Sam Bankman-Fried Charged With Conspiracy to Commit Fraud and Launder Money. Here's What It Means for Investors

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  • FTX's Sam Bankman-Fried faces both criminal and civil charges for fraud and money laundering.
  • Prosecutors say the FTX collapse was because of fraud, not mismanagement.
  • SEC and CFTC set out misuse of client funds and misleading statements made by Bankman-Fried as they file separate charges.

SEC says Bankman-Fried used customer money as his own "piggy bank."

U.S. authorities have charged Sam Bankman-Fried, the founder and former CEO of failed crypto exchange FTX, on eight counts. These include conspiracy to commit wire, securities, and commodities fraud, as well as money laundering and campaign finance violations. "As today's charges make clear, this was not a case of mismanagement or poor oversight, but of intentional fraud, plain and simple," said U.S. Attorney Damian Williams for the Southern District of New York.

Charges mount against former crypto poster boy

Before Bankman-Fried's dramatic fall from grace, many had viewed the 30-year-old as a responsible face of crypto investment. The former billionaire testified in front of congressional committees on the topic of digital currencies, appeared on the front page of top magazines such as Forbes and Fortune, and presented FTX as a safe platform with sophisticated risk management systems.

Bankman-Fried was arrested on Monday night in his Bahamas home and now faces extradition to the U.S. to face trial. His application for bail was denied. In addition to the wave of criminal charges, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) are also taking civil action against Bankman-Fried.

SEC alleges Bankman-Fried orchestrated "a massive, years-long fraud"

The SEC says Bankman-Fried misrepresented the risk involved in depositing or investing money with FTX and that he misled investors from the start. It details the back door that allowed FTX's sister company, Alameda Research, to draw on FTX customer assets. The SEC says Bankman-Fried "used Alameda as his personal piggy bank to buy luxury condominiums, support political campaigns, and make private investments, among other uses."

CFTC says over $8 billion in customer assets are missing

In a 40-page document, the CFTC accuses Bankman Fried, FTX, and Alameda Research of violating commodities and exchange regulations by committing fraud and making fraudulent statements. It echoed the SEC's accusations in terms of the mixing of funds and how Alameda benefited from preferential trading conditions. The CFTC said the collapse of FTX has had a "significant, observable negative impact on digital commodity markets."

John J. Ray III testifies to House Financial Services Committee

As prosecutors laid out their case against Sam Bankman-Fried, John J. Ray, the man brought in to clear up the mess in FTX, testified before the House of Representatives. Ray, who oversaw the Enron bankruptcy proceedings, said: "FTX Group's collapse appears to stem from the absolute concentration of control in the hands of a very small group of grossly inexperienced and unsophisticated individuals who failed to implement virtually any of the systems or controls that are necessary for a company that is entrusted with other people's money or assets."

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He said that he and his team were working to mitigate the harm to FTX customers and creditors, but pointed to a number of "unacceptable" practices. These include allowing senior management to access customer funds, letting Alameda Research borrow money without any limits, and a lack of documentation for over 500 investments.

Bankman-Fried has previously told journalists that he did not knowingly commit fraud and that the issues were down to incompetence rather than negligence. According to the New York Times, Bankman-Fried's lawyer Mark Cohen says his client "is reviewing the charges with his legal team and considering all of his legal options."

What it all means for investors

The swift legal action shows that prosecutors are serious about bringing Bankman-Fried to justice. It isn't clear how long it might take to extradite him to the U.S. or for the legal proceedings to run their course. But what does it mean for investors, and particularly for those who had money in FTX?

For FTX customers hoping to get their money back, the big question is where large chunks of money have gone and how much authorities might be able to recover. In some ways, Ray's testimony is more illuminating than the criminal proceedings against SBF. Ray told lawmakers that his team is working to recover the lost funds, but it isn't clear how much they'll be able to recover. He also said that FTX U.S. customers have the best chance of getting their money back, but it is too early to say more.

More widely, the legal proceedings against Bankman-Fried may not have much direct impact on cryptocurrency prices. Beyond raising important questions about risk management and transparency on crypto platforms, much of the damage is already done. Other factors are now more likely to sway the crypto industry, including the potential collapse of other platforms, increased regulation, and what's happening in the wider economy. However, the case does send a strong message to crypto criminals that they are not above the law.

In addition, the dramatic revelations around what went on behind the scenes at FTX will almost certainly accelerate moves toward increased crypto regulation. For example, we may see rules on how crypto exchanges operate and how they are audited. In the long run, this could help inject much needed trust into the industry. However, in the shorter term, it could cause more disruption and price volatility.

Increased regulation may also eventually translate into more protections for crypto investors. Right now, digital assets held on a crypto platform don't have the same protections as funds held in a traditional bank. For example, FDIC insurance means dollars held in a bank account are covered for up to $250,000 against bank failure. Some crypto platforms offer FDIC insurance on U.S. dollars held with them, but that protection doesn't extend to crypto assets. If your crypto platform fails, it could be very difficult to recover your funds. Right now, the best way to protect your cryptocurrency assets against platform failure is to move them to a non-custodial crypto wallet that you control.

Bottom line

The biggest takeaway from the Sam Bankman-Fried charges is that the crypto world is not exempt from existing fraud and other financial laws. For crypto investors, the other key lesson is that it is difficult to know for sure what a crypto exchange is doing with your funds. Don't wait for regulators or investigators to uncover more uncomfortable truths. Instead, take steps to protect your assets if you plan to hold them for the long term.

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