Along the Davos Promenade in 2023 there were fewer crypto companies than in previous years after the market crash. Circle, the company behind the stablecoin USDC, was one the few present.
Arjun Kharpal | CNBC
DAVOS, Switzerland — Over the past few years at the World Economic Forum in Davos, Switzerland, the number of cryptocurrency industry attendees has boomed.
But after a near $1.4 trillion wipeout in 2022, the crypto industry is being a bit more reserved with how it splashes the cash and several companies spotted last year are not in attendance. 2022 was marked by failed crypto projects, liquidity issues and bankruptcies, topped off by the collapse of major exchange FTX.
When the World Economic Forum was held last May, bitcoin was hovering around $30,000, after having already fallen more than 50% from its all-time high hit in November 2021. More pain followed with bitcoin dipping as low as $15,480.
The Promenade is the main street in Davos where companies and governments take over shops and cafes for the week. Last year, crypto firms from all walks of life took over the place. But since the market slide, there are far fewer crypto firms with flashy store fronts at Davos.
One shop selling non-fungible tokens, or NFTs, has disappeared. Prices of NFTs, which are digital collectibles, also plunged last year. What’s left are companies that survived the bear market and that are looking to expand their businesses.
“It’s very clear that the speculation period is drawing to a close and every company that you see featured … is really focused on real-world use cases,” said Teana Baker-Taylor, vice-president of policy and regulatory strategy at Circle, the company behind the USDC stablecoin.
A stablecoin is a type of digital currency that is supposed to be pegged one-to-one with a fiat currency. USDC is pegged to the U.S. dollar. Circle says it is backed with real-world assets such as U.S. Treasurys so that one USDC can be redeemed for $1.
Casper Labs, a company that has built a blockchain designed to be used by businesses, is running a space on the Promenade called the Blockchain Lab. Casper Labs was also present last year in Davos.
Cliff Sarkin, chief of strategic relations at Casper Labs, said he’s “cautiously optimistic” that the crypto market has bottomed.
“So we’re over a year into the bear market, so I think the shock of that is settled in and for those of us that have been in the space for years … we feel like this is the time to build,” Sarkin told CNBC.
He added that the crypto firms that have remained at Davos are “substantiative projects” and “the real deals” versus things like NFTs.
There were also those in traditional finance who welcomed fewer crypto firms.
Mark Haefele, chief investment officer at UBS Global Wealth Management, was asked during an event hosted by the Swiss bank what he would like to see in Davos this year. He said he had seen it already: “It’s less crypto on the main street.”
The mysterious case of the orange bitcoin car
On Monday, a flashy bright orange Mercedes-Benz car was parked outside of the Blockchain Hub on the Promenade.
The orange Mercedes was parked along the Promenade in Davos. Nobody in the vicinity saw who parked it there. The license plate says “Kuna” on it, which is the name of a Ukrainian cryptocurrency exchange.
Arjun Kharpal | CNBC
A coin that represented a bitcoin was placed where the Mercedes-Benz logo would usually be. On the tires and the licenses plate, the words “in crypto we trust” were printed. The license plate had the Ukrainian flag on it and the name Kuna, which is the company behind a cryptocurrency exchange of the same name.
Kuna also set up the “reserve fund of Ukraine” after the war with Russia began where people could donate crypto to Ukraine.
People in the vicinity that CNBC spoke to could not verify who parked the car there.
However, two crypto executives who spoke to CNBC did not welcome the orange car, particularly after the market crash and the excesses of the industry were exposed. One remarked that the presence of such a car was not helpful for the industry’s reputation which took a hit last year.
CNBC reached out to Semen Kaploushenko, CEO of the Kuna exchange, via LinkedIn, but is yet to receive a response.
CNBC also reached out to the Blockchain Association of Ukraine which Kuna founder Michael Chobanian is the president of, but is yet to receive a response.
The license plate and tyres had the words “in crypto we trust” printed on them.
After a tumultuous 2022, crypto investors are trying to figure out when the next bitcoin bull run could be.
Last week, at a crypto conference in St. Moritz, Switzerland, CNBC spoke to industry insiders who painted a picture of 2023 as year of caution. Bitcoin is expected to trade within a range, be sensitive to the macroeconomic situation such as interest rate rises and continue to be volatile. A new bull run is unlikely in 2023.
However, experts are looking to next year and beyond with optimism.
In 2022, the entire cryptocurrency market lost about $1.4 trillion in value with the industry facing liquidity issues and bankruptcies topped off by the collapse of exchange FTX. Contagion spread across the industry.
While bitcoin has gotten a small bump at the start of the year, in line with risk assets like stocks, experts say bitcoin is unlikely to retest its all-time high of just under $69,000 but it may have bottomed.
“I think there’s a little bit more downside, but I don’t think there’s going to be a lot,” Bill Tai, a venture capitalist and crypto veteran told CNBC last week.
“There’s a chance that [bitcoin] kind of has bottomed here,” adding that it could fall as low as $12,000 before jumping back up.
Meltem Demirors, chief strategy officer at CoinShares, said bitcoin is likely to be rangebound trading at the lower end between $15,000 and $20,000 and on the upper end between $25,000 to $30,000.
She said a lot of the “forced selling” that happened in 2022 as a result of collapses in the market is now over, but there isn’t much new money coming into bitcoin.
“I don’t think there’s a lot of forced selling remaining, which is optimistic,” Demirors told CNBC Friday. “But again, I think the upside is quite limited, because we also don’t see a lot of new inflows coming in.”
Investors are also keeping one eye on the macroeconomic situation. Bitcoin has proved to be closely correlated to risk assets such as stocks, and in particular, the tech-heavy Nasdaq. These assets are affected by changes in interest rates from the Federal Reserve and other macroeconomic moves. Last year, the Fed embarked on an aggressive interest rate hike path to try to tame inflation, which hurt risk assets along with bitcoin.
Industry insiders said a change in the macro situation could help bitcoin.
“There could be catalysts that we’re not aware of, again, the macro situation and the political environment is fairly uncertain, inflation continuing to run quite hot, I think is a new thing. We haven’t seen that, you know, in 30, 40 years,” Demirors said.
“So who knows, as people look to make allocations going into the new year where crypto will fit into that portfolio?”
