Castles Made of Sand Dollars: SBF, FTX, and other Three Letter Agents

By Bitcoin News On Dec 8, 2022

The story of Bitcoin has certainly had its fair share of nefarious characters, criminal activity, bad haircuts and worse wardrobes, and yet our anti-hero du jour has seemed to outdo them all. Sam Bankman-Fried, better known by the three letter acronym SBF, burst onto the scene at the peak of the 2017 bubble, founding Alameda Research that September, just four years after graduating from an internship into a full-time position at one of the world’s largest market makers, Jane Street Capital.

SBF is the son of Stanford Law professor and founder of left-wing super PAC Mind The Gap, Barbara Fried, and Stanford professor Joseph Bankman, an expert on tax shelter laws and government regulation. At the start of 2018, SBF had struck digital gold while taking advantage of the arbitrage opportunity presenting itself between a higher demand for bitcoin in the Asian market, colloquially known as the “kimchi premium”. By the end of the year, and after amassing a considerable fortune from this high-volume bitcoin/dollar spread, he officially moved to Hong Kong, formally founding the derivatives exchange FTX in the following spring.

The Bitcoin network that SBF rode from rags to riches and back again was partially launched in direct response to the fiat money experiment rearing its ugly head in the subprime mortgage, real estate and eurodollar crises that culminated into what is now known as the Great Financial Crisis of 2007 to 2009.

“??EThe Times 03/Jan/2009 Chancellor on brink of second bailout for banks%”

– Satoshi Nakamoto, January 3, 2009

This now infamous inscription in the genesis block made clear the inappropriate fractional reserve banking and predatory loan fiascos of our regulated banking industry was to be put to rest once and for all by this emergent monetary protocol; a completely transparent and decentralized ledger would de-incentivize fraud and prevent obfuscation of illicit activity. A new competitor to the dollar arose from the ashes of the meltdown, and with it, a new standard for financial fairness, complete with predictable issuance, controlled once and for all by the people for the people. Yet in any system made with good intentions, criminals like SBF and his bought-and-paid-for political and media allies manage to find a way to hurt innocent people for the advantage of an unknown few. Like most intriguing stories of fraudulent financial crimes, this one starts in the Bahamas, and ends with a tidal wave of asset liquidations and broken homes.

“If you think the Bahamas has ruined your global tax system, you have a pretty terrible global tax system.”

– Steven Dean, Summer 2020 [1]

Launching The Stablecoin, CBDC Race To The Bottom

The Bahamas seems innocuous enough, and yet there is a long history of U.S. tax avoidance, complete with rum-running bootleggers during the prohibition era. Continuing this tradition, the Caribbean banking centers, including the Bahamas and the Cayman Islands, as of August 2022, were the fourth-largest foreign holders of treasury securities, behind only Japan, China and the U.K. Shortly after the time of its founding, FTX was fully taking advantage of the free money era that began with the 2008 crash and was sustained by low-to-zero interest rates brought upon by the Trump administration.

These rate cuts were started by the Trump-nominated and Biden-renominated Jerome Powell and were further exacerbated by both of their administrations’ COVID responses. An unprecedented pumping of all things dollar denominated occurred, with real estate, stock indexes, bitcoin and a whole bunch of unregistered securities known as altcoins reaching new highs across the board. In June 2019, one month after the founding of FTX, Facebook’s Mark Zuckerberg announced Libra, a digital currency based on a basket of international currencies; a novel take on stablecoins. This launched the stablecoin and CBDC race in earnest, and coincidentally enough, the Central Bank of the Bahamas became the first such institution to announce its own CBDC, the sand dollar, in October 2020. The sand dollar itself was pegged to the Bahamian dollar, which is itself pegged to the United States dollar, and thus with its government-sanctioned launch, the birth of the first central bank-issued stablecoin dollar came to be on the sandy beaches of SBF’s new home.

“What is the reserve currency of the crypto economy going to be? Right now it’s unambiguously the USD. And interestingly it’s USD whether or not you’re looking at the American crypto economy.”

– Sam Bankman-Fried, November 5, 2021

While the U.S. government feigned fear of systemic risk at the time, the Chinese government understood the Libra project to be a backdoor dollarization of the G7 currencies rumored to be included in its basket. A Metaverse-held take on the 1985 Plaza Accord, this plan of coordinated central banking would spread USD network users across the internet’s biggest network, sped up by the high velocity available in centralized digital payments and globalized by the borderless nature of the Facebook user base.

