FTX's crimes, published by FTXwatcher on April 11, 2024 on The Effective Altruism Forum.

In the aftermath of SBF's convinction, there have been a few posts trying to make sense of FTX. Some people are trying to figure out what happened, and some people are interested in trying to find clever defenses.

I'm in a much more boring position: I am confident SBF is the fraud the world believes him to be. I hope this post can provide reasoning transparency on why I think this, and perhaps serve as an easy link for others who feel similarly but don't want to get bogged down in a point-by-point.

Posted anonymously as some protection against future employers Googling [1].

I have divided this post into a summary of the major crimes and my basis for believing they occurred, an 'FAQ' dealing with some common misapprehensions I've seen on this forum and elsewhere, and an appendix explaining some crypto exchange basics / jargon for those who don't have a background there.

Crimes

Misappropriation of Funds

Summary

This is the big one. Customers who deposited to FTX believed their assets were being held separately to FTX's own funds. In reality, their funds were available for Alameda to use freely.

For practical purposes, there wasn't any separation between these two companies; FTX's money was Alameda's money and Alameda's money was FTX's money. Since SBF was majority-owner of both Alameda and FTX, this overlap is not obviously [2] illegal, though it is highly inadvisable. However, if customer money is FTX's money and FTX's money is Alameda's money and then Alameda invests a ton of that money, all while SBF tweets to customers that their money is safe and uninvested [3], that's a problem.

Detail

If a troubled company has a few days to beg potential investors for a bailout before it files for bankruptcy, and it sends those investors its balance sheet so they can consider investing, and they all pass, and then the company files for bankruptcy, of course the balance sheet was bad. That is not a state of affairs that is consistent with a pristine fortress balance sheet.

But there is a range of possible badness, even in bankruptcy, and the balance sheet that Sam Bankman-Fried's failed crypto exchange FTX.com sent to potential investors last week before filing for bankruptcy on Friday is very bad. It's an Excel file full of the howling of ghosts and the shrieking of tortured souls. If you look too long at that spreadsheet, you will go insane.

Matt Levine, FTX's Balance Sheet Was Bad

There's a ton that could be written here, but since intent seems to be the main point of contention I think the most interesting data points are the ones that suggest how big of a problem the insiders thought it was before facing criminal charges:

Here's SBF's balance sheet that he circulated to investors during the panic of November 2022. As far as I know this sheet has never been verified, and it's from a convincted felon, and it was essentially a sales pitch. So it could be expected to present a perhaps-too-rosy view of the world. What it in fact presents is an unmitigated disaster. Matt Levine's reaction above was the same as my first reaction, and I recommend that piece as a whole if you want to get a vibe of how insane this was.

Roughly the sheet lists assets as follows, rounding to the nearest $100m and using the 'October / Before This Week' values; note that many of these took substantial hits during the November panic.

$6bn FTT

$5.4bn SRM

$2.2bn SOL

$1.5bn 'Other Ventures'

$1.2bn GDA; this is Genesis Digital Assets, a mining company

$500m Anthropic

$865m MAPS

$600m HOOD; Robinhood shares owned personally by SBF

$1.5bn of other assets of varying quality

Total of $19.6bn

There isn't as much colour on the liabilities, but based on the section at the bottom they were $8.9bn, all owed to custome...