Timing the next bitcoin bull run
In CNBC’s interviews, several industry participants spoke about historical bitcoin cycles, which happen roughly every four years. Typically, bitcoin will hit an all time high, then have a massive correction. There will be a bad year and then a year of mild recovery.
Then “halving” will happen. This is when miners, who run specialized machines to effectively validate transactions on the bitcoin networks, see their rewards for mining cut in half. Miners get bitcoin as a reward for validating transactions. The halving, which happens every four years, effectively slows down the supply of bitcoin onto the market. There will ever only be 21 million bitcoin in circulation.
Halving usually precedes a bull run. The next halving event takes place in 2024.
Scaramucci called 2023 a “recovery year” for bitcoin and predicted it could trade at $50,000 to $100,000 in two to three years.
“You are taking on risk but you’re also believing in [bitcoin] adoption. So if we get the adoption right, and I believe we will, this could easily be a fifty to one hundred thousand dollar asset over the next two to three years,” Scaramucci said.
Tai meanwhile said the beginning of a bull run is “probably a year away,” saying the after effects of the FTX collapse might continue to be felt for another six to nine months.
Jean-BaptisteGraftieaux, global CEO of cryptocurrency exchange Bitstamp, told CNBC last week that the next bull run could come over the next two years, citing rising interest from institutional investors.
However, Demirors warned that the events over 2022 “have caused tremendous reputational damage to the industry and to the asset class,” adding that “it will take some time for that confidence to return.”
SEC chairman Gary Gensler testifies before a Senate Banking, Housing, and Urban Affairs Committee hearing on Sept. 14, 2021 in Washington.
Evelyn Hockstein-Pool/Getty Images
The Securities and Exchange Commission on Thursday charged crypto firms Genesis and Gemini with allegedly selling unregistered securities in connection with a high-yield product offered to depositors.
Gemini, a crypto exchange, and Genesis, a crypto lender, partnered in February 2021 on a Gemini product called Earn, which touted yields of up to 8% for customers.
According to the SEC, Genesis loaned Gemini users’ crypto and sent a portion of the profits back to Gemini, which then deducted an agent fee, sometimes over 4%, and returned the remaining profit to its users. Genesis should have registered that product as a securities offering, SEC officials said.
“Today’s charges build on previous actions to make clear to the marketplace and the investing public that crypto lending platforms and other intermediaries need to comply with our time-tested securities laws,” SEC chair Gary Gensler said in a statement.
Gemini’s Earn program, supported by Genesis’ lending activities, met the SEC’s definition by including both an investment contract and a note, SEC officials said. Those two features are part of how the SEC assesses whether an offering is a security.
Regulators are seeking permanent injunctive relief, disgorgement, and civil penalties against both Genesis and Gemini.
The two firms have been engaged in a high-profile battle over $900 million in customer assets that Gemini entrusted to Genesis as part of the Earn program, which was shuttered this week.
Gemini, which was founded in 2015 by bitcoin advocates Cameron and Tyler Winklevoss, has an extensive exchange business that, while beleaguered, could possibly weather an enforcement action.
But Genesis’ future is more uncertain, because the business is heavily focused on lending out customer crypto and has already engaged restructuring advisers. The crypto lender is a unit of Barry Silbert’s Digital Currency Group.
SEC officials said the possibility of a DCG or Genesis bankruptcy had no bearing on deciding whether to pursue a charge.
It’s the latest in a series of recent crypto enforcement actions led by Gensler after the collapse of Sam Bankman-Fried’s FTX in November. Gensler was roundly criticized on social media and by lawmakers for the SEC’s failure to impose safeguards on the nascent crypto industry.
Gensler’s SEC and the Commodity Futures Trading Commission, chaired by Rostin Benham, are the two regulators that oversee crypto activity in the U.S. Both agencies filed complaints against Bankman-Fried, but the SEC has, of late, ramped up the pace and the scope of enforcement actions.
The SEC brought a similar action against now bankrupt crypto lender BlockFi and settled last year. Earlier this month, Coinbase settled with New York state regulators over historically inadequate know-your-customer protocols.
Since Bankman-Fried was indicted on federal fraud charges in December, the SEC has filed five crypto-related enforcement actions.
Former FTX chief executive Sam Bankman-Fried (C) arrives to enter a plea before US District Judge Lewis Kaplan in the Manhattan federal court, New York, January 3, 2023.
Ed Jones | AFP | Getty Images
Sam Bankman-Fried pleaded not guilty in New York federal court Tuesday to eight charges related to the collapse of his former crypto exchange FTX and hedge fund Alameda Research.
The onetime crypto billionaire was indicted on charges of conspiracy to commit wire fraud and securities fraud, individual charges of securities fraud and wire fraud, money laundering and conspiracy to avoid campaign finance regulations.
Bankman-Fried arrived outside the courthouse in a black SUV and was swarmed with cameras from the moment his car arrived. The scrum grew so thick that Bankman-Fried’s mother was unable to exit the vehicle, falling onto the wet pavement as cameras scrambled to catch a glimpse of her son.
Bankman-Fried was hauled by security through the throng and into the courthouse in a matter of moments, with photographers scrambling to get out of the way.
Earlier in the day, attorneys for Bankman-Fried filed a motion to seal the names of two individuals who had guaranteed Bankman-Fried’s good behavior with a bond. They claimed that the visibility of the case and the defendant had already posed a risk to Bankman-Fried’s parents, and that the guarantors should not be subject to the same scrutiny. Judge Lewis Kaplan approved the motion in court.
Bankman-Fried returned to the U.S. from the Bahamas on Dec. 21, and the next day was released on a $250 million recognizance bond, secured by his family home in California.
Federal prosecutors also announced the launch of a new task force to recover victim assets as part of an ongoing investigation into Bankman-Fried and the collapse of FTX.
“The Southern District of New York is working around the clock to respond to the implosion of FTX,” U.S. Attorney Damian Williams said in a statement Tuesday.
The U.S. Attorney’s Office for the SDNY had argued that Bankman-Fried used $8 billion worth of customer assets for extravagant real estate purchases and vanity projects, including stadium naming rights and millions in political donations.
Federal prosecutors built the indictment against Bankman-Fried with unusual speed, packaging together the criminal charges against the 30-year-old in a matter of weeks. The federal charges came alongside complaints from the Commodity Futures Trading Commission and the Securities and Exchange Commission.
