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Lawyers for collapsed cryptocurrency exchange FTX said at the firm’s bankruptcy hearing on Tuesday that the company served as founder Sam Bankman-Freed’s personal “fiefdom,” reaching a market capitalization of $40 billion as of January before collapsing in recent weeks prior to its current estimates around $422 million. .

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Those looking under the hood after the collapse, including new FTX CEO John J. Ray III, expressed dismay at the company’s lack of basic accounting and compliance protocols, raising questions about how Bankman-Fried was able to create such a huge, uncontrolled operation that brought him incredible influence and political power.

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So how did Bankman-Fried do it? Ben McMillan, co-founder of IDX Digital Assets, explains this with a simple analogy:

In a hypothetical scenario, imagine that someone owns every home in a 100-home neighborhood and forces one home to be sold for $1 million, and then uses that sale to show they have $100 million of “equity.” But then the owner is forced to sell all the remaining 99 houses, and the houses only sell for $100,000 each, meaning that $90 million of their so-called equity disappears.

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But such equality never existed.

McMillan told FOX Business that this is exactly what Bankman-Fried did with his FTT tokens because he controlled the circulation.

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FTX, according to McMillan, will make sure to exchange a small portion of FTT and other coins like Serum at a good enough dollar price to create “equity” reflected in the balance sheet. Then Bankman-Freed borrowed a lot of money against, in fact, a very large – and very fake – amount of assets.

This, in turn, allowed FTX and its hedge fund Alameda Research to artificially inflate assets.

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“By the way, this is not new or unique to cryptography,” Macmillan explained. “This was done by more than a few hedge funds during the 2008 crash, especially in the area of ​​distressed debt.”

FTX and Alameda have accelerated the scenario by using an inflated amount of assets to pay off very real liabilities, McMillan said. It also appears that Bankman-Fried has been acquiring companies and forcing them to “hold” in FTX so that he can allegedly continue the cycle using client assets.

Alameda Research CEO Caroline Ellison

McMillan says an important signal came when Changpeng Zhao, founder and CEO of major cryptocurrency exchange Binance, announced Nov. 6 that his firm was selling a large number of FTTs on the open market, and Alameda CEO Caroline Ellison quickly responded by offering to buy everything. tokens for $22 each.

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Many now speculate that this amount was the crucial number above which FTT had to trade for FTX and Alameda to remain solvent.

“Once FTT plummeted on November 8,” Macmillan notes, “the house of cards collapsed.”