FTX · alameda · SBF
entry · 2017–2024 · status: archived · 25-year sentence
summary
FTX was a cryptocurrency exchange founded in 2019 by Sam Bankman-Fried (SBF). At its 2021 peak it was valued at $32 billion, regarded as the "cleanest" exchange in the industry, and held a customer-deposit base in the tens of billions. Alameda Research was its sister hedge fund. On November 11, 2022, FTX, Alameda, and 100+ affiliated entities filed for Chapter 11 bankruptcy. New CEO John J. Ray III — the same restructuring lawyer who had handled Enron — described FTX in his initial declaration as having the worst "failure of corporate controls" he had ever seen, including over Enron. SBF was extradited from the Bahamas, tried in 2023, convicted on seven federal counts in November 2023, and sentenced to 25 years in March 2024.
the architecture
- The "back door." FTX's accounting code contained a special privilege flag — known internally as the "back door" — that allowed Alameda to maintain a negative balance with FTX without triggering FTX's normal liquidation engine. Customer funds on FTX were swept into Alameda accounts and used for proprietary trading and venture investments by SBF and his inner circle. The flag was custom-coded for Alameda only; no other counterparty had it.
- $10B+ moved. Court filings and post-collapse forensic accounting showed more than $10 billion of customer deposits had been transferred from FTX to Alameda over the firm's lifetime.
- The "FTT loop." Alameda's balance sheet was inflated by holdings of FTX's own exchange token (FTT). When CoinDesk published the leaked Alameda balance sheet on November 2, 2022, the FTT-as-collateral structure was visible. Binance CEO Changpeng Zhao tweeted he would liquidate his FTT position. The bank run started.
- The collapse window. FTX went from "industry leader" to bankruptcy in 10 days (November 2 to November 11, 2022).
- The hole. An $8 billion shortfall between customer claims and FTX's available assets. ~$1.7 billion of customer funds remained unaccounted for in initial filings (later substantially recovered through bankruptcy proceedings — but not the full balance, and not at the time customers needed it).
who else fell that quarter
- Three Arrows Capital (3AC): $10B fund, liquidated June 2022 after concentrated bets on Terra/LUNA went to zero.
- Celsius Network: Filed Chapter 11 July 2022. CEO Alex Mashinsky later convicted (2024) of fraud.
- Voyager Digital: Filed Chapter 11 July 2022.
- BlockFi: Filed Chapter 11 November 2022, six days after FTX.
- Genesis (DCG): Filed Chapter 11 January 2023.
the sentence
SBF was tried in U.S. District Court for the Southern District of New York (Judge Lewis Kaplan presiding). Convicted November 2, 2023 on seven counts: wire fraud, conspiracy to commit wire fraud, conspiracy to commit securities fraud, conspiracy to commit commodities fraud, conspiracy to commit money laundering. Sentencing on March 28, 2024: 25 years in federal prison and ~$11 billion in forfeiture. Co-conspirators (Caroline Ellison, Gary Wang, Nishad Singh) cooperated and received reduced sentences.
the recovery
Through 2024, the FTX bankruptcy estate recovered substantial assets — partly through the favorable trajectory of crypto prices during the case, partly through clawbacks from venture investments. Most customers will receive distributions roughly equal to the dollar value of their account at the petition date (November 11, 2022). Customers who held volatile crypto and did not get to sell at peak — the practical reality for most — will not be made whole in the relevant economic sense.
why this matters to PRIOR
FTX is a clean case study in the EA-coded "trustworthy" exchange archetype. SBF was the most-platformed crypto figure of 2021–2022. He testified to Congress, met with the SEC, donated heavily to both parties, and was framed by mainstream media as the "responsible" face of the industry. He had also written custom code to siphon customer funds. The "responsible" framing was load-bearing for the fraud — without it, the regulatory deference and the institutional trust would not have been available. The "cleanest exchange" had bespoke software to hide the hole. That is the lesson PRIOR keeps next to it.
"the cleanest exchange had custom software to hide the hole."