They were assisted by two of Bankman-Fried’s closest allies, Caroline Ellison, the former CEO of his hedge fund Alameda Research, and Gary Wang, who co-founded FTX with Bankman-Fried.
Ellison, 28, and Wang, 29, pleaded guilty on Dec. 21. Their plea deals with prosecutors came after rampant speculation that Ellison, Bankman-Fried’s onetime romantic partner, was cooperating with federal probes.
Another former FTX executive, Ryan Salame, apparently first alerted regulators to alleged wrongdoing inside FTX. Salame, a former co-CEO at FTX, flagged “possible mishandling of clients’ assets” to Bahamian regulators two days before the crypto exchange filed for bankruptcy protection, according to a filing from the Securities Commission of the Bahamas.
Bankman-Fried was accused by federal law enforcement and financial regulators of perpetrating what the SEC called one of the largest and most “brazen” frauds in recent memory. His stunning fall was precipitated by reporting that raised questions on the nature of his hedge fund’s balance sheet.
In the weeks since FTX’s Nov. 11 Delaware bankruptcy filing, the extent of corporate malfeasance has been exposed. Replacement CEO John J. Ray said there was a “complete failure of corporate control.”
Bankman-Fried was indicted in New York federal court on Dec. 9, and was arrested by Bahamas law enforcement at the request of U.S. prosecutors on Dec. 12. Following his indictment, Bankman-Fried’s legal team in the Bahamas flip-flopped on whether or not their client would consent to extradition.
This is a developing story. Check back for updates.
The crypto market has been battered this year, with more than $2 trillion wiped off its value since its peak in Nov. 2021. Cryptocurrencies have been under pressure after the collapse of major exchange FTX.
Jonathan Raa | Nurphoto | Getty Images
2022 marked the start of a new “crypto winter,” with high-profile companies collapsing across the board and prices of digital currencies crashing spectacularly. The events of the year took many investors by surprise and made the task of predicting bitcoin’s price that much harder.
The crypto market was awash with pundits making feverish calls about where bitcoin was heading next. They were often positive, though a few correctly forecast the cryptocurrency sinking below $20,000 a coin.
But many market watchers were caught off guard in what has been a tumultuous year for crypto, with high-profile company and project failures sending shock waves across the industry.
It began in May with the collapse of terraUSD, or UST, an algorithmic stablecoin that was supposed to be pegged one-to-one with the U.S. dollar. Its failure brought down terraUSD’s sister token luna and hit companies with exposure to both cryptocurrencies.
Three Arrows Capital, a hedge fund with bullish views on crypto, plunged into liquidation and filed for bankruptcy because of its exposure to terraUSD.
Then came the November collapse of FTX, one of the world’s largest cryptocurrency exchanges which was run by Sam Bankman-Fried, an executive who was often in the spotlight. The fallout from FTX continues to ripple across the cryptocurrency industry.
On top of crypto-specific failures, investors have also had to contend with rising interest rates, which have put pressure on risk assets, including stocks and crypto.
Bitcoin has sunk around 75% since reaching its all-time high of nearly $69,000 in November 2021 and more than $2 trillion has been wiped off the value of the entire cryptocurrency market. On Friday, bitcoin was trading at just under $17,000.
CNBC reached out to the people behind some of the boldest price calls on bitcoin in 2022, asking them how they got it wrong and whether the year’s events have changed their outlook for the world’s largest digital currency.
Tim Draper: $250,000
In 2018, at a tech conference in Amsterdam, Tim Draper predicted bitcoin reaching $250,000 a coin by the end of 2022. The famed Silicon Valley investor wore a purple tie with bitcoin logos, and even performed a rap about the digital currency onstage.
Four years later, it’s looking pretty unlikely Draper’s call will materialize. When asked about his $250,000 target earlier this month, the Draper Associates founder told CNBC $250,000 “is still my number” — but he’s extending his prediction by six months.
“I expect a flight to quality and decentralized crypto like bitcoin, and for some of the weaker coins to become relics,” he told CNBC via email.
Bitcoin would need to rally nearly 1,400% from its current price of just under $17,000 for Draper’s prediction to come true. His rationale is that despite the liquidation of notable players in the market like FTX, there’s still a huge untapped demographic for bitcoin: women.
“My assumption is that, since women control 80% of retail spending and only 1 in 7 bitcoin wallets are currently held by women, the dam is about to break,” Draper said.
Nexo: $100,000
In April, Antoni Trenchev, the CEO of crypto lender Nexo, told CNBC he thought the world’s biggest cryptocurrency could surge above $100,000 “within 12 months.” Though he still has four months to go, Trenchev acknowledges it is improbable that bitcoin will rally that high anytime soon.
Bitcoin “was on a very positive path” with institutional adoption growing, Trenchev says, but “a few major forces interfered,” including an accumulation of leverage, borrowing without collateral or against low-quality collateral, and fraudulent activity.
“I am pleasantly surprised by the stability of crypto prices, but I do not think we are out of the woods yet and that the second and third-order effects are still to play out, so I am somewhat skeptical as to a V-shape recovery,” Trenchev said.
The entrepreneur says he’s also done making bitcoin price predictions. “My advice to everyone, however, remains unchanged,” he added. “Get a single digit percentage point of your investable assets in bitcoin and do not look at it for 5-10 years. Thank me later.”
Guido Buehler: $75,000
On Jan. 12, Guido Buehler, the former CEO of regulated Swiss bank Seba, which is focused on cryptocurrencies, said his company had an “internal valuation model” of between $50,000 and $75,000 for bitcoin in 2022.
Buehler’s reasoning was that institutional investors would help drive the price higher.
At the time, bitcoin was trading at between $42,000 and $45,000. Bitcoin never reached $50,000 in 2022.
The executive, who now runs his own advisory and investment firm, said 2022 has been an “annus horribilis,” in response to CNBC questions about what went wrong with the call.
“The war in Ukraine in February triggered a shock to the paradigm of world order and the financial markets,” Buehler said, citing the consequences of raised market volatility and rising inflation in light of the disruption of commodities like oil.
