FTX Founder Sam Bankman-Fried Faces Market Manipulation Inquiry

Federal prosecutors are investigating whether the founder of FTX, Sam Bankman-Fried, manipulated the market for two cryptocurrencies this past spring, leading to their demise and creating an effect. The last domino reaction caused the collapse of his own crypto exchange last month, two people said. knowledge of the problem.

U.S. prosecutors in Manhattan are looking into the possibility that Bankman-Fried manipulated the prices of two interlinked currencies, TerraUSD and Luna, to benefit organizations he controlled, including including FTX and Alameda Research, a hedge fund he co-founded and owned. people have said.

The investigation is in its early stages and it is unclear whether prosecutors have identified any wrongdoing by Mr. Bankman-Fried or when they began looking into the TerraUSD and Luna transactions. The issue is part of an extensive investigation into the collapse of Bankman-Fried’s Bahamas-based crypto empire and its ability to embezzle billions of dollars in client funds.

Federal prosecutors and the Securities and Exchange Commission examined whether FTX broke the law by transferring customer funds to Alameda. Last month, a depleted deposit exposed an $8 billion loss in the exchange’s account, causing the company to collapse. Mr. Bankman-Fried stepped down as chief executive officer of FTX when the company filed for bankruptcy on Nov.

FTX is also being investigated for violating U.S. money laundering laws that require remittance businesses to know who their customers are and to report any potential illegal activity to law enforcement agencies. law, three people familiar with the investigation said. That investigation, first report by Bloomberg News, which began a few months before the bankruptcy of FTX. Investigators are also looking into the activities of other foreign cryptocurrency trading platforms.

In a statement, Mr. Bankman Fried said he was “not aware of any market manipulation and certainly never intended to engage in market manipulation”.

“To the best of my knowledge, all trades are for investment or hedging,” he added.

A representative of the United States attorney for the Southern District of New York declined to comment. Representatives for FTX did not immediately respond to requests for comment.

The focus on market manipulation could add to the regulatory storm brewing around Mr. Bankman-Fried. It is illegal for an individual to knowingly orchestrate market activity designed to move the price of an asset up or down.

TerraUSD is called a stablecoin, but unlike other stablecoins, its value is not directly backed by the US dollar. Instead, it maintains its value from a second coin called Luna through a complex set of algorithms. Traders in the digital ecosystem can mint these coins, whose price will fluctuate based on the amount in circulation. Whenever the price of TerraUSD falls, the supply of Luna will increase, as traders have created more Lunas to try to capitalize on the difference.

In May, major cryptocurrency market makers — exchanges or individuals that arrange for buyers and sellers to match orders — noticed a flurry of “sell” orders for TerraUSD, one with knowledge of market operations said. The person said the orders were in small denominations, but they were placed very quickly.

The sudden spike in TerraUSD sell orders overloaded the system, making it difficult to find suitable “buy” orders. Under normal conditions, any sell orders that have not been executed for too long will be matched with buy orders at a lower price. The longer the orders go unfilled, the more they force the TerraUSD price down and cause the price of Luna to drop accordingly due to the way these two coins are linked.

The exact cause of the collapse of the two cryptocurrencies remains unclear. However, the majority of TerraUSD sell orders seem to come from one place: Sam Bankman-Fried’s crypto exchange, which also bets big on the price of Luna going down, according to one person with knowledge of the matter. market activities.

If the trade goes as expected, the falling price in Luna could yield a lucrative profit. Instead, the entire TerraUSD-Luna ecosystem has bottomed out. The crash caused more trouble in the crypto industry, causing several well-known companies to go bankrupt and erase around $1 trillion in value from the crypto market.

The chain effect from the Luna crash ultimately contributed to the collapse of Mr. Bankman-Fried’s business empire. In November, Caroline Ellison, chief executive of Alameda, told employees that loans to Alameda had been revoked due to market turmoil caused by the crash, according to a person familiar with the matter. this. But the money Alameda borrowed wasn’t easy anymore, Ms. Ellison told employees, so the company used FTX customer funds to make the payments.

Ellison’s attorney did not respond to a request for comment.