One of the most famous players in the industry is Sam Bankman- Fried, who built FTX into a top site for traders and investors.
In January, his company was valued at $32 billion and currently has more than a million users with a total of $10 billion in daily trading volume. The public doesn't know how badly it has been damaged by the last few months. The mining company has lost half of its value this year and the public company has lost two-thirds of it's value.
During a five-hour Chapter 11 bankruptcy hearing in the Southern District of New York, Bankman- Fried's exposure to the broader industry washout became obvious.
There has been a flood of client withdrawals after the plunge in the price of digital currency. Bankman- Fried controls quantitative trading firm Alameda Research, which borrowed hundreds of millions of dollars from Voyager and became a major equity investor before turning around and offering a bail out to the firm.
Bankman- Fried is trying to play the role of industry consolidator, snapping up distressed assets both as a wager on their eventual recovery and to strengthen his foothold in the U.S. Bankman- Fried has denied any active discussions are underway, despite a report that FTX was trying to buy Robinhood.
FTX has been in discussions to acquire the owner of Bithumb in South Korea.
With his activity on hyperdrive, it has become clear that Bankman- Fried is not immune to the infections in the criptocurrency industry.
Alameda Research and its lawyers fought in court over what was revealed to be a deep and complex relationship between the companies. According to documents reviewed by CNBC, ties go back as far as September 2011. Alameda owed the company over $370 million, but the firm didn't say how long they'd been a borrower.
Three Arrows Capital, also known as 3AC, which went under after default on loans from a number of firms in the industry, was the cause of the huge losses suffered by Voyager.
According to court documents and financial statements, Alameda moved from a borrower to a lender in a matter of weeks after the 3AC debacle. In late June, Bankman-Fried's firm gave a $500 million bail out to Voyager.
In court, a partner at Kirkland & Ellis said that Bankman-Fried had "wore many hats" during the rapid journey of the company. Bankman-Fried said his priority was to offer them liquidity after FTX and Alameda moved in as potential bidders for the customer accounts.
Bankman- Fried turned a boring process into a circus. According to the legal team, the billionaire was trying to create leverage for himself in a potential transaction.
FTX has a leg up and is working behind the scenes to force its way according to the parties in our process. I want to assure everyone that we won't tolerate that.
Andrew Dietderich, Alameda's lawyer and a partner at Sullivan & Cromwell, said that the rescue deal had been rejected violently.
The judge for the Southern District of New York didn't like where the arguments were going.
The hearings would not be turned into a sort of cable news show with people slinging accusations at each other and making extremely characterized descriptions of what their prior proposals or discussions were, according to Wiles.
Attorneys from Alameda acknowledged that the business ties between Voyager and their client ran deeper than a simple lending relationship.
According to the company's financial documents, Alameda had initially borrowed significantly more than that. The British Virgin Islands is referred to in the firm's December 2021 books as the location of a $1.6 billion asset loan.
The British Virgin Islands have head offices for Alameda and are the only place in the world where it is located. It was one of several entities that borrowed from the same company. A British Virgin Islands-registered firm named Counterparty A is listed in the same document as owing $376 million. Alameda is listed as owing $377 million in the company's Chapter 11 presentation. The amount of the loan is tied to the firm's borrowing rate.
A person didn't reply to questions.
The loan balances to the British Virgin Islands-based fund fell from $728 million to $377 million in less than a year. The disclosure data was provided by FactSet.
3AC's default on $654 million of its debt brought the firm to the ground.
The bail out was done on June 22, but with restrictions. The funding amount for the $500 million rescue was limited to $75 million due to a cap on the rate of withdrawal.
Attorneys from Alameda said in court that the loan was given at the request of the management of the company.
Bankman- Fried was a major stakeholder in the company.
In late 2021, Alameda closed a $75 million stock purchase and obtained 7.72 million shares at $9.71 a piece, according to a filing with the Securities and Exchange Commission. In May of this year, Alameda spent $35 million on 15 million shares, with the stock price dropping to $2.34.
Alameda became the largest shareholder of the company after the purchases. Alameda's $110 million equity investment was worth only $17 million after the rescue.
Alameda had to file disclosures with Canadian securities regulators as a holder of at least 10% of the equity in the company. On the day of the rescue, Alameda surrendered a block of 4.5 million shares, bringing its ownership down to 9.49% and voiding reporting requirements in Canada. The surrendered shares were subsequently canceled by the company.
Alameda gave away a 2.29% stake in exchange for pulling its ownership below the 10% threshold.
The tide could not be stopped as customer redemptions swallowed the cash. Customer withdrawals and trading were stopped nine days after the package was announced. Chapter 11 was declared by Voyager.
Stephen Ehrlich, the CEO of the platform, reassured the platform's millions of users that after the company goes through bankruptcy proceedings, they would be eligible for a grab bag of stuff, including a combination of their holdings.
There is no guarantee of that. The court granted access to $270 million in cash to the customers of Voyager after they filed for bankruptcy. Users are out of luck when it comes to other things.
Bankman- Fried wants to help customers get back up and running. The FTX-Alameda bid was portrayed as a fire sale.
This might be Bankman-Fried's last chance to get some value out of his money. In a July press release, he tried to spin his offer as a benefit to customers who were suddenly wrapped up in a failing business.
Bankman-Fried said in the statement that the deal would allow the clients of the company to get early cash and not have to worry about the consequences of their decisions.
Federal charges over an alleged Ponzi scheme may be the beginning of a bigger problem.
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