Another major factor was “the realization that interest rates are still the driver of most asset classes,” including crypto, which “was hard blow for the crypto community, where there has been the belief that this asset class is not correlated to traditional assets.”
Buehler said lack of risk management in the crypto industry, missing regulation and fraud have also been major factors affecting prices.
The executive remains bullish on bitcoin, however, saying it will reach $75,000 “sometime in the future,” but that it is “all a matter of timing.”
“I believe that BTC has proven its robustness throughout all the crisis since 2008 and will continue to do so.”
Paolo Ardoino: $50,000
Paolo Ardoino, chief technology officer of Bitfinex and Tether, told CNBC in April that he expected bitcoin to fall sharply below $40,000 but end the year “well above” $50,000.
“I’m a bullish person on bitcoin … I see so much happening in this industry and so many countries interested in bitcoin adoption that I’m really positive,” he said at the time.
On the day of the interview, bitcoin was trading above $41,000. The first part of Ardoino’s call was correct — bitcoin did fall well below $40,000. But it never recovered.
In a follow-up email this month, Ardoino said he believes in bitcoin’s resilience and the blockchain technology underlying it.
“As mentioned, predictions are hard to make. No one could have predicted or foreseen the number of companies, well regarded by the global community, failing in such a spectacular fashion,” he told CNBC.
“Some legitimate concerns and questions remain around the future of crypto. It might be a volatile industry, but the technologies developed behind it are incredible.”
Deutsche Bank: $28,000
A key theme in 2022 has been bitcoin’s correlation to U.S. stock indexes, especially the tech-heavy Nasdaq 100. In June, Deutsche Bank analysts published a note that said bitcoin could end the year with a price of approximately $27,000. At the time of the note, bitcoin was trading at just over $20,000.
It was based on the belief from Deutsche Bank’s equity analysts that the S&P 500 would jump to $4,750 by year-end.
But that call is unlikely to materialize.
Marion Laboure, one of the authors of Deutsche Bank’s initial report on crypto in June, said the bank now expects bitcoin to end the year around $21,000.
“High inflation, monetary tightening, and slow economic growth have likely put additional downward pressure on the crypto ecosystem,” Laboure told CNBC, adding that more traditional assets such as bonds may begin to look more attractive to investors than bitcoin.
Laboure also said high-profile collapses continue to hit sentiment.
“Every time a major player in the crypto industry fails, the ecosystem suffers a confidence crisis,” she said.
“In addition to the lack of regulation, crypto’s biggest hurdles are transparency, conflicts of interest, liquidity, and the lack of reliable available data. The FTX collapse is a reminder that these problems continue to be unresolved.”
JPMorgan: $13,000
In a Nov. 9 research note, JPMorgan analyst Nikolaos Panigirtzoglou and his team predicted the price of bitcoin would slump to $13,000 “in the coming weeks.” They had the benefit of hindsight after the FTX liquidity crisis, which they said would cause a “new phase of crypto deleveraging,” putting downside pressure on prices.
The cost it takes miners to produce new bitcoins historically acts as a “floor” for bitcoin’s price and is likely to revisit a $13,000 low as seen over the summer months, the analysts said. That’s not as far off bitcoin’s current price as some other predictions, but it’s still much lower than Friday’s price of just under $17,000.
A JPMorgan spokesperson said Panigirtzoglou “isn’t available to comment further” on his research team’s forecast.
Absolute Strategy Research: $13,000
Ian Harnett, co-founder and chief investment officer at macro research firm Absolute Strategy Research, warned in June that the world’s top digital currency was likely to tank as low as $13,000.
Explaining his bearish call at the time, Harnett said that, in crypto rallies past, bitcoin had subsequently tended to fall roughly 80% from all-time highs. In 2018, for instance, the token plummeted close to $3,000 after hitting a peak of nearly $20,000 in late 2017.
Harnett’s target is closer than most, but bitcoin would need to fall another 22% for it to reach that level.
When asked about how he felt about the call today, Harnett said he is “very happy to suggest that we are still in the process of the bitcoin bubble deflating” and that a drop close to $13,000 is still on the cards.
“Bubbles usually see an 80% reversal,” he said in response to emailed questions.
With the U.S. Federal Reserve likely set to raise interest rates further next year, an extended drop below $13,000 to $12,000 or even $10,000 next can’t be ruled out, according to Harnett.
“Sadly, there is no intrinsic valuation model for this asset — indeed, there is no agreement whether it is a commodity or a currency — which means that there is every possibility that this could trade lower if we see tight liquidity conditions and/or a failure of other digital entities / exchanges,” he said.
Mark Mobius: $20,000 then $10,000
Veteran investor Mark Mobius has probably been one of the more accurate predictors of bitcoin.
In May, when the price of bitcoin was above $28,000, he told Financial News that bitcoin would likely fall to $20,000, then bounce, but ultimately move down to $10,000.
Bitcoin did fall below $20,000 in June, and then bounce in August before falling again through the rest of the year.
However, the $10,000 mark was not reached.
Mobius told CNBC he forecasts bitcoin to hit $10,000 in 2023.
Carol Alexander: $10,000
In December 2021, a month on from bitcoin’s all-time high, Carol Alexander, professor of finance at Sussex University, said she expected bitcoin to drop down to $10,000 “or even more” in 2022.
Bitcoin at the time had fallen about 30% from its near $69,000 record. Still, many crypto talking heads at the time were predicting further gains. Alexander was one of the rare voices going against the tide.
“If I were an investor now I would think about coming out of bitcoin soon because its price will probably crash next year,” she said at the time. Her bearish call rested on the idea that bitcoin has little intrinsic value and is mostly used for “speculation.”
Bitcoin didn’t quite slump as low as $10,000 — but Alexander is feeling good about her prediction. “Compared with others’ predictions, mine was by far the closest,” she said in emailed comments to CNBC.
FTX CEO Sam Bankman-Fried attends a press conference at the FTX Arena in downtown Miami on Friday, June 4, 2021.
Matias J. Ocner | Miami Herald | Tribune News Service | Getty Images
Sam Bankman-Fried, the disgraced former CEO of FTX — the bankrupt cryptocurrency exchange that was worth $32 billion a few weeks ago — has a real knack for self-promotional PR. For years, he cast himself in the likeness of a young boy genius turned business titan, capable of miraculously growing his crypto empire as other players got wiped out. Everyone from Silicon Valley’s top venture capitalists to A-list celebrities bought the act.
