Federal prosecutors are investigating whether FTX founder Sam Bankman-Fried manipulated the market for two cryptocurrencies last spring, causing them to crash and creating a domino effect that ultimately caused his own exchange to implode. cryptocurrency last month, according to two people with knowledge of the matter.
US prosecutors in Manhattan are investigating the possibility that Mr. Bankman-Fried directed the prices of two interrelated currencies, TerraUSD and Luna, to benefit entities he controlled, including FTX and Alameda Research, a hedge fund he co-founded and detained, people said.
The investigation is in its early stages, and it’s unclear if prosecutors have determined Mr. Bankman-Fried’s wrongdoing, or when they began looking into the TerraUSD and Luna transactions. The case is part of a larger investigation into the collapse of Mr. Bankman-Fried’s Bahamas-based cryptocurrency empire and the potential embezzlement of billions of dollars in client funds.
Federal prosecutors and the Securities and Exchange Commission are investigating whether FTX broke the law by transferring its clients’ funds to Alameda. Last month, a run on deposits exposed an $8 billion hole in the exchange’s accounts, causing the company to collapse. Mr Bankman-Fried resigned as chief executive of FTX when the company filed for bankruptcy on November 11.
FTX is also being investigated for violating U.S. money laundering laws that require money transfer companies to know who their customers are and to report any potentially illegal activity to enforcement authorities. laws, said three people familiar with the investigation. This investigation, first reported by Bloomberg News, began several months before FTX went bankrupt. Investigators are also looking into the activities of other offshore cryptocurrency trading platforms.
The consequences of the fall of FTX
The sudden collapse of the crypto exchange left the industry stunned.
- A spectacular rise and fall: Who is Sam Bankman-Fried and how did he become the face of crypto? The Daily charted the dramatic rise and fall of the man behind FTX.
- Clinging to power: The emails and text messages show how lawyers and FTX executives struggled to persuade Mr. Bankman-Fried to relinquish control of his bankrupt business.
- Collateral damage: BlockFi, a cryptocurrency lender that targeted mainstream investors hungry for a piece of the crypto mania, filed for bankruptcy on Nov. 28, shot down by its financial ties to FTX.
- A symbiotic relationship: Mr. Bankman-Fried built FTX in part to help the business operations of Alameda Research, his first venture. The links between the two entities are now under scrutiny.
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 my knowledge, all transactions were for investment or hedging purposes,” he added.
Representatives of the U.S. Attorney for the Southern District of New York declined to comment. FTX representatives did not immediately respond to requests for comment.
The focus on possible market manipulation adds to the legal storm brewing around Mr. Bankman-Fried. It is illegal for an individual to knowingly engage in market activity intended to drive up or down the price of an asset.
TerraUSD was a so-called stablecoin, but unlike other stablecoins, its value was not directly backed by the US dollar. Rather, it retained its value from a second coin called Luna through a complex set of algorithms. Merchants in the digital ecosystem could mint these coins, whose prices would fluctuate depending on the number of coins in circulation. Each time the price of TerraUSD fell, the supply of Luna increased, as traders created more Luna to try to capitalize on the difference.
In May, major cryptocurrency market makers — exchanges or people who organize the matching of buyers and sellers — noticed a flood of “sell” orders coming in for TerraUSD, one person says. knowledge of market activity. The orders were in small denominations, but they went through very quickly, the person said.
The sudden increase in sell orders for TerraUSD overwhelmed the system, making it difficult to find matching “buy” orders for them. Under normal conditions, any sell order left unfulfilled for too long would be matched with buy orders at a lower price. The longer the orders persisted without being matched, the more they drove down the price of TerraUSD and caused a corresponding drop in Luna prices due to how the two coins were linked.
The exact causes of the collapse of the two cryptocurrencies remain unclear. However, the bulk of the sell orders for TerraUSD seemed to come from one place: Sam Bankman-Fried’s cryptocurrency trading firm, which also bet big on Luna’s price drop, according to the person with knowledge. market activity.
If the trade had gone as planned, the lower prices at Luna could have yielded a big profit. Instead, the background fell from the entire TerraUSD-Luna ecosystem. The collapse caused more problems in the cryptocurrency industry, sending several top companies into bankruptcy and wiping out an estimated $1 trillion of value from the cryptocurrency market.
The ripple effects of the Luna crash ultimately contributed to the collapse of Mr. Bankman-Fried’s business empire. In November, Caroline Ellison, chief executive of Alameda, told staff that loans to Alameda had been recalled following the market chaos sparked by the crash, according to a person familiar with the matter. But the funds Alameda had borrowed were no longer readily available, Ms. Ellison told staff, so the company used funds from FTX customers to make the payments.
A lawyer for Ms Ellison did not return requests for comment.
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