The trial of Sam Bankman-Fried, founder of failed cryptocurrency exchange FTX, is underway in New York. Some are calling his crimes one of the biggest financial frauds in decades. The 31-year-old former crypto mogul is charged with orchestrating a conspiracy to use $10 billion that FTX’s customers had entrusted to him for venture capital investments, political donations and luxury real estate purchases.
While his crime may seem complicated because bitcoin is involved, Virginia Tech criminology expert Thomas Dearden says it really comes down to traditional embezzlement. “While we do not know what he did with all the money yet, the accusations suggest he siphoned money from investors and used some of the holdings from investors as collateral for additional loans,” says Dearden.
In this case Bankman-Fried is accused of using a special cryptocurrency created by FTX, called FTT or FTX Token, to store investor money. However, Dearden says, FTT was easily manipulated. “The bulk of the currency was stored with Alameda Research, the crypto hedge fund with strong ties to FTX,” explains Dearden. “In essence, the accusation is that investor money was transferred to Alameda Research using FTT and then personally used by Sam Bankman-Fried and close associates.”
The future of crypto currency is still uncertain. Following the bankruptcy of FTX, the entire crypto market lost value. But, Dearden says the markets have generally recovered since then. “Large cryptocurrencies, such as bitcoin, are worth more today than they were just prior to FTX's bankruptcy.”
This case shines a light on concerns of criminal activity in cryptocurrency adoption and investment. A recent national survey conducted and being reviewed by Virginia Tech professors Katalin Parti, James Hawdon, and Dearden found that the most common reason people choose not to invest in cryptocurrency is due to the belief that there were too many scams or frauds. “Structurally, private exchanges such as FTX are not regulated as much as public companies. There is no doubt that scams and frauds are problematic in cryptocurrency,” says Deaden. “To address this, I would expect to see a future focus on regulation and transparency in an attempt to protect investors and reduce the public perception that cryptocurrency is risky due to scams and fraud.”
About Dearden
Thomas Dearden is an assistant professor of sociology in the College of Liberal Arts and Human Sciences at Virginia Tech. He specializes in research technology and crime, including cyber and white-collar crime. Dearden has conducted research and statistical analysis for organizations across the globe including the Polynesian Cultural Center in Hawaii, Food for Life Vrindavan in Uttar Pradesh, India, and Pay Tel in North Carolina.
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