But during Bankman-Fried’s press junket of the last few weeks, the onetime wunderkind has spun a new narrative – one in which he was simply an inexperienced and novice businessman who was out of his depth, didn’t know what he was doing, and crucially, didn’t know what was happening at the businesses he founded.
It is quite the departure from the image he had carefully cultivated since launching his first crypto firm in 2017 – and according to former federal prosecutors, trial attorneys and legal experts speaking to CNBC, it recalls a classic legal defense dubbed the “bad businessman strategy.”
At least $8 billion in customer funds are missing, reportedly used to backstop billions in losses at Alameda Research, the hedge fund he also founded. Both of his companies are now bankrupt with billions of dollars worth of debt on the books. The CEO tapped to take over, John Ray III, said that “in his 40 years of legal and restructuring experience,” he had never seen “such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.” This is the same Ray who presided over Enron’s liquidation in the 2000s.
In America, it is not a crime to be a lousy or careless CEO with poor judgement. During his recent press tour from a remote location in the Bahamas, Bankman-Fried really leaned into his own ineptitude, largely blaming FTX’s collapse on poor risk management.
At least a dozen times in a conversation with Andrew Ross Sorkin, he appeared to deflect blame to Caroline Ellison, his counterpart (and one-time girlfriend) at Alameda. He says didn’t know how extremely leveraged Alameda was, and that he just didn’t know about a lot of things going on at his vast empire.
Bankman-Fried admitted he had a “bad month,” but denied committing fraud at his crypto exchange.
Fraud is the kind of criminal charge that can put you behind bars for life. With Bankman-Fried, the question is whether he misled FTX customers to believe their money was available, and not being used as collateral for loans or for other purposes, according to Renato Mariotti, a former federal prosecutor and trial attorney who has represented clients in derivative-related claims and securities class actions.
“It sure looks like there’s a chargeable fraud case here,” said Mariotti. “If I represented Mr. Bankman-Fried, I would tell him he should be very concerned about prison time. That it should be an overriding concern for him.”
But for the moment, Bankman-Fried appears unconcerned with his personal legal exposure. When Sorkin asked him if he was concerned about criminal liability, he demurred.
“I don’t think that — obviously, I don’t personally think that I have — I think the real answer is it’s not — it sounds weird to say it, but I think the real answer is it’s not what I’m focusing on,” Bankman-Fried told Sorkin. “It’s — there’s going to be a time and a place for me to think about myself and my own future. But I don’t think this is it.”
Comments such as these, paired with the lack of apparent action by regulators or authorities, have helped inspire fury among many in the industry – not just those who lost their money. The spectacular collapse of FTX and SBF blindsided investors, customers, venture capitalists and Wall Street alike.
Bankman-Fried did not respond to a request for comment. Representatives for his former law firm, Paul, Weiss, did not immediately respond to comment. Semafor reported earlier that Bankman-Fried’s new attorney was Greg Joseph, a partner at Joseph Hage Aaronson.
Both of Bankman-Fried’s parents are highly respected Stanford Law School professors. Semafor also reported that another Stanford Law professor, David Mills, was advising Bankman-Fried.
Mills, Joseph and Bankman-Fried’s parents did not immediately respond to requests for comment.
What kind of legal trouble could he be in?
Bankman-Fried could face a host of potential charges – civil and criminal – as well as private lawsuits from millions of FTX creditors, legal experts told CNBC.
For now, this is all purely hypothetical. Bankman-Fried has not been charged, tried, nor convicted of any crime yet.
Richard Levin is a partner at Nelson Mullins Riley & Scarborough, where he chairs the fintech and regulation practice. He’s been involved in the fintech industry since the early 1990s, and has represented clients before the Securities and Exchange Commission, Commodity Futures Trading Commission and Congress. All three of those entities have begun probing Bankman-Fried.
There are three different, possibly simultaneous legal threats that Bankman-Fried faces in the United States alone, Levin told CNBC.
First is criminal action from the U.S. Department of Justice, for potential “criminal violations of securities laws, bank fraud laws, and wire fraud laws,” Levin said.
A spokesperson for the U.S. Attorney’s Office for the Southern District of New York declined to comment.
Securing a conviction is always challenging in a criminal case.
Mariotti, the former federal prosecutor is intricately familiar with how the government would build a case. He told CNBC, “prosecutors would have to prove beyond a reasonable doubt that Bankman-Fried or his associates committed criminal fraud.”
“The argument would be that Alameda was tricking these people into getting their money so they could use it to prop up a different business,” Mariotti said.
“If you’re a hedge fund and you’re accepting customer funds, you actually have a fiduciary duty [to the customer],” Mariotti said.
Prosecutors could argue that FTX breached that fiduciary duty by allegedly using customer funds to artificially stabilize the price of FTX’s own FTT coin, Mariotti said.
But intent is also a factor in fraud cases, and Bankman-Fried insists he didn’t know about potentially fraudulent activity. He told Sorkin that he “didn’t knowingly commingle funds.”
“I didn’t ever try to commit fraud,” Bankman-Fried said.
Beyond criminal charges, Bankman-Fried could also be facing civil enforcement action. “That could be brought by the Securities Exchange Commission, and the Commodity Futures Trading Commission, and by state banking and securities regulators,” Levin continued.
“On a third level, there’s also plenty of class actions that can be brought, so there are multiple levels of potential exposure for […] the executives involved with FTX,” Levin concluded.
Who is likely to go after him?
The Department of Justice is most likely to pursue criminal charges in the U.S. The Wall Street Journal reported that the DOJ and the SEC were both probing FTX’s collapse, and were in close contact with each other.
That kind of cooperation allows for criminal and civil probes to proceed simultaneously, and allows regulators and law enforcement to gather information more effectively.
But it isn’t clear whether the SEC or the CFTC will take the lead in securing civil damages.
An SEC spokesperson said the agency does not comment on the existence or nonexistence of a possible investigation. The CFTC did not immediately respond to a request for comment.
“The question of who would be taking the lead there, whether it be the SEC or CFTC, depends on whether or not there were securities involved,” Mariotti, the former federal prosecutor, told CNBC.
