The food in your kitchen cabinets may not be what it seems.
“I guarantee you any time a product can be passed off as something more expensive, it will be. It’s that simple,” Larry Olmsted, author of “Real Food/Fake Food,” told CNBC.
Fraudsters motivated by economic gain secretly infiltrate the global food market through a variety of means, including counterfeits, dilutions, substitution and mislabeling.
This not only harms consumers’ wallets, but it also puts public health and safety at risk.
Some estimates say food fraud affects at least 1% of the global food industry at a cost as high as $40 billion a year, according to the Food and Drug Administration.
“We might not know the overall impact of food fraud because so much of what fraudsters do is hidden from us and has been for centuries.” Kristie Laurvick, senior manager of the foods program at the U.S. Pharmacopeial Convention, told CNBC.
Even the FDA says it can’t estimate how often this fraud happens or its economic impact.
“Be aware of the product that you put on you or plug in the wall,” John Spink, director of the Food Fraud Prevention Think Tank, told CNBC.
Between 2012 and 2021, the most common type food fraud was lying about an animal’s origin and dilution or substitution, both ranking at 16% of recorded incidents by food-safety monitor Food Chain ID.
For example, dilution could entail adding a cheaper vegetable oil to an expensive extra virgin olive oil.
“If I drink scotch, I couldn’t tell you [the] difference between a $50 bottle and a $5,000 bottle. So, I know I could be deceived at that point,” Spink said.
The Food Fraud Prevention Think Tank suggests five questions a consumer can ask themselves to reduce their vulnerability to product fraud.
What type of product is it? Take extra caution with any product that you put on your body, ingest or plug in the wall.
Can you recognize the difference between products?
Do you know the retailer or supplier? Do you trust them?
Are you shopping online? If so, did you find the online supplier from a reliable source?
Complain. Is the supplier legitimate? If so, they will want to know.
Watch the video above to learn more about the different types of food fraud, how the industry is preventing risk, what consumers can do and where fraud in the olive oil, spices and seafood markets may be lurking.
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.
FTX founder Sam Bankman-Fried was arrested by Bahamian authorities Monday evening after the United States Attorney for the Southern District of New York shared a sealed indictment with the Bahamian government, setting the stage for extradition and U.S. trial for the onetime crypto billionaire at the heart of the crypto exchange’s collapse.
Before his arrest was announced, Bankman-Fried had been expected to testify virtually before the House Financial Services Committee on Tuesday, but his attorneys told CNBC that he will not testify.
His arrest is the first concrete move by regulators to hold individuals accountable for the multi-billion dollar implosion of FTX last month.
Damian Williams, the U.S. Attorney for the Southern District of New York, said on Twitter that the federal government anticipated moving to “unseal the indictment in the morning.” The New York times reported that the charges include wire fraud, wire fraud conspiracy, securities fraud, securities fraud conspiracy, and money laundering, according to the New York Times, citing a person familiar with the matter.
Bahamas Attorney General Ryan Pinder said that the United States was “likely to request his extradition.” The Royal Bahamas police force confirmed his arrest and said he would appear in magistrate court in Nassau on Tuesday.
In a statement, Bahamian Prime Minister Philip Davis said, “The Bahamas and the United States have a shared interest in holding accountable all individuals associated with FTX who may have betrayed the public trust and broken the law.”
“While the United States is pursuing criminal charges against SBF individually, The Bahamas will continue its own regulatory and criminal investigations into the collapse of FTX, with the continued cooperation of its law enforcement and regulatory partners in the United States and elsewhere,” continued the statement.
Bahamian regulators and FTX’s attorneys had been engaged in a bruising battle in chambers and in the court of public opinion. Earlier Monday, FTX attorneys accused the Bahamian government of allegedly working with Bankman-Fried to spirit away FTX assets from company control and into into crypto wallets controlled by Bahamian regulators.
Bankman-Fried’s arrest by Bahamas law enforcement, as well as his expected extradition, suggest that close cooperation between the Bahamas and the U.S. will continue to evolve throughout the bankruptcy proceedings. The Bahamas and the United States have had an extradition treaty in place since the early 20th century, when the Bahamas was still under British control. The current treaty was signed in 1990 and requires that the requesting party provide an arrest warrant issued by a judge or “other competent authority.”
In November, FTX and its affiliates filed for bankruptcy and Bankman-Fried stepped down from his role as CEO. The crypto trading firm imploded in spectacular fashion following a run on assets similar to a bank run.
FTX’s collapse was precipitated when reporting from CoinDesk revealed a highly concentrated position in self-issued FTT coins, which Bankman-Fried’s hedge fund Alameda Research used as collateral for billions in crypto loans. Binance, a rival exchange, announced it would sell its stake in FTT, spurring a massive withdrawal in funds. The company froze assets and declared bankruptcy days later. Reports later claimed that FTX had commingled customer funds with Bankman-Fried’s crypto hedge fund, Alameda Research, and that billions in customer deposits had been lost along the way.
