Sam Bankman-Fried’s perspective on FTX failure

Sam “SBF” Bankman-Fried took the stand this week in an ongoing criminal trial in New York's Southern District Court, denying any wrongdoing between FTX and Alameda Research, admitting to making “huge mistakes” during the companies' fast-paced growth.

His official testimony began on October 27 after the jury heard in absentia the previous day. During the hearing, Banman-Fried struggled to answer questions from state attorneys, but appeared better prepared to face the jury the next day.

Some of the highlights of Bankman-Fried's testimony this week included the 2021 ban on inner circle millionaire political donations and FTX's terms of use for transactions between Alameda and the crypto exchange. Moreover, the former CEO revealed that he requested additional hedge strategies for Alameda in 2021 and 2022, but they were never implemented.

The defense is expected to complete the Bankman-Fried examination on October 30, followed by the prosecution's cross-examination and the closing arguments of both sides. As prosecutors may testify next week – the man who was called to prove another witness's testimony was false or misleading – hinted.

Bankman-Fried could face up to 115 years in prison if convicted of all counts of fraud and embezzlement. Below is Scientelegraph's coverage of his testimony on Earth.

SBF has rejected claims of political donations

Bankman-Fried denied in court that FTX Digital Markets' former CEO, Ryan Salame, and former director of engineering, Nishad Singh, directed millions of dollars in political campaign spending.

According to data on OpenSecret, Singh has given $8 million to federal campaigns in the 2022 election cycle. Salame donated $10 million to politicians with loans from Alameda Research.

Although Banman-Fried denied ordering any political contributions, he acknowledged that he played a key role in lobbying Washington, D.C., to push for a regulatory framework for crypto companies in the United States by 2021.

“I believed I could make an impact on the world.”

According to prosecutors, Bankman-Fried made political campaign contributions of more than $100 million from clients' deposits at FTX before the 2022 midterm elections.

Bankman-Fried denied any wrongdoing during his testimony, saying FTX had more than $1 billion in revenue by 2021 and that political donations were made from his own money.

Maxine Waters is leading the investigation into FTX pic.twitter.com/Ox6O5w4nOl

— Jordan Schachtel @ dossier.today (@JordanSchachtel) November 17, 2022

The New York Times test

Bankman-Fried had an employee relations manual at FTX and Alameda Research: The New York Times Challenge.

Based on the informal test, the staff should not write anything they are not comfortable seeing on the front page of the newspaper. According to Bankman-Fried, even innocuous things can “look really bad out of context,” so employees should always provide enough context in text messages.

Bankman-Fried cited that as part of the explanation for why more than 200 channels on Signal had a self-delete policy that permanently deletes messages after a week.

Prosecutors have used evidence of automatic cancellations in recent days to suggest wrongdoing between the companies was being covered up. According to Bankman-Fried, official communications and regulatory documents are handled through other channels such as Slack or email, but Signal was the choice for daily communication within the companies.

Alameda's special role at FTX

Bankman-Fried provided details about Alameda Billionaire's line of credit with FTX. According to the testimony, Alameda acted as a payment provider for FTX when the exchange could not have its own account.

In addition to being a payment processor, Alameda was also a major liquidity provider, market maker and customer of FTX.

As a liquidity provider and market maker, if FTX's risk engine failed, Alameda had to step in and cover client losses. During his testimony, Banman-Fried offered the example of a catastrophic engine failure in 2021 that caused Alameda to cover millions of dollars in losses.

The nature of Alameda's role in the activities of the exchange inspired custom features in the FTX code, such as the ability to go negative through the credit line without activating the risk engine. According to Bankman-Fried, the exemption was necessary to prevent Alameda's potential liquidation, which would negatively impact crypto markets.

As a customer of FTX, Alameda was able to borrow money by putting the money up as collateral. FTX's terms of use allow borrowers to use funds for any purpose, meaning Alameda can trade with the borrowed funds.

Alameda's line of credit with FTX grew during the crypto industry's bull market.

Alameda could not close

Bankman-Fried discussed hedging strategies with former Alameda Research CEO Caroline Ellison in 2021 and 2022 as they look to protect the trading platform from a potential market crash.

According to the testimony, Bankman-Fried asked Ellison to withhold $2 billion in Bitcoin (BTC) against a possible devaluation in 2021. He told the jury that the strategy was never practical.

As early as 2022, Ellison's notes state that Bahnmann-Fried was “difficult” to hedge. The defense used the evidence to show that Bankman-Fried was one of the highest threats and that he spoke to Ellison frequently.

Without proper hedging, Alameda was hit hard by the collapse of the Terra ecosystem and the fall in crypto prices. By September 2022, Bankman-Fried learned that the liability between the companies had grown from $2 billion to $8 billion a year.

“I was surprised,” he told the court, adding that he believed Alameda's assets exceeded its liabilities by $10 billion.

Clawback provision in terms of use

According to Bankman-Fried, FTX's terms of use include an arbitration provision that covers losses between clients using margin trading and futures contracts if the exchange's risk engine fails.

The document submitted to the court says:

“[…] Your account balance may be compromised due to losses incurred by other users.

If FTX is unable to cover losses related to spot margins and futures, the loss will be shared among all clients. Defense attorneys used the provision to argue that clients trading in FTX were aware of the potential risks.