SEC Chairman Gary Gensler, who met with Bankman-Fried and FTX executives in spring 2022, has said publicly that “many crypto tokens are securities,” which would make his agency the primary regulator. But many exchanges, including FTX, have crypto derivatives platforms that sell financial products like futures and options, which fall under the CFTC’s jurisdiction.
“For selling unregistered securities without a registration or an exemption, you could be looking at the Securities Exchange Commission suing for disgorgement — monetary penalties,” said Levin, who’s represented clients before both agencies.
“They can also sue, possibly, claiming that FTX was operating an unregistered securities market,” Levin said.
Then there are the overseas regulators that oversaw any of the myriad FTX subsidiaries.
The Securities Commission of The Bahamas believes it has jurisdiction, and went as far as to file a separate case in New York bankruptcy court. That case has since been folded into FTX’s main bankruptcy protection proceedings, but Bahamian regulators continue to investigate FTX’s activities.
Court filings allege that Bahamian regulators have moved customer digital assets from FTX custody into their own. Bahamian regulators insist that they’re proceeding by the book, under the country’s groundbreaking crypto regulations — unlike many nations, the Bahamas has a robust legal framework for digital assets.
But crypto investors aren’t sold on their competence.
“The Bahamas clearly lack the institutional infrastructure to tackle a fraud this complex and have been completely derelict in their duty,” Castle Island Ventures partner Nic Carter told CNBC. (Carter was not an FTX investor, and told CNBC that his fund passed on early FTX rounds.)
“There is no question of standing. U.S. courts have obvious access points here and numerous parts of Sam’s empire touched the U.S. Every day the U.S. leaves this in the hands of the Bahamas is a lost opportunity,” he continued.
Investors who have lost their savings aren’t waiting. Class-action suits have already been filed against FTX endorsers, like comedian Larry David and football superstar Tom Brady. One suit excoriated the celebrity endorsers for allegedly failing to do their “due diligence prior to marketing [FTX] to the public.”
FTX’s industry peers are also filing suit against Bankman-Fried. BlockFi sued Bankman-Fried in November, seeking unnamed collateral that the former billionaire provided for the crypto lending firm.
FTX and Bankman-Fried had previously rescued BlockFi from insolvency in June, but when FTX failed, BlockFi was left with a similar liquidity problem and filed for bankruptcy protection in New Jersey.
Bankman-Fried has also been sued in Florida and California federal courts. He faces class-action suits in both states over “one of the great frauds in history,” a California court filing said.
The largest securities class-action settlement was for $7.2 billion in the Enron accounting fraud case, according to Stanford research. The possibility of a multibillion-dollar settlement would come on top of civil and criminal fines that Bankman-Fried faces.
But the onus should be on the U.S. government to pursue Bankman-Fried, Carter told CNBC, not on private investors or overseas regulators.
“The U.S. isn’t shy about using foreign proxies to go after Assange — why in this case have they suddenly found their restraint?”
What penalties could he face?
Wire fraud is the most likely criminal charge Bankman-Fried would face. If the DOJ were able to secure a conviction, a judge would look to several factors to determine how long to sentence him.
Braden Perry was once a senior trial lawyer for the CFTC, FTX’s only official U.S. regulator. He’s now a partner at Kennyhertz Perry, where he advises clients on anti-money laundering, compliance and enforcement issues.
Based on the size of the losses, if Bankman-Fried is convicted of fraud or other charges, he could be behind bars for years — potentially for the rest of his life, Perry said. But the length of any potential sentence is hard to predict.
“In the federal system, each crime always has a starting point,” Perry told CNBC.
Federal sentencing guidelines follow a numeric system to determine the maximum and minimum allowable sentence, but the system can be esoteric. The scale, or “offense level,” starts at one, and maxes out at 43.
A wire fraud conviction rates as a seven on the scale, with a minimum sentence ranging from zero to six months.
But mitigating factors and enhancements can alter that rating, Perry told CNBC.
“The dollar value of loss plays a significant role. Under the guidelines, any loss above $550 million adds 30 points to the base level offense,” Perry said. FTX customers have lost billions.
“Having 25 or more victims adds 6 points, [and] use of certain regulated markets adds 4,” Perry continued.
In this hypothetical scenario, Bankman-Fried would max out the scale at 43, based on those enhancements. That means Bankman-Fried could be facing life in federal prison, without the possibility of supervised release, if he’s convicted on a single wire fraud offense.
But that sentence can be reduced by mitigating factors – circumstances that would lessen the severity of any alleged crimes.
“In practice, many white-collar defendants are sentenced to lesser sentences than what the guidelines dictate,” Perry told CNBC, Even in large fraud cases, that 30-point enhancement previously mentioned can be considered punitive.
By way of comparison, Stefan Qin, the Australian founder of a $90 million cryptocurrency hedge fund, was sentenced to more than seven years in prison after he pleaded guilty to one count of securities fraud. Roger Nils-Jonas Karlsson, a Swedish national accused by the United States of defrauding over 3,500 victims of more than $16 million was sentenced to 15 years in prison for securities fraud, wire fraud and money laundering.
Bankman-Fried could also face massive civil fines. Bankman-Fried was once a multibillionaire, but claimed he was down to his last $100,000 in a conversation with CNBC’s Sorkin at the DealBook Summit last week.
“Depending on what is discovered as part of the investigations by law enforcement and the civil authorities, you could be looking at both heavy monetary penalties and potential incarceration for decades,” Levin told CNBC.
How long will it take?
Whatever happens won’t happen quickly.
In the most famous fraud case in recent years, Bernie Madoff was arrested within 24 hours of federal authorities learning of his multibillion-dollar Ponzi scheme. But Madoff was in New York and admitted to his crime on the spot.
The FTX founder is in the Bahamas and hasn’t admitted wrongdoing. Short of a voluntary return, any efforts to apprehend him would require extradition.
With hundreds of subsidiaries and bank accounts, and thousands of creditors, it’ll take prosecutors and regulators time to work through everything.
Similar cases “took years to put together,” said Mariotti. At FTX, where record keeping was spotty at best, collecting enough data to prosecute could be much harder. Expenses were reportedly handled through messaging software, for example, making it difficult to pinpoint how and when money flowed out for legitimate expenses.