Bankman-Fried was replaced by John J. Ray III, who had overseen Enron’s bankruptcy. Ray is also scheduled to testify before Congress this week. In prepared remarks released Monday, Ray said that FTX went on a “spending binge” from late 2021 through 2022, when approximately “$5 billion was spent buying a myriad of businesses and investments, many of which may be worth only a fraction of what was paid for them,” and that the firm made more than $1 billion in “loans and other payments…to insiders.”
Ray also confirmed media reports that FTX customer funds were commingled with assets from Alameda Research. Alameda used client funds to do margin trading, which exposed them to massive losses, Ray said.
Legal experts told CNBC that if the federal government pursues wire or bank fraud charges, Bankman-Fried could face life in prison without the possibility of supervised release. Such a severe punishment would be unusual but not extraordinary. Ponzi scheme mastermind Bernie Madoff was sentenced to 150 years in prison, an effective life sentence, for his massive ponzi scheme. FTX’s collapse has already triggered the demise of BlockFi Lending, and has thrown the entire space into disarray.
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.
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.
Samuel Bankman-Fried’s poster in downtown San Francisco.
MacKenzie Sigalos | CNBC
The Kimchi Swap put Sam Bankman-Fried on the map.
The year was 2017, and the ex-Jane Street Capital quant trader noticed something funny when he looked at the page on CoinMarketCap.com listing the price of bitcoin on exchanges around the world. Today, that price is pretty much uniform across the exchanges, but back then, Bankman-Fried previously told CNBC that he would sometimes see a 60% difference in the value of the coin. His immediate instinct, he says, was to get in on the arbitrage trade — buying bitcoin on one exchange, selling it back on another exchange, and then earning a profit equivalent to the price spread.
“That’s the lowest hanging fruit,” Bankman-Fried said in September.
The arbitrage opportunity was especially compelling in South Korea, where the exchange-listed price of bitcoin was significantly more than in other countries. It was dubbed the Kimchi Premium – a reference to the traditional Korean side dish of salted and fermented cabbage.
After a month of personally dabbling in the market, Bankman-Fried launched his own trading house, Alameda Research (named after his hometown of Alameda, California, near San Francisco), to scale the opportunity and work on it full-time. Bankman-Fried said in an interview in September that the firm sometimes made as much as a million dollars a day.
Part of why SBF, as he’s also called, earned street cred for carrying out a relatively straightforward trading strategy had to do with the fact that it wasn’t the easiest thing to execute on crypto rails five years ago. Bitcoin arbitrage involved setting up connections to each one of the trading platforms, as well as building out other complicated infrastructure to abstract away a lot of the operational aspects of making the trade. Bankman-Fried’s Alameda became very good at that and the money rolled in.
From there, the SBF empire ballooned.
Alameda’s success spurred the launch of crypto exchange FTX in the spring of 2019. FTX’s success begat a $2 billion venture fund that seeded other crypto firms. Bankman-Fried’s personal wealth grew to over $16 billion at its peak in March.
Bankman-Fried was suddenly the poster boy for crypto everywhere, and the FTX logo adorned everything from Formula 1 race cars to a Miami basketball arena. The 30-year-old went on an endless press tour, bragged about having a balance sheet that could one day buy Goldman Sachs, and became a fixture in Washington, where he was one of the Democratic party’s top donors, promising to sink $1 billion into U.S. political races (before later backtracking).
It was all a mirage.
As crypto prices tanked this year, Bankman-Fried bragged that he and his enterprise were immune. But in fact, the sector-wide wipeout hit his operation quite hard. Alameda borrowed money to invest in failing digital asset firms this spring and summer to keep the industry afloat, then reportedly siphoned off FTX customers’ deposits to stave off margin calls and meet immediate debt obligations. A Twitter fight with the CEO of rival exchange Binance pulled the mask off the scheme.
Alameda, FTX and a host of subsidiaries Bankman-Fried founded have filed for bankruptcy protection in Delaware. He’s stepped down from his leadership roles and lost 94% of his personal wealth in a single day. It is unclear exactly where he is now, as his $40 million Bahamas penthouse is reportedly up for sale.The photos of his face plastered across FTX advertisements throughout downtown San Francisco serve as an unwelcome reminder of his rotting empire.
It was a steep fall from hero to villain. But there were a lot of signs.
Bankman-Fried told CNBC in September that one of his fundamental principles when it comes to playing the markets is working with incomplete information.
“When you can sort of start to quantify and map out what’s going on, but you know there are a lot of things you don’t know,” he said. “You know you’re being approximate, but you have to try to figure out what trade to do anyway.”
The following account is based on reporting from CNBC, Bloomberg, the New York Times, the Wall Street Journal, and elsewhere. Piecing together bits and pieces from various news sources paints a picture of an investor who over-extended himself, frantically moved to cover his mistakes with questionable and perhaps illegal tactics, and surrounded himself with a tight cabal of advisors who could not or would not curb his worst impulses.
What went wrong in the last year
At some point in the last two years, according to reports, Alameda began borrowing money for various purposes, including to make venture investments.
