FTX co-founder Sam Bankman-Fried, a poster child for the cryptocurrency industry’s worst excesses, is on trial in New York this week after adopting a new look: a solemn face and a jailhouse trim of his famously floppy hair. The change comes as prosecutors seek to portray him as the architect of a crypto empire that robbed investors of billions of dollars when the inflated market for digital currency burst, like asset bubbles always do.
The federal trial of Bankman-Fried, who has been likened to Bernie Madoff for allegedly running one of the biggest frauds in history, will stain the cryptocurrency industry — even if he beats the odds and wins an acquittal on seven criminal counts, including wire fraud and conspiracy to commit money laundering. That is perhaps the clearest outcome of this case. Nothing prosecutors or defense attorneys will present at SBF’s trial will absolve the industry of blame.
Bankman-Fried has become a stand-in for the cryptocurrency industry, the nefarious face of a business in dire need of regulation.
Bankman-Fried has become a stand-in for the cryptocurrency industry, the nefarious face of a business in dire need of regulation. He designed FTX as an exchange that would entice everyday Americans to take risks trading in digital assets, from the historically volatile Bitcoin to even wilder bets such as dogecoin, which was based on an internet dog meme and lauded on social media by Elon Musk.
In a now infamous Super Bowl ad starring Larry David, FTX was described as “a safe and easy way to get into crypto.” Other celebrities, such as retired NFL quarterback Tom Brady and NBA star Stephen Curry, endorsed the platform. Many investors in the United States agreed, and FTX grew into the second-largest crypto exchange in the world, behind only Binance.
Months before the November 2022 collapse of his company, SBF testified before the House and the Senate, outlining regulations he would like to see for the cryptocurrency sector. He cultivated a reputation as an honest broker, who dreamed of changing the world through altruism and dressed almost exclusively in shorts and T-shirts. Prosecutors are out to prove SBF, far from being honest, was a robber baron all along.
During the six weeks that SBF’s trial is expected to last, jurors will be introduced to a catalog of questionable spending. The indictment describes multimillion-dollar expenditures on politicians’ campaigns and more than $200 million in real estate purchases in the Bahamas.
The trial will also show just how quickly an average person’s investment in digital currency can fall down a rabbit hole of mismanagement. At the heart of the government’s case is the allegation that Alameda Research, a trading and investment firm founded by SBF, used an unlimited line of credit to divert billions of dollars in funds from FTX customers to make its own speculative investments in assets such as FTT, the native token of FTX. (Bankman-Fried has pleaded not guilty.)
In opening statements Wednesday, SBF’s attorneys gave no indication they planned to defend the standards and safeguards of the cryptocurrency industry. Instead, defense attorney Mark Cohen told jurors, according to media reports, that FTX was simply a startup with growing pains.
“Sam and his colleagues were building the plane as they were flying it,” Cohen said.
For their part, prosecutors are also not going to say the cryptocurrency industry has robust standards. The linchpin of the government’s case is that FTX simply violated its own terms of service which promised customers, “Title to your Digital Assets shall at all times remain with you and shall not transfer to FTX Trading.” Those assurances were false, according to prosecutor Thane Rehn, who said in his opening statements that when panicked customers tried to retrieve their funds as FTX collapsed, “all that was left at FTX is what amounted to an I.O.U. from Alameda.” Notably absent from the government’s case is any allegation SBF violated regulations specifically designed for the cryptocurrency market. Congress has not yet passed a law to regulate the cryptocurrency sector, although the Commodity Futures Trading Commission has assumed an oversight role and the Securities and Exchange Commission has taken action against the industry’s top players. On June 5, the SEC filed 13 charges against Binance and its CEO Changpeng Zhao, accusing them of multiple securities violations, including operating unregistered exchanges. A day later, the SEC brought a similar complaint against Coinbase, another major cryptocurrency exchange. The SEC runs the risk of testing enforcement theories in the absence of a robust regulatory environment and players in the crypto industry run the risk of operating businesses without the clear guidance that regulations are intended to provide and having to defend against novel SEC theories. Given all this, it should not be surprising that the players themselves, such as Coinbase CEO Brian Armstrong, are asking Congress to pass legislation to regulate the industry. In the meantime, the enforcement of existing criminal laws at least reinforces the message that fraud is still fraud in any industry, and offers some assurance to investors that the most egregious bad actors, such as SBF, will be held accountable.
Christine Adams
Christine Adams is a partner at the Los Angeles-based law firm Adams, Duerk & Kamenstein and a former federal prosecutor with over 25 years of experience in the public and private sectors. She specializes in internal investigations, civil litigation, SEC investigations and white-collar matters. 