In Enron’s bankruptcy, senior executives weren’t charged until nearly three years after the company went under. That kind of timeline infuriates some in the crypto community.
“The fact that Sam is still walking free and unencumbered, presumably able to cover his tracks and destroy evidence, is a travesty,” said Carter.
But just because law enforcement is tight-lipped, that doesn’t mean they’re standing down.
“People should not jump to the conclusion that something is not happening just because it has not been publicly disclosed,” Levin told CNBC.
Could he just disappear?
“That’s always a possibility with the money that someone has,” Perry said, although Bankman-Fried claims he’s down to one working credit card. But Perry doesn’t think it’s likely. “I believe that there has been likely some negotiation with his attorneys, and the prosecutors and other regulators that are looking into this, to ensure them that when the time comes […] he’s not fleeing somewhere,” Perry told CNBC.
In the meantime, Bankman-Fried won’t be resting easy as he waits for the hammer to drop. Rep. Maxine Waters extended a Twitter invitation for him to appear before a Dec. 13 hearing.
Bankman-Fried responded on Twitter, telling Waters that if he understands what happened at FTX by then, he’d appear.
Correction: Caroline Ellison is Bankman-Fried’s counterpart at Alameda. An earlier version misspelled her name.
The bitcoin logo displayed on a smartphone with euro banknotes in the backgrouund.
Andrea Ronchini | NurPhoto via Getty Images
The European Central Bank gave a strong critique of bitcoin on Wednesday, saying the cryptocurrency is on a “road to irrelevance.”
In a blogpost titled “Bitcoin’s last stand,” ECB Director General Ulrich Bindseil and Analyst Jürgen Schaff said that, for bitcoin’s proponents, the apparent stabilization in its price this week “signals a breather on the way to new heights.”
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“More likely, however, it is an artificially induced last gasp before the road to irrelevance — and this was already foreseeable before FTX went bust and sent the bitcoin price to well below USD16,000,” they wrote.
Bitcoin topped $17,000 Wednesday, marking a two-year high for the world’s largest digital coin. However, it struggled to maintain that level, falling slightly to $16,875. Vijay Ayyar, vice president of corporate development and international at crypto exchange Luno, warned that the bounce is likely just a bear market rally and would not be sustained. “This is just a bearish retest,” he told CNBC.
The remarks from the ECB officials are timely, with the crypto industry reeling from one of its most catastrophic failures in recent history — the downfall of FTX, an exchange once valued at $32 billion. And the market has been largely down in the dumps this year amid higher interest rates from the Federal Reserve.
Bindseil and Schaff said that bitcoin didn’t fit the mold of an investment and wasn’t suitable as a means of payment, either.
“Bitcoin’s conceptual design and technological shortcomings make it questionable as a means of payment: real Bitcoin transactions are cumbersome, slow and expensive,” they wrote. “Bitcoin has never been used to any significant extent for legal real-world transactions.”
“Bitcoin is also not suitable as an investment. It does not generate cash flow (like real estate) or dividends (like equities), cannot be used productively (like commodities) or provide social benefits (like gold). The market valuation of Bitcoin is therefore based purely on speculation,” they added.
Analysts say that FTX’s insolvency is likely to hasten regulation of digital currencies. In the European Union, a new law called Markets in Crypto Assets, or MiCA, is expected to harmonize regulation of digital assets across the bloc.
Bindseil and Schaff said it was important not to mistake regulation as a sign of approval.
“The belief that space must be given to innovation at all costs stubbornly persists,” they said.
“Firstly, these technologies have so far created limited value for society — no matter how great the expectations for the future. Secondly, the use of a promising technology is not a sufficient condition for an added value of a product based on it.”
They also raised concerns with bitcoin’s poor environmental credentials. The cryptocurrency’s technical underpinnings are such that it requires a massive amount of computing power in order to verify and approve new transactions. Ethereum, the network behind bitcoin rival ether, recently transitioned to a new framework that backers say would cut its energy consumption by more than 99%.
“This inefficiency of the system is not a flaw but a feature,” Bindseil and Schaff said. “It is one of the peculiarities to guarantee the integrity of the completely decentralised system.”
It’s not the first time the ECB has raised doubts about digital currencies. ECB President Christine Lagarde in May said she thinks cryptocurrencies are “worth nothing.” Her comments came on the back of a separate scandal for the industry — the multibillion-dollar implosion of so-called stablecoin terraUSD.
Sam Bankman-Fried, co-founder and CEO of FTX, in Hong Kong, China, on Tuesday, May 11, 2021.
Lam Yik | Bloomberg | Getty Images
Newly appointed FTX CEO John Ray III minced no words in a filing with the U.S. Bankruptcy Court for the District of Delaware, declaring that “in his 40 years of legal and restructuring experience,” he had never seen “such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”
Ray formerly served as CEO of Enron after the implosion of the energy titan. He promised to work with regulators to investigate FTX founder Sam Bankman-Fried.
In the filing, Ray disclosed that he did “not have confidence” in the accuracy of the balance sheets for FTX and its sister company Alameda Research, writing that they were “unaudited and produced while the Debtors [FTX] were controlled by Mr. Bankman-Fried.”
The document is a declaration from Ray in his new role as CEO of FTX and associated entities, which filed for bankruptcy last week in an implosion that left the crypto world reeling and investors shaken.
Ray excoriated Bankman-Fried and his management team for what were described as lackadaisical controls on systems and regulatory compliance.
“The concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals” was unprecedented, the former Enron recovery boss said.
Ray said a “substantial portion” of assets custodied with FTX may be “missing or stolen,” following widespread reports on social media of the theft of hundreds of millions in cryptocurrencies.
Coordinating with regulators, Ray wrote, the chapter 11 bankruptcy process would examine the actions of Bankman-Fried in connection with FTX’s collapse.
Alarmingly, Ray wrote that part of his remit would be to implement controls and basic corporate standards such as “accounting, audit, cash management, cybersecurity, human resources, risk management, data protection and other systems that did not exist, or did not exist to an appropriate degree, prior to my appointment.”
Bankman-Fried and FTX had “management practices included the use of an unsecured group email account as the root user to access confidential private keys and critically sensitive data for the FTX Group companies around the world, the absence of daily reconciliation of positions on the blockchain, the use of software to conceal the misuse of customer funds.”
