SBF Has One More Thing To Worry About: A US Attorney Inquiry

It is unclear how long the investigation has been going on, or whether Bankman-Fried has committed any wrongdoing in relation to the matter

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Blockworks exclusive art by Axel Rangel

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US federal prosecutors are reportedly investigating former FTX CEO Sam Bankman-Fried for his potential role in manipulating the price of two cryptocurrencies belonging to the now-defunct Terra ecosystem earlier this year.

According to a report by The New York Times on Wednesday, Bankman-Fried is under investigation by prosecutors in Manhattan over Terra’s UST stablecoin and sister token LUNA. 

Both collapsed in spectacular fashion in May when the algorithmic stablecoin wobbled from its peg shortly before dropping to $0.20 after redemptions skyrocketed. Luna’s price simultaneously tanked to near zero, thanks in part to Terra’s design.

The investigation, still in its infancy, is attempting to determine whether Bankman-Fried manipulated prices to the benefit of firms and entities he controlled. It is not proven if the former CEO has conducted any wrongdoing at this stage.

It is also unclear when the investigation began, though it is considered part of the larger inquiry into FTX’s collapse last month. FTX did not immediately respond to a request for comment.

In another angle prosecutors may wish to pursue, Bankman-Fried admitted this week that, at least insofar as FTX customer withdrawals are concerned, funds held by the exchange were commingled between spot and margin traders — referring to “omnibus wallets between the various categories” — in apparent violation of FTX’s Terms of Service.

“If you look at especially a lot of the withdrawals that happened, those withdrawals were not only necessarily coming from people who never used margin trading or futures or staking or anything else…that effectively meant that there was, if you want to put it this way, like, fungibility created during those withdrawals between assets,” Bankman-Fried said.

At some point, the cryptoassets available to process withdrawals ran out, with billions in customer demand left unfulfilled.

Blockworks Research analyst Ryan West has argued that the cascading liquidations at FTX during Terra’s unraveling may in fact have been the root cause of Alameda Research’s balance sheet woes — providing the seeds of FTX’s downfall.

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Terra’s crisis began on May 7 when a large trader swapped UST for rival stablecoins and forced UST to dip to $0.99, sparking concerns over the stability and capacity of the crypto to hold its peg. 

It was later revealed through Terra’s failed algorithmic experiment that more than $1 trillion had been wiped from crypto markets, forcing many firms underwater amid an industry-wide liquidity crunch. 

FTX is rumored to have had exposure in Terra through its sister trading firm Alameda Research. Alameda is said to have owed now-bankrupt crypto lender Voyager Digital $1 billion. FTX US, the American arm of the exchange, purchased Voyager’s cryptoassets in late September, valued at roughly $1.4 billion in an auction bid.

Alameda, meant to be separate from FTX, is at the center of the debacle that blew an $8 billion hole in FTX’s balance sheet following a series of allegedly fraudulent trades using customers’ commingled funds.

“With the fallout of Terra and 3AC in May/June, it is likely that Alameda experienced liquidity issues as a result of the declining price of FTT, which was likely utilized as loan collateral,” blockchain analysis firm Nansen wrote in a November blog post

Nansen said Alameda may have received an FTT-backed loan from FTX, pointing to on-chain data which suggested it “may have happened.”

FTT was the native utility token of the FTX exchange, used for reducing trading fees. It is also at the heart of the implosion as it was revealed on Nov. 2 that FTT made up a large portion of Alameda’s balance sheet — a fact that quickly brought about the downfall of the exchange nine days later.

Macauley Peterson contributed reporting.

This story was updated on Dec. 8, 2022, at 12:16 p.m. ET.


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