The fallout from the crypto controversy is widely spread — and it has hit both parties.
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Sam Bankman-Fried in the Bahamas in April. He agreed this week to be extradited to the United States after being charged with offenses including wire and securities fraud and money laundering.
Back in May, months before Sam Bankman-Fried’s cryptocurrency exchange imploded seemingly overnight, he suggested that he might be willing to spend as much as $1 billion in political donations during the 2024 presidential election.
It was an astronomical sum to throw around — Bankman-Fried later called it “a dumb quote on my part” — but at the time, the crypto kingpin was still an object of curiosity rather than ridicule.
Billboards with his frizzy-haired visage popped up in Manhattan; journalists examined his growing political empire and his “schlubby” personal style. Endless articles were written about “effective altruism,” his utilitarian-tinged philanthropic philosophy. At one point, Forbes pegged his net worth as high as $26.5 billion; Fortune ran a cover, cringe-inducing in hindsight, asking, “The Next Warren Buffett?”
It’s hard to quickly sum up the extent of the influence operation Bankman-Fried, 30, and his associates built during his meteoric ascent. My colleagues have described it as “a network of political action committees, nonprofits and consulting firms” that “worked to court politicians, regulators and others in the policy orbit.”
Last week, Bankman-Fried was arrested in the Bahamas, and a federal grand jury indicted him on eight charges that include wire and securities fraud and money laundering, along with conspiracy to commit those offenses. He has agreed to be extradited to the United States as soon as Wednesday, a decision one of his lawyers said defied “the strongest possible legal advice.” Bankman-Fried has denied wrongdoing.
The extraordinary financial scandal has also become a sticky political morass, sucking in dozens of lawmakers and groups. Prosecutors also accused Bankman-Fried last week of defrauding the Federal Election Commission by running what’s known as a straw-donor scheme — making political contributions under someone else’s name.
Bankman-Fried’s contributions, Damian Williams, the U.S. attorney for the Southern District of New York, said last week, “were disguised to look like they were coming from wealthy co-conspirators when in fact the contributions were funded by Alameda Research,” a hedge fund closely tied to Bankman-Fried’s cryptocurrency exchange, FTX, “with stolen customer money.”
FTX, under new management, said on Tuesday that it wanted to recoup that money, and is threatening legal action if the cash is not returned voluntarily. It’s not clear how much is considered stolen, but Bankman-Fried and his associates poured at least $70 million into various campaigns over 18 months.
In 2022, Bankman-Fried donated about $40 million to various candidates and political committees, overwhelmingly to Democrats. Those donations were “mostly for pandemic prevention,” Bankman-Fried has insisted. But a less lofty aim of his influence-peddling, clearly, was to shape federal regulations in his company’s favor.
Before his arrest, Bankman-Fried told Tiffany Fong, a YouTube journalist, that he had also donated about the same amount to Republicans in ways, he suggested, that would not necessarily pop up in federal campaign finance reports.
What to Know About the Collapse of FTX
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What is FTX? FTX is a now bankrupt company that was one of the world’s largest cryptocurrency exchanges. It enabled customers to trade digital currencies for other digital currencies or traditional money; it also had a native cryptocurrency known as FTT. The company, based in the Bahamas, built its business on risky trading options that are not legal in the United States.
Who is Sam Bankman-Fried? He is the 30-year-old founder of FTX and the former chief executive of FTX. Once a golden boy of the crypto industry, he was a major donor to the Democratic Party and known for his commitment to effective altruism, a charitable movement that urges adherents to give away their wealth in efficient and logical ways.
How did FTX’s troubles begin? Last year, Changpeng Zhao, the chief executive of Binance, the world’s largest crypto exchange, sold the stake he held in FTX back to Mr. Bankman-Fried, receiving a number of FTT tokens in exchange. In November, Mr. Zhao said he would sell the tokens and expressed concerns about FTX’s financial stability. The move, which drove down the price of FTT, spooked investors.
What led to FTX's collapse? Mr. Zhao’s announcement drove down the price and spooked investors. Traders rushed to withdraw from FTX, causing the company to have a $8 billion shortfall. Binance, FTX’s main rival, offered a loan to save the company but later pulled out, forcing FTX to file for bankruptcy on Nov. 11.
Why was Mr. Bankman-Fried arrested? FTX’s collapse kicked off investigations by the Justice Department and the Securities and Exchange Commission focused on whether FTX improperly used customer funds to prop up Alameda Research, a crypto trading platform that Mr. Bankman-Fried had helped start. On Dec. 12, Mr. Bankman-Fried was arrested in the Bahamas for lying to investors and committing fraud. The day after, the S.E.C. also filed civil fraud charges.
“All my Republican donations were dark,” Bankman-Fried said. He did it, he explained, because reporters are “all secretly liberal” and would “freak” if he donated to Republicans in his own name.
“You don’t often have someone giving an interview and admitting that,” said Donald Sherman, a lawyer who worked on the F.E.C. complaint on behalf of Citizens for Responsibility and Ethics in Washington, a nonprofit group.
A former FTX colleague, Ryan Salame, gave about $24 million in the midterm elections, mostly to Republican candidates and groups. It’s not clear if that’s what Bankman-Fried was referring to, but his careless comments to Fong prompted an outside group to file a complaint to the F.E.C., which started to show some bipartisan interest in cracking down on straw donors this year.