Sam Bankman-Fried wasn’t immediately available for comment.
Sophisticated software was similarly used to conceal mismarked and fraudulent customer positions in the 2008 collapse of Bernie Madoff’s Ponzi scheme.
FTX is presently working to account for an accurate statement of cash and crypto assets. Ray said that it would not be “appropriate for stakeholders or the Court to rely on the audited financial statements as a reliable indication of the financial circumstances” of FTX.
The CEO of the largest online exchange for trading cryptocurrency, Binance, said he is establishing a recovery fund to help people in the industry, while saying the sector “will be fine.”
Ben McShane / Contributor / Getty Images
The CEO of the largest online exchange for trading cryptocurrency said Wednesday that he’s establishing a recovery fund to help people in the industry while saying the sector “will be fine.”
“We want the strong industry players today to protect the good industry players who might just be hurt short term,” Binance CEO Changpeng Zhao said during an interview with CNBC’s Dan Murphy at Abu Dhabi Finance Week.
“That’s not to say we can save everybody. If a project is mismanaged on multiple fronts we won’t be able to help them anyway.”
Zhao said cryptocurrency had “shown extreme resilience,” suggesting he didn’t expect recent turbulence in the industry to cause long-term damage. He did not specify an exact figure for the size of the recovery fund.
His comments come just a week after Binance backed out of a deal to rescue rival exchange FTX, which declared bankruptcy Friday.
The price of bitcoin dropped below $17,000 for the first time since 2020 and there are concerns the so-called “crypto contagion” could lead to the downfall of other big industry names, such as Crypto.com. The company’s CEO denied the claims and said the platform was “performing business as usual.”
“Short term there’s a lot of pain but long term it’s accelerating the efforts we’re making to make this industry healthier,” Zhao said.
The CEO on Monday said Binance had seen a “slight increase in withdrawals” in the last week, but he said this was in line with other dips in the market.
“Whenever prices drop, we see an uptick in withdrawals,” Zhao said. “That’s quite normal.”
Regulations will help, but they won’t fix everything
Zhao said he wants to form an organization that could “establish best practices” across the industry, which is known for its lack of regulation.
“Regulations need to be adapted for this industry,” Zhao said. “Regulation won’t fix all of this, it will reduce it. It’s important but we’ve got to have the right expectations,” he added.
Zhao reflected on how there were elements of traditional finance that could help the cryptocurrency market to become more regulated and better trusted, but practices would need to be adapted to be fit for purpose.
The “transparency” and “audit” aspects of traditional finance could benefit the crypto industry, but there are “subtle but very important” differences that would need to be made, according to the CEO.
“Too many regulators are more of a traditional mindset, they need to get a crypto mindset,” he said
The comments echo those made by Ripple CEO Brad Garlinghouse, who said the idea that crypto is “not regulated is overstated,” but that “transparency builds trust.”
“Crypto has never just been sunshine and roses and as an industry, it needs to mature,” Garlinghouse said on CNBC’s “Squawk Box Europe” Wednesday.
Economist Nouriel Roubini took a different line in his Abu Dhabi Finance Week interview and described crypto and some of its major players as an “ecosystem that is totally corrupt.”
The New York University professor said there were “seven Cs of crypto”: “Concealed, corrupt, crooks, criminals, con men, carnival barkers,” and finally, Changpeng Zhao himself.
— CNBC’s Jenni Reid and Ryan Browne contributed to this report.
Bankruptcy filings from Celsius and Voyager have raised questions about what happens to investors’ crypto when a platform fails.
Rafael Henrique | Sopa Images | Lightrocket | Getty Images
Cryptocurrencies were under pressure for a second day Wednesday as the market digested the fallout of Binance’s planned bailout of FTX.
Bitcoin was last down by 5% to hit a new bear market low of $17,019.14, according to Coin Metrics. It hit its all-time high of $17,585.25 one year ago Thursday. Ether, fell 10% to $1,152.34.
The Solana token continued its slide. It was last down 30%, after plunging 26.4% on Tuesday. Alameda Research, the trading firm owned by Sam Bankman-Fried, who also runs FTX, was a big and early backer of the Solana project.
“Market factors such as providing SOL token liquidity as well as support for Solana ecosystem projects on FTX exchange has been an important driver for Solana’s success,” Bernstein’s Gautam Chhugani said in a note Wednesday. “This is an adverse event for the Solana ecosystem in the short run. Further, given FTX/Alameda’s balance sheet situation, there may be near term pressure on its Solana holdings, as the situation resolves.”
The crypto market briefly spiked on Tuesday after Bankman-Fried, also known as SPF, announced that Binance will acquire its non-U.S. operations but plummeted shortly after.
The SBF empire unraveled quickly after a report last week showed a large portion of Alameda’s balance sheet was concentrated in FTX Token (FTT), the native token of the FTX trading platform. After some sparring on Twitter with SBF, Binance CEO Changpeng Zhao announced his company was offloading the FTT on its books, leading to a run on the popular FTX exchange and a liquidity crisis.
FTT was down 10% Wednesday, after tumbling more than 75% the day before.
The bombshell is likely to set the crypto industry back, but to what extent remains to be seen. Analysts foresee further regulatory scrutiny of offshore exchanges, where the majority of crypto derivatives trading takes place. It’s also unclear how much financial contagion will spill into the rest of the market.
Additionally, Bankman-Fried had recently been lauded as a “white knight” in the industry as he came to the rescue of crypto services firms like BlockFi and Voyager that almost didn’t survive the crypto contagion of this spring.
For newcomers to the crypto market, he and FTX became the faces of the industry, securing the naming rights to the Miami Heat basketball team’s stadium last year, bringing Tom Brady and Giselle Bündchen on as ambassadors of the company, and becoming a megadonor to Democratic politics.
“Given the public-facing nature of FTX CEO Sam Bankman-Fried and the size of FTX, we believe that the week’s events could cause some loss of consumer confidence in the crypto industry, beyond that seen in the aftermath of the 3AC, Celsius, and Voyager events that took place earlier this year,” especially if contagion takes hold and crypto prices keep dropping, KBW analysts said in a note Tuesday. “It may take time for customers to regain trust in the industry, broadly speaking (and we think regulation could help this).”
