What did the Sam Bankman-Fried case teach us about the need for a legal framework?

In United States v. Bankman-Fried, infamous Sam Bankman-Fried, founder of the now bankrupt crypto-exchange FTX, was convicted of orchestrating a multibillion-dollar fraud against FTX’ customers, marking a significant legal precedent in the realm of cryptocurrency. Following an intensive month-long trial that captured global attention, Bankman-Fried was found guilty on all charges. Bankman-Fried currently awaits sentencing, facing a maximum of 110 years in prison for his crimes.

Bankman-Fried was convicted of misusing customer deposits and investments in a manner that contravened not only FTX’s terms of service, but also criminal law. His conviction included charges of wire fraud on customers and lenders, conspiracy to commit commodities fraud, conspiracy to commit securities fraud, and conspiracy to commit money laundering. These charges were based on actions that began as early as 2019, highlighting the prolonged period of Bankman-Fried’s fraudulent practices.

The trial was noted for its strategic prosecution and the substantial evidence presented against Bankman-Fried. Four cooperators from inside FTX, including Bankman-Fried’s former girlfriend, friends, and roommates, testified against Bankman-Fried, underscoring his central role in decision-making as well as his direct involvement in and responsibility for the fraudulent activities.

Caroline Ellison, former CEO of Alameda Research (a crypto trading firm co-founded by Bankman-Fried) and former girlfriend of Bankman-Fried, asserted that Bankman-Fried was directly responsible for setting up systems to take customer money. FTX co-founder Gary Wang’s testimony revealed the implementation of an “allow negative” feature in FTX’s database specifically for Alameda Research. The “allow negative” feature permitted Alameda Research’s account to maintain a negative balance, enabling the misappropriation of customer funds. According to Wang’s testimony, Bankman-Fried instructed the implementation of the “allow negative” feature. This feature was central to the fraud charges against Bankman-Fried, who, using this feature, was able to make fraudulent use of customer funds for purposes like funding political contributions, venture investments, and lavish real estate purchases.

Bankman-Fried’s defense faced substantial challenges. Their attempt to present witnesses was blocked, and their efforts to create reasonable doubt were overshadowed by the overwhelming evidence to the detriment of Bankman-Fried. Additionally, Bankman-Fried’s own hesitant and evasive testimony did not resonate well with the jury. He often tried to defer responsibility for FTX’ and Alameda Research’s collapse to Ellison, arguing that her failure to hedge the company negatively impacted it long-term. However, Ellison’s counterclaims and the testimonies of other cooperators painted a different picture, emphasizing Bankman-Fried’s primary role and decision-making authority in the fraud.

The legal implications of this case are significant, particularly in the context of cryptocurrency regulation. The court’s rejection of the defense’s argument about FTX’ terms of service being governed by English law due to FTX’ Bahamas headquarters indicates the complexities of jurisdiction in international crypto operations. U.S. Attorney Damian Williams remarked that Bankman-Fried’s actions represent one of the largest frauds in American history, highlighting the timeless nature of financial corruption in a modern context involving emerging technology.

The Bankman-Fried case reflects the intricacies of financial regulations, the importance of ethical conduct in digital finance, and the legal system’s adaptability to new technological landscapes. It will likely influence future legal approaches to similar financial misconducts in the cryptocurrency industry.

As do three cases of the U.S. SEC against Ripple, Binance and Kraken: The SEC charged the cryptocurrency company Ripple Labs with raising over USD 1.3 billion through an unregistered digital asset securities offering involving the sale of XRP to investors globally. The SEC further charged Binance, a leading crypto exchance, for securities law violations, including operating unregistered exchanges and misleading investors about U.S. customer restrictions and control over Binance. In its latest case, the SEC charged Kraken, another leading crypto exchange, for operating as an unregistered securities exchange, broker, dealer, and clearing agency.

Alongside with these SEC cases, the Bankman-Fried case underscores the need for robust legal frameworks and vigilance in the rapidly evolving crypto space.

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Felix is a partner in gunnercooke Rechtsanwaltsgesellschaft mbH, whose registered office is Kurfurstendamm 15, 10719, AG Charlottenburg, HRB 224488 B. All lawyers of gunnercooke Rechtsanwaltsgesellschaft mbH are admitted in Germany to practise as Rechtsanwalt or Rechtsanwaeltin and are members of and regulated by the relevant local Bar (Rechtsanwaltskammer).