Six months ago, a wave of titans in the crypto sector folded as depressed token prices sucked liquidity out of the market. First came the spectacular failure of a popular U.S. dollar-pegged stablecoin project — the stablecoin known as terraUSD (or UST, for short) and its sister token luna — wiping out $60 billion. That collapse helped to bring down Three Arrows Capital, or 3AC, which was one of the industry’s most respected crypto hedge funds. Crypto brokers and lenders like Voyager Digital and Celsius had significant exposure to 3AC, so they fell right along with it in quick succession.
The big problem was that everyone was borrowing from one another, which only works when the price of all those crypto coins keeps going up. By June, bitcoin and ether had both tumbled by more than half for the year.
“Leverage is the source of every implosion in financial institutions, both traditional and crypto,” said Hart Lambur, a former Goldman Sachs government bond trader who provided liquidity in U.S. Treasuries for central banks, money managers and hedge funds.
“Lehman Brothers, Bear Stearns, Long-Term Capital, Three Arrows Capital and now FTX all blew up due to bad leverage that got sniffed out and exploited by the market,” continued Lambur, who now works in decentralized finance.
As the dominoes fell, SBF jumped into the mix in June to try to bail out some of the failing crypto firms before it was too late, extending hundreds of millions of dollars in financing. In some cases, he made moves to try to buy these companies at fire-sale prices.
Amid the wave of bankruptcies, some of Alameda’s lenders asked for their money back. But Alameda didn’t have it, because it was no longer liquid. Bankman-Fried’s trading firm had parked the borrowed money in venture investments, a decision he told the Times was “probably not really worth it.”
To meet its debt obligations, FTX borrowed from customer deposits in FTX to quietly bail out Alameda, the Journal and the Times reported. The borrowing was in the billions. Bankman-Fried admitted the move in his interview with the Times, saying that Alameda had a large “margin position” on FTX, but he declined to disclose the exact amount.
“It was substantially larger than I had thought it was,” Bankman-Fried told the Times. “And in fact the downside risk was very significant.”
Reuters and the Journal both reported that the lifeline was around $10 billion, and Reuters reports that $1 billion to $2 billion of that emergency financing is now missing. Tapping customer funds without permission was a violation of FTX’s own terms and conditions. On Wall Street, it would be a clear violation of U.S. securities laws.
The two firms – one of the world’s biggest crypto brokers and one of the world’s biggest crypto buyers – were supposed to be separated by a firewall. But they were, in fact, quite cozy, at one point extending to a romantic relationship between Bankman-Fried and Alameda CEO Caroline Ellison, he acknowledged to the Times.
“FTX and Alameda had an extremely problematic relationship,” Castle Island Venture’s Nic Carter told CNBC. “Bankman-Fried operated both an exchange and a prop shop, which is super unorthodox and just not really allowed in actually regulated capital markets.”
The borrowing and lending scheme between the two firms was more convoluted than just using customer funds to make up for bad trading bets. FTX tried to paper over the hole by denoting assets in two crypto tokens that were essentially made up – FTT, a token created by FTX, and Serum, which was a token created and promoted by FTX and Alameda, according to financial filings reported by Bloomberg’s Matt Levine.
Firms make up crypto tokens all the time – indeed, it’s a big part of how the crypto boom of the last two years was financed – and they usually offer some sort of benefit to users, although their real value to most traders is simple speculation, that is, the hope that the price will rise. Owners of FTT were promised lower trading costs on FTX and the ability to earn interest and rewards like waived blockchain fees. While investors can profit when FTT and other coins increase in value, they’re largely unregulated and are particularly susceptible to market downturns.
These tokens were essentially proxies for what people believedBankman-Fried’s exchange to be worth, since it controlled the vast majority of them. Investor confidence in FTX was reflected in the price of FTT.
The key point here is that FTX was reportedlysiphoning off customer assets as collateral for loans, and then covering it with a token it made up and printed at will, drip-feeding only a fraction of its supply into the open market. The financial acrobatics between the two firms somewhat resembles the moves that sunk energy firm Enron almost two decades ago – in that case, Enron essentially hid losses by transferring underperforming assets to off-balance sheet subsidiaries, then created complicated financial instruments to obscure the moves.
As all this was happening, Bankman-Fried continued his press tour, lionized as one of the great young tech entrepreneurs of the age. It only began to unravel onceBankman-Fried got into a public spat with Binance, a rival exchange.
What went wrong in the last two weeks
The relationship between Binance and Bankman-Fried goes back almost to the beginning of his time in the industry. In 2019, Binance announced a strategic investment in FTX and said that as part of the deal it had taken “a long-term position in the FTX Token (FTT) to help enable sustainable growth of the FTX ecosystem.”
Flash forward a couple years to the summer of 2022. Bankman-Fried was pressing regulators to look into Binance and criticizing the exchange in public. It’s unclear exactly why – it could have been based on legitimate suspicions. Or it may simply have been because Binance was a major competitor to FTX, both as an exchange and as a potential buyer of other distressed crypto companies.
Whatever the reason, Binance CEO Changpeng Zhao, known as CZ, soon saw his chance to strike.
