Crypto Checkmate? The Rise And Fall Of The King Of Crypto

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Crypto Checkmate? The Rise And Fall Of The King Of Crypto

On November 2nd 2023, Sam Bankman-Fried – once considered the King of Crypto – was found guilty on all charges of defrauding customers.

Bankman-Fried was accused of diverting $10 billion from FTX to Alameda Research, a hedge fund of which he holds 90% ownership. The now ex-King used customers’ money to cover his luxury lifestyle, publicity endorsements from A-list celebrities and even buying properties in the Caribbean.

But how did this happen?

These types of scams are, unfortunately, not new. The exorbitant rise and fall of the prices of ‘digital assets’, restrictions in liquidity, limitations on customers’ withdraw positions and even an article published by a competitor were the typical indicators that the FTX model was not only having trouble as a business, but was also potentially following the same steps as previous fraudulent schemes.

From Enron in 2002 to FTX in 2022, the same story is repeated again and again. Criminals taking advantage of the lack of legal framework that allows organizations to operate under opaque circumstances, diverting funds or covering financial holds due to criminal activities.

Customers looking to obtain high-level returns in a hyper volatile ‘asset’, a strong bull market and minimum regulatory scrutiny were the perfect combination for criminals to build and expand this scheme.

What’s next for crypto?

The reality is, this scandal has nothing to do with crypto; criminals perpetrated a fraud, and crypto currency was just the means they used.

Since the scandal started, the crypto market has been in a frozen period, forcing regulators to step in (once again) and define regulatory mechanisms where market players are required to establish a reporting and transparency mechanism. Legislation on this is still in progress.

As reaction, users and customers have been moving positions from centralized exchanges (CEX), such as FTX, Binance and Coinbase, to decentralized exchanges (DEX), such as Uniswap, Pancakeswap and Thorwallet, looking for a more transparent mechanism and less mismanagement.

From a regulatory perspective, governments around the word have started preparing different mechanisms to regulate these market participants – such as the EU’s Markets in Crypto-Assets Regulation (MiCA) and the UK’s stablecoin regulations. This is essential to establish a common framework that not only protects customers but also ensures market stability.

Daniel Garcia

Senior Manager

Daniel is a risk and compliance subject-matter expert (SME), with over 16 years of global experience, having worked for major financial institutions and consulting firms in Latin America, Europe and Asia. He leads the Verdantix Risk Management practice, where he steers market research intelligence and provides Advisory services on risk and compliance matters. Daniel has a BA in Economics and an MSc in Capital Markets and Financial Engineering.