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Despite allegations that crypto-exchange founder Sam Bankman-Fried lost $12 billion, FTX has enough assets to make all creditors whole.
Ian Ayres and John Donohue
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Last November, FTX founder Sam Bankman-Fried’s closely watched criminal trial ended with his conviction on seven counts of fraud and conspiracy. According to the prosecution, Bankman-Fried stole “billions of dollars” from the crypto exchange’s customers “out of sheer greed”.
One key issue was how much money FTX’s customers lost. During the trial, the prosecution and its witnesses repeatedly – in fact, 97 times – put that number at $US8 billion ($12 billion). Although no proof to substantiate this massive figure was ever offered, the prosecution clearly wanted it to stay in jury members’ heads.
In fact, the figure is misleading. Instead of measuring loss, the $US8 billion reflects the temporary shortfall in cash and other liquid assets needed to cover FTX customers’ remaining redemption requests after FTX’s chief competitor triggered a run on the exchange in November 2022.
At the same time, the presiding judge barred the defence from introducing any evidence to support Bankman-Fried’s claim that FTX was solvent – that it had enough assets to cover all its liabilities to customers – at every point before Bankman-Fried relinquished control to John J. Ray III, a bankruptcy lawyer, shortly after FTX collapsed. The defence was also prohibited from showing that the value of FTX’s assets had grown steadily after crypto markets rebounded.
To date, no independent party has examined the accuracy of these claims. A recent federal appellate court decision ordering the appointment of an independent auditor in the FTX bankruptcy – requested by a government watchdog and opposed by Ray – should provide, in the words of the court, “much-needed elucidation”.
A recent report valued Anthropic, one of Bankman-Fried’s AI investments, at $US18.4 billion, which would add roughly $US2.5 billion to the FTX estate. And that is just the tip of the iceberg. Extrapolating from the numbers in Ray’s September 2023 report to creditors, the assets in the estate right now are sufficient to make whole all creditors, including customers, lenders and investors.
Venture investments
Consider that in the September report, Ray valued the estate’s assets at $US6.7 billion and its liabilities at $US10.6 billion, suggesting FTX was insolvent. This reflects the bankruptcy team’s decision to count only the most liquid assets held by FTX, such as cash and big-name cryptocurrencies like bitcoin. They ignored what Michael Lewis, in a book about Bankman-Fried, described as a “dragon’s hoard” of valuable assets assembled by the FTX founder.
Among the many assets that Ray and his team did not count were FTX’s portfolio of 416 venture investments (including Anthropic and Genesis Digital Assets, a leading bitcoin miner), FTX’s holdings of 1300 less liquid tokens (Ray valued the top 20 alone at US$1 billion); and miscellaneous other token holdings and non-debtor assets that cost FTX $US1.3 billion.
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Including these assets would add billions to Ray’s estimates of value. Since last August, the market value of FTX’s crypto holdings has grown by about $US5 billion. This has been largely driven by the five-fold increase in the market value of Solana, FTX’s largest holding, as well as a 50 per cent increase in its remaining top 10 tokens. Indeed, some FTX account holders are now objecting to a proposed pricing of their claims that is based on the lower US dollar value of cryptocurrencies when FTX filed for bankruptcy in November 2022.
As friends and colleagues of Bankman-Fried’s parents, we have relied exclusively on figures published by Ray and publicly available market prices to avoid any appearance of a conflict of interest, and have tried to estimate appropriate discounts for selling into illiquid markets. While some of these valuations could be significantly off in either direction, the overall picture is clear: the current assets held by the bankrupt estate are more than sufficient to repay all creditors with interest and still have billions left over – if only the bankruptcy team would distribute them.
Brilliant businessman
Whatever else might be said about Bankman-Fried, he was a brilliant businessman. In four short years, he built two companies from scratch that had a combined market value of $US30 billion to $US40 billion and annual revenues of more than $1 billion. Absent the liquidity crisis and the Chapter 11 team’s decision to shut down FTX’s international and US exchanges, the companies could be worth twice that amount today, given the crypto market’s recovery.
The biggest financial loser by far would appear to be Bankman-Fried, who owned a majority interest in both exchanges. The biggest winners will be the lawyers and financial advisers representing FTX, who together billed in excess of $US400 million by the end of 2023, a fact that may explain the sluggish asset distribution. At an average billing rate of $US1230 per hour, Sullivan & Cromwell alone has billed at least $US180 million to the FTX estate.
As a legal matter, the correct measure of losses will likely be raised on appeal. But as a practical matter, the public would view Bankman-Fried very differently if they realised that FTX had sufficient assets to make whole its customers and other creditors all along. The prosecutors must have understood this, which explains why they went to such great lengths to persuade the jury through sheer repetition that FTX’s customers lost $US8 billion, and to prevent the defence from introducing evidence to refute that claim.
Ian Ayres is Professor of Law at Yale University. John Donohue is Professor of Law at Stanford Law School and a research associate at the National Bureau of Economic Research.
Project Syndicate
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