On Nov. 2, CoinDesk reported a leaked balance sheet showing that a significant amount of Alameda’s assets were held in FTX’s illiquid FTT token. It raised questions both about the trading firm’s solvency, as well as FTX’s financials.
Zhao took to Twitter on Sunday, Nov. 6, saying that Binance had about $2.1 billion worth of FTT and BUSD, its own stablecoin.
Then he dropped the bomb:
“Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books,” he said.
Investors raced to pull money out of FTX. On Nov. 6, according to Bankman-Fried, the exchange had roughly $5 billion of withdrawals, “the largest by a huge margin.” On an average day, net inflows had been in the tens of millions of dollars.
The speed of the withdrawals underscores how the largely unregulated crypto market is often operating in an information vacuum, meaning that traders react fast when new facts come to light.
“Crypto players are reacting quicker to news and rumor, which in turn builds up a liquidity crisis much faster than one would have seen in traditional finance,” said Fabian Astic, head of decentralized finance and digital assets for Moody’s Investors Service.
“The opacity of the market operations often leads to panic reactions that, in turn, spark a liquidity crunch. The developments with Celsius, Three Arrows, Voyager, and FTX show how easy it is for crypto investors to lose confidence, prompting them to withdraw large sums and causing a near-death crisis for these firms,” continued Astic.
As the FTT token plunged in value in tandem with the mass withdrawals, SBF quietly sought investors to cover the multibillion-dollar hole from the money that had been withdrawn by Alameda. That value may have been as high as $10 billion, according to multiple reports. They all declined, and in a move of desperation, SBF turned to CZ.
In a public tweet on Nov. 8, CZ said Binance agreed to buy the company, though the deal had a key term: non-binding. The sudden public revelation that FTX was in need of a bailout caused FTT’s value to plunge off a cliff.
The next day, CZ claimed he did due diligence and didn’t like what he saw, essentially sealing FTX’s demise. Bankman-Fried speculated to the Times that CZ never intended to buy it in the first place.
On Friday, Nov. 11, FTX and Alameda both filed for bankruptcy. FTX, which was valued at $32 billion in a financing round earlier this year, has frozen trading and customer assets and is seeking to discharge its creditors in bankruptcy court. Bankman-Fried is no longer the boss at either firm.
A new bankruptcy filing posted on Tuesday shows that FTX may have more than one million creditors. It plans to file a list of the 50 largest ones this week.
Lawyers for the exchange wrote that FTX has been in contact with “dozens” of regulators in the U.S. and overseas in the last 72 hours, including the U.S. Attorney’s Office, the Securities and Exchange Commission and the Commodity Futures Trading Commission. The SEC and Department of Justice are reportedly investigating FTX for civil and criminal violations of securities laws. Financial regulators in the Bahamas are also reportedly looking at the possibility of criminal misconduct.
CEO of FTX Sam Bankman-Fried testifies during a hearing before the House Financial Services Committee at Rayburn House Office Building on Capitol Hill December 8, 2021 in Washington, DC.
Alex Wong | Getty Images
Binance is nowpoised to claim absolute dominance over the industry.
“Binance clearly comes out stronger from all of this,” said William Quigley, co-founder of the U.S. dollar-pegged stablecoin tether. “CZ claims Binance has no debt, and doesn’t use its BNB token as collateral. Both of those are good practices in the highly volatile crypto markets.”
Quigley added that more institutional trading and custody will likely shift to Binance.
“The cryptocurrency industry’s entire ethos is founded on disintermediation and decentralization, so Binance’s ever-growing dominance raises reasonable fears over how further centralization will affect the average trader,” said Clara Medalie, director of research at data firm Kaiko.
“FTX’s collapse benefits no one, not even Binance, which will now face growing questions over its monopoly of market activity,” Medalie told CNBC, speculating that we are just seeing the tip of the iceberg of market participants affected by the fall of FTX and Alameda.
“Each entity has numerous twisted and over-lapping financial ties to projects throughout the industry that now stand to lose support or go under themselves,” she said.
In the meantime, though, Binance took a bath on the collapse of the FTT token, which CZ says the firm held after Bankman-Fried asked for a bailout.
“Full disclosure,” CZ tweeted last Sunday.
“Binance never shorted FTT. We still have a bag of as we stopped selling FTT after SBF called me. Very expensive call.”
– CNBC’s Ari Levy, Kate Rooney and Ryan Browne contributed to this report.
New York Attorney General Letitia James on Wednesday sued former President Donald Trump, the Trump Organization, three of his adult children, and others for allegedly widespread fraud involving false financial statements related to the company.
The civil lawsuit filed in Manhattan Supreme Court seeks at least $250 million in damages, to permanently bar Trump, Donald Trump Jr., Eric Trump, and Ivanka Trump from serving as an officer of a company in New York, and permanently prohibit the Trump companies named in the suit from doing business in New York state.
James also said that she was referring evidence obtained in the course of a three-year investigation to federal prosecutors in Manhattan, as well as to the Internal Revenue Service, saying she believed it showed violations of federal criminal laws.
