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David Z. Morris is CoinDesk's Chief Insights Columnist. He holds Bitcoin, Ethereum, and small amounts of other crypto assets.

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Join the most important conversation in crypto and Web3 taking place in Austin, Texas, April 26-28.

It has now been more than a month since the CoinDesk report that unraveled Sam Bankman-Fried’s FTX exchange, what could be one of the largest and most egregious criminal frauds in human history. But we’re still getting a steady stream of horrifying revelations, like desiccated victims being excavated from a serial killer’s basement on live TV. On the brighter side, we also have some fresh insight into the severe consequences Bankman-Fried and his co-conspirators are likely to face.

This article is excerpted from The Node, CoinDesk's daily roundup of the most pivotal stories in blockchain and crypto news. You can subscribe to get the full newsletter here.

There has been huge anxiety, particularly among crypto types, about when and whether Bankman-Fried will be brought to justice. Despite clear signs of fraud, he does not seem to have been detained by law enforcement. He remains in the Bahamas, giving interviews intended to obfuscate his actions and distract from the continuing drumbeat of grisly financial discoveries. Coinbase CEO Brian Armstrong is not alone in regarding this as “baffling.”

The most paranoid observers (and the seemingly delusional Bankman-Fried himself) might suspect this to be light treatment, the fruit of his years of currying favor with U.S. leaders. But it’s more likely the delay is just part of the slow-grinding legal process, according to an in-depth new legal report from the excellent MacKenzie Sigalos at CNBC. The U.S. Department of Justice has requested an independent probe of the case, and former federal prosecutor Renato Mariotti told CNBC that “it sure looks like there’s a chargeable fraud case here.”

And Bankman-Fried’s potential punishment is no small potatoes. He could be sentenced to life in prison, former Commodity Futures Trading Commission trial lawyer Braden Perry told CNBC. That’s according to U.S. sentencing guidelines, and taking into account the number of victims and the size of the apparent fraud at FTX and its closely related trading shop Alameda Research. The CNBC report goes into gratifying detail about exactly what books are likely to be thrown at Bankman-Fried, and how hard.

The bad news is that those sentencing guidelines are often “bent” to give softer penalties to white-collar criminals. That’s based on the implicit belief, still widespread in the U.S. court system, that things like financial fraud and embezzlement aren’t “real” crimes. Bankman-Fried’s youth, combined with his ongoing scheme to paint himself as an incompetent buffoon, could also elicit undeserved mercy from a court. It will take real and sustained public and political pressure to make sure that Bankman-Fried gets what’s coming to him.

Trigger warning: financial gore

Coming to him it most certainly is – and investigators just keep pulling up bodies. Recent days have seen the emergence of at least two leaks that suggest the fraud was even more depraved than previously understood.

Data shared with Bitcoin.com appears to show that Alameda Research CEO Caroline Ellison had a staggering $1.3 billion deficit on her personal FTX margin trading account as of May 2022. Accounting at both FTX and Alameda was clearly considered a detriment to organizational goals (that is, theft). But taken as read, this deficit would be in addition to the mind-bending losses Alameda proper was allowed to rack up on FTX.

These deficits, it must be emphasized, point to fraud at FTX more than malfeasance by Caroline Ellison or Alameda (though there was probably plenty of that, too).

It has become increasingly clear that part of Bankman-Fried’s strategy is to throw Ellison under the bus by blaming Alameda for losing funds. This was especially clear in an interview published Tuesday with Frank Chaparro at The Block. But the real crime here was not Alameda being terrible at trading – it was FTX’s failure to enforce fair liquidation rules for Alameda, Ellison and perhaps other allies. In effect, exempting them from margin controls enabled their use of FTX customer funds for speculative activities. Bankman-Fried’s backstabbing of Ellison (reportedly a former romantic partner) should be understood above all as an index of just how little character he has, despite his carefully crafted altruistic persona.

And the hits just keep on coming: The Financial Times has received a leaked copy of the investment holdings of FTX Ventures, the exchange’s venture capital (VC) unit. One number is paramount here: The total of investment outflows, tallied by the FT, runs to more than $5.4 billion.

Here’s the thing: It seems impossible that FTX could have afforded those investments, along with its other vast expenditures, simply from three years of exchange revenue and its own venture capital inflows of $1.8 billion. Maybe some of the FTX Ventures stakes used fake FTX money like FTT, so there’s more work to be done. But very simple arithmetic strongly suggests not only that FTX was dipping into customer funds, but that the people running FTX could not possibly have been ignorant of that fact.

Another detail from those FTX Ventures documents may or may not be criminal, but it is unambiguously disgusting. Among the entities receiving money from FTX Ventures were funds that themselves initially invested in FTX, including Sequoia Capital and Skybridge Capital. Why were they investing in their investors? The Skybridge deal in particular had an air of weirdness even back when it was announced in September. The FTX Ventures funding was earmarked for the Anthony Scaramucci-run venture firm to purchase cryptocurrency.

This likely meant buying and custodying crypto through FTX, which has been alleged as a condition of other deals by the exchange. So Skybridge (among others) first gave FTX money to attract more users. FTX then effectively sent those user funds back to Skybridge (and others). That left users with fictitious balances, while Skybridge funneled the cash back to FTX. The technical term for this is “shady as hell.”

And now we venture into the real basement. What follows is a hypothetical so shocking, so gory, so foul that only the most steel-stomached financial gorehounds should dare entertain it.

The Skybridge announcement doesn’t specify what kind of crypto strategies the fund would pursue with the FTX Ventures money. The most horrifying, human-centipede scenario would be that Skybridge, and/or other funds that got tens of millions from FTX, used some of those rehypothecated FTX user funds to buy the exchange token FTT, which was created by FTX.

As I’ve detailed, the role of FTT as collateral in various loans was key to the entire house of cards. Re-re-re-hypothecating user funds by getting outside funds to use them to buy or hold FTT would have opened up further leverage for creative accounting. It’s a possibility that’s beyond grim, and beyond Machiavellian.

Maybe that’s all we should ask ourselves to stomach for now. Time to go enjoy some light entertainment, something to distract us from the depths of real-world human depravity. I would suggest a light romp like, say, "The Texas Chainsaw Massacre."


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David Z. Morris is CoinDesk's Chief Insights Columnist. He holds Bitcoin, Ethereum, and small amounts of other crypto assets.

David Z. Morris is CoinDesk's Chief Insights Columnist. He holds Bitcoin, Ethereum, and small amounts of other crypto assets.