The F.E.C. can’t sent people to jail, but the Justice Department certainly can: Getting busted for making straw donations worth more than $25,000 can land you in federal prison for up to five years.
If FTX’s cash weren’t politically toxic before, it surely is now. Federal regulations require the return of illegal campaign donations, and The New York Times reported recently that prosecutors were reaching out to the campaigns and committees that took money from Bankman-Fried and his associates to learn more about the nature of those contributions.
For the Democrats who are embarrassed by taking dirty money, perhaps the only blessing of this scandal might be that it’s a bipartisan one.
That might be why, as Michael Schaffer noted in an astute column for Politico written before Bankman-Fried’s indictment, the two parties aren’t firing at each other in Washington. The city’s “polarized political-media ecosystem can’t do much with a potential scandal,” he wrote, “if there’s no partisan advantage to drive it.”
But the FTX scandal has already become a factor in at least one Democratic primary.
ImageRepresentative Jesús García with Mayor Lori Lightfoot of Chicago in July. He is challenging her in next year’s race for mayor. Credit…Ashlee Rezin/Chicago Sun-Times, via Associated Press
In Chicago, Representative Jesús García, who is known as Chuy and is leading some polls in the city’s mayoral race, is under attack by surrogates of Mayor Lori Lightfoot for the fact that one of Bankman-Fried’s groups supported García’s campaign with about $150,000 worth of direct mail. García is a member of the House Financial Services Committee, which oversees the crypto industry, and Lightfoot’s allies have insinuated that his financial ties undercut his claim to be a reformer.
“Congressman García is and always has been a skeptic of cryptocurrencies,” his spokesman responded, adding that García had already redirected a $2,900 donation from Bankman-Fried to charity. As for the direct mail, the campaign said, it was an independent expenditure that was spent on his behalf without his involvement.
That isn’t likely to be where the blast radius of FTX’s implosion ends, however. I chatted with Ken Vogel, an investigative reporter in the Washington bureau of The Times, about the widening scandal. Here is our conversation:
You’ve been covering money in politics for a long time. Have you ever seen anything like this?
This one stands out. I can’t think of another example of a small group of people who so rapidly accrued such a huge amount of cash — legally or otherwise — and then almost immediately started spreading it so widely around the political system in an effort to achieve specific policy goals. Usually, ascendant companies and their executives take a few years to start working Washington in such a concerted way.
As you survey the fallout from Bank-Friedman’s donations, what strikes you as the most surprising thing we’ve learned?
I’m not surprised that the scandal, which is fundamentally about alleged financial fraud, has come to include a significant campaign finance angle.
As questions started percolating about FTX, I began talking to people and reviewing documents outlining its Washington operation. It quickly became apparent that this sudden surge in political and advocacy spending was not necessarily accompanied by the careful attention to byzantine campaign finance rules that you typically see with efforts involving this much money.
Having said that, the more I learn, the more surprised I am by just how blurry the lines were at FTX between corporate affairs, issue advocacy and political spending.
The Aftermath of FTX’s Downfall
The sudden collapse of the crypto exchange has 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 spectacular rise and fall of the man behind FTX.
- How FTX Operated: FTX called itself an exchange. But it was vastly different from stock exchanges, which are highly regulated and barred from engaging in many of the activities that the crypto company pursued.
- Political Donations: Federal prosecutors are seeking information from Democrats and Republicans about donations from Mr. Bankman-Fried and two former FTX executives.
- Ryan Salame: The former FTX executive, who told regulators about wrongdoing at the exchange and was a big Republican donor, has emerged as a central player in the scandal.
A lot of Democrats were no doubt surprised to learn that FTX was also donating to Republicans. Why would a crypto company want to play both sides? It wasn’t just about “pandemic prevention,” was it?
Even if we take Bankman-Fried and his associates at their word that they were deeply concerned about pandemic preparedness, the spending on that issue at times overlapped with spending geared toward creating a favorable regulatory climate for cryptocurrency.
The crypto push was bipartisan because lawmakers and regulators across the political spectrum have an interest in the issue. So the FTX crew worked to cultivate allies in both parties, with Bankman-Fried leading the effort to court Democrats and Ryan Salame, another former FTX executive, leading the effort to court Republicans.
Now that Bankman-Fried has been indicted, there’s a scramble to return his donations. Is there any legitimate reason that groups that took his money would need to wait for legal guidance, or are they really just stalling for time?
Some campaigns and committees, or their lawyers, say they are waiting for the Justice Department to set up or endorse some kind of fund through which restitution could be paid to FTX customers who lost their shirts as a result of the company’s alleged fraud.
While donating money to charity in amounts equivalent to FTX-linked contributions might provide a nice talking point for a campaign or political action committee, it doesn’t necessarily help FTX’s victims.
Another reason some groups might be waiting: They received big checks from FTX executives, but don’t have that much in the bank to return, because they spent most of their cash in the run-up to the midterms. For instance, House Majority PAC, a group close to Speaker Nancy Pelosi, received $6 million from Bankman-Fried, but the group ended last month with less than $500,000 in the bank.
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Source: nytimes.com