“Trump falsely inflated his net worth by billions of dollars,” James said at a press conference.
James said Trump massively overstated the values of his assets to obtain more favorable loan and insurance terms for his company, as well as to lower its tax obligations.
“The number of grossly inflated asset values is staggering, affecting most if not all of the real estate holdings in any given year,” the suit alleges.
“All told, Mr. Trump, the Trump Organization, and the other Defendants, as part of a repeated pattern and common scheme, derived more than 200 false and misleading valuations of assets included in the 11 Statements covering 2011 through 2021.”
Former U.S. president Donald Trump speaks in support of candidates Doug Mastriano and Mehmet Oz during a rally in Wilkes-Barre, Pennsylvania, September 3, 2022.
Andrew Kelly | Reuters
The complaint says that Trump’s personal financial statements “for the period 2011 through 2021 were fraudulent and misleading in both their composition and presentation.”
James said that Trump had falsely claimed that his apartment in Manhattan was more than triple its actual size as part of the fraud.
And the suit says Trump valued his Mar-a-Lago club property in Palm Beach, Florida, on the false premise that it sat on unrestricted property and could be developed for residential use, even though he allegedly knew that asset was subject to a slew of tight restrictions.
Mar-a-Lago “generated less than $25 million in annual revenue,” the suit says. “It should have been valued at about $75 million, but it was valued at $739 million
Trump’s lawyer Alina Habba, in a statement, said, “Today’s filing is neither focused on the facts nor the law – rather, it is solely focused on advancing the Attorney General’s political agenda.”
“It is abundantly clear that the Attorney General’s Office has exceeded its statutory authority by prying into transactions where absolutely no wrongdoing has taken place,” Habba said.
“We are confident that our judicial system will not stand for this unchecked abuse of authority, and we look forward to defending our client against each and every one of the Attorney General’s meritless claims.”
James’ office interviewed more than 65 witnesses and reviewed millions of documents part of the investigation, the lawsuit said.
Read the lawsuit against Trump and others here.
This is breaking news. Please check back for updates.
U.S. President Joe Biden walks from Marine One to the White House following a trip from Michigan, in Washington, U.S., September 14, 2022.
Tom Brenner | Reuters
The Biden White House has just released its first-ever framework on what crypto regulation in the U.S. should look like — including ways in which the financial services industry should evolve to make borderless transactions easier, and how to crack down on fraud in the digital asset space.
The new directives tap the muscle of existing regulators such as the Securities and Exchange Commission and the Commodity Futures Trading Commission, but nobody’s mandating anything yet. The long-awaited direction from Washington has, however, captured the attention of both the crypto industry as a whole — and of investors in this nascent asset class.
The framework follows an executive order issued in March, in which President Biden called on federal agencies to examine the risks and benefits of cryptocurrencies and issue official reports on their findings.
For six months, government agencies have been working to develop their own frameworks and policy recommendations to address half a dozen priorities listed in the executive order: consumer and investor protection; promoting financial stability; countering illicit finance; U.S. leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation. Together, these recommendations comprise the first, “whole-of-government approach” to regulating the industry.
Brian Deese, Director of the National Economic Council, and National Security Advisor Jake Sullivan said in a statement that the new guidelines are meant to position the country as a leader in governance of the digital assets ecosystem at home and abroad.
Here are some of the key takeaways from the White House’s new crypto framework.
Fighting illicit finance
One section of the White House’s new framework on crypto regulation focuses on eliminating illegal activity in the industry — and the measures proposed appear to have real teeth.
“The President will evaluate whether to call upon Congress to amend the Bank Secrecy Act, anti-tip-off statutes, and laws against unlicensed money transmitting to apply explicitly to digital asset service providers — including digital asset exchanges and nonfungible token (NFT) platforms,” according to a White House fact sheet.
The president is also looking into whether to push Congress to raise the penalties for unlicensed money transmitting, as well as potentially amending certain federal statutes to allow the Department of Justice to prosecute digital asset crimes in any jurisdiction where a victim of those crimes is found.
In terms of next steps, “Treasury will complete an illicit finance risk assessment on decentralized finance by the end of February 2023 and an assessment on non-fungible tokens by July 2023,” reads the fact sheet.
Crime is rife in the digital asset sector. More than $1 billion in crypto has been lost to fraud since the start of 2021, according to research from the Federal Trade Commission.
Last month, the SEC said it charged 11 people for their roles in creating and promoting a fraudulent crypto pyramid and Ponzi scheme that raised more than $300 million from millions of retail investors worldwide, including in the United States.Meanwhile, in February, U.S. officials seized $3.6 billion worth of bitcoin — their biggest seizure of cryptocurrencies ever — related to the 2016 hack of crypto exchange Bitfinex.
A new kind of digital dollar
The framework also points to the potential for “significant benefits” from a U.S. central bank digital currency, or CBDC, which you can think of as a digital form of the U.S. dollar.
Right now, there are several different types of digital U.S. dollars.