The digital yuan was trialed in April 2021 with great haste in reaction to this development, and by the Winter Olympics 2022, had launched for foreign attendees in Beijing. Not to be outdone by these new-look, same-shit fiat cryptocurrencies, Bitcoin made its own financial history when President Nayib Bukele of El Salvador took to the stage at Bitcoin 2021 to announce the legal tender aspirations of his small but dollarized nation. On March 9, 2022 President Joe Biden signed Executive Order #14067–”Ensuring Responsible Development of Digital Assets”, which included aspirations for mitigation of financial risks in digital asset markets, as well as a clause stating that within 210 days, the attorney general, in consultation with the secretary of the treasury and the chairman of the Federal Reserve, must provide a formal proposal for a government-issued CBDC.

By this point, the Bitcoin financial system had been utterly and properly dollar-ified, with billions of dollars in liquidity of dollar-denominated trading pairs making up the lion’s share of market activity. The same can be said for the Ethereum network, which has seen its compliance-driven perversion by non-native assets taking the wheel from its token Ether, as stablecoin and other dollar derivatives now uphold the majority of economic weight of the system. Both stablecoin giants Circle, issuer of USDC, and Tether came out in support of the merge, further ossifying their stake in the now-nearly-70%-OFAC-compliant blockchain. [2] As of this article’s writing, over 15.5 million ether are currently staked without active withdrawals in the Ethereum 2.0 beacon chain, worth nearly $18 billion dollars.[3] Fortunately for Bitcoin, the consensus weight of its system is not manipulated by user stake, and thus the Bitcoin market has been seemingly unaffected – negatively anyway – by this decade-long development. At least until scammer Do Kwon and his ponzi-scheme Luna wreaked havoc on investors at the start of May of 2022.

“[Crypto is] obviously serious…you want to do right by it in the regulatory space.”

– President Bill Clinton, April 27, 2022 (Allegedly) [4]

Contagion Spreads

Only a few weeks after SBF hosted a keynote with former U.K. Prime Minister Tony Blair and President Bill Clinton at the FTX-organized Crypto Bahamas conference, one of the largest-ever over-the-counter bitcoin purchases was announced by the LUNA team.

Terraform Labs and the non-profit Luna Foundation Guard, two entities headed by Do Kwon, had begun a campaign to purchase bitcoin as a reserve asset in the event that their algorithmic stablecoin, UST, deviated from its $1 peg. Shortly before their collapse, the plan had ballooned to the lofty goal of stacking over $10 billion in the hardest known digital commodity known to man. This purchase was financed with Three Arrows Capital, or 3AC, and was facilitated by cryptocurrency broker Genesis.

“Terra’s remarkable growth has continuously reshaped crypto markets over the last two years”, said Joshua Lim, head of derivatives at Genesis. “Genesis is excited to be a liquidity partner to the Terra ecosystem, connecting it to a broader audience of institutional market participants.”

With the bitcoin reserves of Luna Foundation Guard totalling 80,394 BTC, valued at over $3.1 billion on May 5, 2022, this purchase placed LFG among the top-10 bitcoin holders in the world. [5] But only for a moment, for while it might feel like a lifetime ago, what happened next should look awfully familiar; the peg was attacked, the recently-purchased bitcoin fortune was liquidated, Binance, led by CEO Changpeng Zhao (CZ), aptly halted all trading on LUNA and UST pairs – with notable exceptions to their own stablecoin BUSD – and Kwon seemingly fled to outside of U.S. jurisdiction to Asia. [6]

Thus begins our first of many repeatable points of inquiry; where exactly did this bitcoin go? According to an audit released in November 2022, over 33,000 bitcoin were transferred to Binance on May 10, 2022, and sold along with other assets while failing to defend the peg. [7] The same day the nearly $1 billion dollars worth of bitcoin hit Binance’s order books, bitcoin’s USD price broke below $30,000, falling from $40,000 just a week before.

On May 13, SBF purchased a 7.6% stake in Robinhood, the trading platform that came under scrutiny for halting trading during the GameStop fiasco in early 2021. Bloomberg had reported that around 40% of Robinhood’s revenue came directly from selling customers orders to firms such as Two Sigma Securities, and Citadel Securities. [8] Citadel had been fined $700,000 in July 2020 for front running trades placed by customers orders, and in September of that same year, Robinhood itself was questioned by the U.S. Securities and Exchange Commission (SEC) for improperly informing clients of selling stock trades to known high-frequency trading firms.

Previously in December 2020, Robinhood had agreed to pay $65 million to settle charges of repeated misstatements for failure to disclose their receipts of payments from said trading firms. [9] When newly-nominated Treasury Secretary Janet Yellen briefed newly-elected President Joe Biden on this conflict of interest in February 2021, she herself had to acquire an ethics waiver due to having received at least $700,000 in speaker fees from Citadel LLC the year prior. [10] SBF had disclosed this purchase via a filed Schedule 13-D form with the SEC, costing $648.3 billion dollars and giving him 2.8% voting power in their dual-class share structure, under the entity Emergent Fidelity Technologies; a name said to be randomly generated. [11]

Read More: Castles Made of Sand Dollars: SBF, FTX, and other Three Letter Agents

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