Was Sam Bankman-Fried Proven Right About FTX’s Solvency?

In the uncommon realm of bankruptcy proceedings, where creditors often settle for mere pennies, this unexpected outcome leaves some pondering: Could Sam Bankman-Fried have been correct all along?

As an analyst, I’d like to highlight that the perspectives shared in this article are my own and may not align with those of CoinDesk or its related entities. This is a selection from The Node, our daily digest of essential crypto news at CoinDesk which you can sign up for here to receive in full.

In his latest “Money Stuff” newsletter, Bloomberg’s Matt Levine directly addressed the question of FTX’s financial status during SBF’s sentencing for a massive financial fraud: “Was FTX both illiquid and solvent?” Essentially, this means that SBF had long maintained that FTX lacked sufficient liquid assets to meet its obligations but was still financially sound overall.

See also: Could Sam Bankman-Fried’s Saga Happen Without Crypto?

Leading up to FTX’s bankruptcy on November 11, 2022, SBF worked tirelessly to fill a massive financial gap in his company by seeking investments from various sources. These reportedly ranged from Silicon Valley venture capitalists and Saudi investors, all the way to his former rival, Changpeng Zhao, the ex-CEO of Binance. However, after reviewing FTX’s finances, Zhao called off their handshake buyout deal, adding fuel to the ongoing exchange crisis.

He acknowledged the urgent need for additional funds due to two reasons. Firstly, Sam Bankman-Fried (SBF) and his close associates had come to realize that their exchange lacked sufficient liquid assets to cover all customer withdrawal requests, with reports suggesting only $900 million was available. Secondly, there was a belief, albeit debatable, that there was ample capital in total, it was merely illiquid.

“FTX is in good shape, and its assets are sound,” was Sam Bankman-Fried’s response on November 7, when confronted by FTX co-founder Gary Wang about the exchange’s $8 billion deficit as customers started withdrawing funds following Changpeng Zhao’s announcement of selling Binance’s FTT holdings.

During the sentencing hearing, Judge Lewis Kaplan expressed astonishment, remarking, “I’ve never seen a performance like this in my 30-year career,” as he addressed Sam Bankman-Fried’s (SBF) unwillingness to accept responsibility for his actions and his belief that he could have saved FTX if he hadn’t filed for bankruptcy.

While someone’s belief may be strong, it doesn’t automatically make a statement true, no matter how many Substack articles they publish or spreadsheets they generate. As for FTX, John J. Ray III, the current CEO managing its bankruptcy proceedings, has reported that over the past 17 months, approximately $14.5 billion to $16.3 billion in assets have been recovered from sources outside of the exchange at the time of its collapse.

It’s unlikely that publicly accessible documents, such as FTX’s financial statements prior to its collapse, will be sufficient to confirm this theory completely. However, the recovery’s significant progress can primarily be attributed to the surging value of crypto assets. Although JJR’s legal team has reportedly worked diligently to recoup funds from numerous private entities, it is unlikely that their efforts have amassed hundreds of billions of dollars.

See also: The Downfall of FTX: The Crypto Industry Reacts

As an analyst, I would put it this way: One of SBF’s successful wagers in the AI sector, Anthropic, brought FTX a substantial profit of $884 million. This represented a significant windfall for the company, marking one of its largest non-crypto sales. Additionally, FTX sold approximately 38 Bahamian properties for roughly $199 million, and managed to recoup nearly $2.6 billion in cash from various sources.

As a crypto investor, I believe that FTX’s collapse last year didn’t necessarily mean they were insolvent at the time. It seems to me that they could have repaid the $8 billion in missing customer funds if only their CEO Sam Bankman-Fried (SBF) had been able to sell off all of FTX’s assets, such as property, equity investments, and crypto quickly without causing further price instability. However, due to the unexpected bull run that followed, FTX became solvent.

Customers are being fully compensated, not in the form of cryptocurrencies with insufficient supply to cover all claims, but rather in the equivalent dollar amounts based on November 2022 prices. The timely market recovery has enabled the company to cover the entire debt using this method.

SBF lacked the luxury of observing a crypto market recovery before speaking, and his contention that FTX solely faced an illiquidity issue is clearly unfounded.