Sitting in commercial bank accounts across the country are electronic U.S. dollars, which are partially backed by reserves, under a system known as fractional-reserve banking. As the name implies, the bank holds in its reserves a fraction of the bank’s deposit liabilities. Transferring this form of money from one bank to another or from one country to another operates on legacy financial rails.
There are also a spate of USD-pegged stablecoins, including Tether and USD Coin. Although critics have questioned whether tether has enough dollar reserves to back its currency, it remains the largest stablecoin on the planet. USD Coin is backed by fully reserved assets, redeemable on a 1:1 basis for U.S. dollars, and governed by Centre, a consortium of regulated financial institutions. It is also relatively easy to use no matter where you are.
Then there’s the hypothetical digital dollar that would be the Federal Reserve’s take on a CBDC. This would essentially just be a digital twin of the U.S. dollar: Fully regulated, under a central authority, and with the full faith and backing of the country’s central bank.
“A dollar in CBDC form is a liability of the central bank. The Federal Reserve has to pay you back,” explained Ronit Ghose, who heads fintech and digital assets for Citi Global Insights.
Federal Reserve chair Jerome Powellpreviously said the main incentive for the U.S. to launch its own central bank digital currency, or CBDC, would be to eliminate the use case for crypto coins in America.
“You wouldn’t need stablecoins; you wouldn’t need cryptocurrencies, if you had a digital U.S. currency,” Powell said. “I think that’s one of the stronger arguments in its favor.”
In the White House’s new framework, it points to the fact that a U.S. CBDC could enable a payment system that is “more efficient, provides a foundation for further technological innovation, facilitates faster cross-border transactions, and is environmentally sustainable.”
“It could promote financial inclusion and equity by enabling access for a broad set of consumers,” continues the report.
To that end, the administration urges the Fed to continue its ongoing research, experimentation, and evaluation of a CBDC.
Safeguarding financial stability
Central bankers and U.S. lawmakers have for years bemoaned the rise of stablecoins, a specific subset of cryptocurrencies that have a value pegged to a real-world asset, such as a fiat currency like the U.S. dollar or a commodity like gold.
These nongovernmental digital tokens are increasingly being used in domestic and international transactions, which is scary for central banks because they don’t have a say in how this space is regulated.
In May, the collapse of TerraUSD, one of the most popular U.S. dollar-pegged stablecoin projects, cost investors tens of billions of dollars as they pulled out in a panic that some have compared to a bank run. Widespread buy-in — and public PSAs — from respected financial institutions lent credibility to the project, further driving the narrative that the whole thing was legit.
The implosion of this stablecoin project led to a series of insolvencies that erased nearly $600 billion in wealth, according to the White House.
“Digital assets and the mainstream financial system are becoming increasingly intertwined, creating channels for turmoil to have spillover effects,” according to the White House fact sheet.
The framework goes on to single out stablecoins, warning that they could create disruptive runs if not paired with appropriate regulation.
To make stablecoins “safer,” the administration says Treasury will “work with financial institutions to bolster their capacity to identify and mitigate cyber vulnerabilities by sharing information and promoting a wide range of data sets and analytical tools, as well as team up with other agencies to “identify, track, and analyze emerging strategic risks that relate to digital asset markets.”
Those efforts will also happen in concert with international allies, including the Organization for Economic Cooperation and Development and the Financial Stability Board.
The crypto market can be volatile, but it’s still attractive to young people who have “higher risk appetites,” said Chris Adam of SharpRank.
Insta_photos | Istock | Getty Images
More than 46,000 people say they lost over $1 billion in crypto to scams since the start of 2021, according to a report released by the Federal Trade Commission on Friday.
Losses last year were nearly 60 times what they were in 2018, with a median individual loss of $2,600.
The FTC notes that the top cryptocurrencies people said they used to pay scammers were bitcoin (70%), tether (10%), and ether (9%).
One key feature of cryptocurrencies like bitcoin is that payment transfers are final and can’t be reversed. This isn’t always a good thing. Chargebacks — a type of tool designed to protect consumers — allow consumers to reverse a transaction if they claim they have been fraudulently charged for a good or service they did not receive.
Nearly half the people who reported losing crypto to a scam since 2021 said it started with some kind of message on a social media platform. The top platforms mentioned in these complaints were Instagram (32%), Facebook (26%), WhatsApp (9%), and Telegram (7%).
Fake investment opportunities were by far the most common type of scam. In 2021, $575 million of crypto fraud losses reported to the FTC related to investment opportunities. People reported that investment websites and apps would let them track the growth of their crypto, but the apps were fake, and when they tried to get their money out they could not.
“There’s no bank or other centralized authority to flag suspicious transactions and attempt to stop fraud before it happens,” the FTC warns in its report. “These considerations are not unique to crypto transactions, but they all play into the hands of scammers.”
Romance scams are the second-most common source of crypto fraud losses, followed by business and government impersonation scams, which the FTC said can often start with fake messages purporting to be from tech companies like Amazon or Microsoft.
Younger consumers were more likely to be taken in by crypto scams. The FTC reports that people aged 20 to 49 were more than three times as likely as older age groups to report losing crypto to a scammer.
To avoid being scammed, the FTC says, people should understand that cryptocurrency investments never have guaranteed returns, avoid business arrangements that require a crypto purchase, and watch out for romantic come-ons accompanied by a crypto solicitation.
The news comes after a tumultuous few weeks in the crypto markets. A failed U.S. dollar-pegged stablecoin helped drag down the entire crypto asset class, erasing half a trillion dollars from the sector’s market cap and denting investor confidence in the process. Many institutional and retail investors got wiped out, and for the most part, there are no backstops from the FDIC, nor any other consumer insurance protections.
Billionaire bitcoiners Cameron and Tyler Winklevoss recently announced layoffs at crypto exchange Gemini, citing the fact that the industry is in a “contraction phase” known as “crypto winter,” which has been “further compounded by the current macroeconomic and geopolitical turmoil.”
Pro-Russian separatists are seen next to an abandoned tank on a road between the separatist-controlled settlements of Mykolaivka (Nikolaevka) and Buhas (Bugas), as Russia’s invasion of Ukraine continues, in the Donetsk region, Ukraine March 1, 2022.
Alexander Ermochenko | Reuters
As Moscow’s war on Ukraine rages on and the Russian economy and currency spiral to new lows, Washington is reportedly trying out a new way to dial up the pressure on Putin: sanctions targeting cryptocurrencies like bitcoin and ethereum.
The Department of Justice announced early Wednesday a new task force broadly designed to enforce sanctions. As part of that, it will target efforts to use cryptocurrency to evade U.S. sanctions, launder proceeds of foreign corruption or evade U.S. responses to Russian military aggression.
Taking aim at Russia’s access to digital cash comes as the U.S. and its allies, including notoriously neutral Switzerland, levy heavy punitive measures against Moscow.
The concern is that the Kremlin, as well as other ancillary actors supporting the offensive on Ukraine, will evade the sanctions regime via digital tokens, which are not owned or issued by a central authority like a bank. Bitcoin, like most cryptocurrencies, is decentralized and borderless, which means that it doesn’t respect national boundaries. Because there is no central authority to block transactions, digital currencies are also resistant.
Since Russia invaded Ukraine on Feb. 24, stats from crypto data provider Kaiko show that transactions on centralized bitcoin exchanges in both the Russian ruble and the Ukrainian hryvnia have surged to their highest levels in months. This is likely part of the reason why Ukraine asked all the top crypto exchanges to ban Russian users — a request that has been rejected by many major players, who argue a move like that would go against the very reason why cryptocurrencies exist.
Despite growing signs of crypto adoption — as well as dialed-up rhetoric from world leaders about banning sanctioned Russians from digital currency exchanges — crypto as a pathway to sidestepping sanctions isn’t really a viable option at scale.
First of all, crypto markets offer thin liquidity and token transactions are, by design, traceable via a public ledger known as the blockchain. Aside from that, experts tell CNBC that ultimately there are better and smarter ways than using bitcoin to get around global financial blockades.
“The size and scale of crypto markets — and their state of liquidity — is not sufficient enough to offset what happens from banking disruptions and other disruptions from sanctions,” said Yaya Fanusie, a fellow at the Center for a New American Security who assesses national security and money laundering risks related to digital assets.
“It’s akin to, if someone were to block your paycheck for a month and then you had to rely on your piggy bank to make up for it,” he said.
Russia is no stranger to sanctions
Russia is no stranger to sanctions, and its political class has spent years getting creative on workarounds.
Moscow faced international condemnation in 2014 after Russia annexed the Crimean peninsula in Ukraine. That was also the year that a passenger plane headed from the Netherlands to Malaysia was shot down by a Russian-made surface-to-air missile fired over territory held by pro-Russian separatists in eastern Ukraine.
Since then, President Vladimir Putin has built buffers to insulate Russia from the blowback of Western sanctions, which economists estimate has cost Russia $50 billion a year.
Typically, the way sanctions work is that a government generates a list of the individuals and companies that must be avoided, and those doing business with these banned entities are subject to heavy fines. But sanctions are only as good as the KYC (Know Your Customer) onboarding requirements, explained Sarah Beth Felix, an authority on anti-money laundering and sanctions compliance.
“Depending on how strict that is, then that drives the data, which drives whether or not the sanctions are actually effective,” Felix says. “That is agnostic when it comes to the underlying flow of funds, whether it be crypto, fiat, wires, payable-through accounts — it all lives or dies on the underlying data that’s captured and verified on the ownership of the company, the individual, and all that kind of stuff.”
Part of Putin’s strategy involved diversifying away from U.S. treasuries and the U.S. dollar, cultivating a new kind of debt structure largely based on euros and gold. Putin’s war chest includes $630 billion in foreign reserves, which serves as a sort of financial shield meant to dull the impact of sweeping sanctions.
The country’s underlying financial fundamentals have also helped to absorb the shock. CNBC has reported that Russia has a debt-to-GDP ratio of only 18%, a current account surplus, and the price of oil surging past $113 a barrel (its highest level in more than a decade) is certainly a boon. Thus far, the White House has steered clear of sanctioning Russian oil sales.
Moreover, experts tell CNBC that Russians have been bracing for this kind of crackdown for months.
“Russia’s elite and financial authorities have been preparing for sanctions for some time,” said Salman Banaei, head of public policy for North American for Chainalysis, whichspecializes in tracking activity on blockchain networks.
Any movement of funds likely happened prior to Russia’s invasion, Felix agreed.
“I would assume billions and billions of dollars already moved through these front companies and shell corporations that we have around the world that are owned by Russian businesses and individuals, regardless of whether it involved crypto or normal bank-to-bank wires,” said Felix.
Banaei agrees that it is unlikely that designated persons would opt to move around large quantities of crypto at this point. Instead, Banaei says that if cryptocurrency is being used to evade sanctions, it likely would have happened slowly, over the past several months.
“At the end of all of this, the glaring, massive gap that we have is in the transparency of who owns what companies, not just in the U.S., but around the world,” explained Felix.
Bitcoin wouldn’t work anyway
Even if Russia wanted to use crypto to evade sanctions, its economy is too big, the crypto market is too small, and any huge transactions would likely be flagged.
“The size of crypto markets is small compared to what’s happening in the banking sector,” said Fanusie.
The U.S. has placed new debt and equity restrictions on some of Russia’s most critical state-owned enterprises with estimated assets of nearly $1.4 trillion. These entities won’t be able to raise money through the U.S. market, a critical source of capital. The total cryptocurrency market cap is at around $1.9 trillion.
Cryptocurrencies are also thinly traded, which means that it can prove difficult to buy large swaths of digital tokens like bitcoin. The bitcoin-ruble pair maxes out at about $250,000 per trade on Binance, the world’s biggest cryptocurrency exchange,versus the bitcoin and U.S. dollar pairing, which has a maximum market order of around $2.6 million.
Delston tells CNBC that the size of the transactions that the Russian government would need to conduct would be multiples of what individual Russian citizens might be doing right now. Not only would that prove difficult to do in terms of liquidity limitations, but it could also red flag the transaction entirely.
“On the blockchain, the size of the transaction is immediately available, and very sizable transactions would be very apparent to anyone looking,” Delston said, who added that cryptocurrencies aren’t the bastion of anonymity they are so often made out to be.
While crypto has the advantage of not involving wire transfers from bank to bank (which are heavily policed to ensure sanctions compliance), every transfer ever made is captured on a public, permanent, and immutable blockchain ledger and can be traced in nanoseconds.
“If I hand you find a $5 bill, you can never trace that back to me, where if I were to transfer you money through my wallet, that’s always linked back to my wallet ID, which if I went through a regulated exchange, has all of my CIP (Customer Identification Program) information,” explained Felix.
Chainalysis’ Banaei tells CNBC that a single tip in the cryptocurrency market can, within hours, uncover a network of wallet addresses involved in ransomware fraud and money laundering, while a similar tip relating to a traditional bank wire could take several months to reach a similar level of visibility into a criminal network and its money laundering.
While there are privacy tokens like monero, dash, and zcash, which have additional anonymity built into them, they tend not to be as liquid as other tokens, since many regulated exchanges have chosen not to list them due to regulatory concerns.
There is also the question of what to do once you have the crypto in hand.
“It’s hard to buy stuff with cryptocurrency, especially big stuff,” Delston tells CNBC. He says that he doesn’t know of any major electronics companies, food exporters, or spare parts manufacturers that accept cryptocurrency as payment, which he notes are “all the kinds of things that a country like Russia would need, because it doesn’t produce it on its own.”
And while historically crypto exchange compliance with the global sanctions regime hasn’t been great, Fanusie says it’s actually getting much better, as these platforms beef up their internal compliance teams.
Federal prosecutors are adding muscle to their crypto policing duties, as well. In February, the U.S. Justice Department unveiled a new cryptocurrency enforcement team.
What about a digital ruble?
While a lot of attention goes to the potential for bitcoin to facilitate sanctions evasion, the bigger story to Fanusie is what sanctioned actors are doing with central bank digital currencies, or CBDCs.
The Bank of Russia released a consultation paper for a “digital ruble” in October 2020, and Central Bank Governor Elvira Nabiullina said the country plans to prototype and pilot it this year.
The digital ruble would be a virtual version of the country’s national currency that — similar to China’s digital yuan — would be controlled centrally by the Bank of Russia and use some form of distributed ledger technology.
At the time it was first announced, a Moscow newspaper, citing officials, said a digital ruble would both reduce dependency on the dollar, as well as mitigate exposure to sanctions.
Well before the Russian invasion of Ukraine, former U.S. Treasury official Michael Greenwald told CNBC that a digital ruble could prove problematic for the U.S.
“What alarms me is if Russia, China, and Iran each creates central bank digital currencies to operate outside of the dollar and other countries followed them,” he said. “That would be alarming.”
