The Texas agency that helped uncover the FTX empire of “King of Crypto” Sam Bankman-Fried

Sometimes you don’t need a subpoena or search warrant to uncover a multi-billion dollar loss in the cryptocurrency world. All you need is a cell phone.

Look what Joseph Rotunda did. He is the Enforcement Director of the Texas State Securities Board, which licenses qualified financial advisors to sell securities in Texas.

Rotunda wanted to see if FTX, a top crypto exchange, was breaking the law by selling it in the US

Last month he downloaded the free FTX trading app, provided his Austin address, created an FTX account and linked it to his bank account. He used the app to transfer $50 from his bank to his new FTX account. He also transferred a small amount of crypto.

Despite legal bans in the US, Rotunda’s account yielded an 8% return.

It is against Texas law to sell unregistered securities in the form of high-yield accounts to US residents

The company issued a statement that it believes it is operating legally as it has an active application for a license pending.

Rotunda filed its statement as part of related bankruptcy proceedings.

“The Enforcement Department is now investigating FTX Trading, FTX US and their principals, including Sam Bankman-Fried,” Rotunda said in the filing.

What impact this had on the crypto marketplace cannot be measured. But almost a month later, FTX crashed, turning the crypto world upside down.

How did it happen?

Rotunda’s cell phone experiment was a small part of FTX’s collapse, but it was a canary-in-the-coal-mine moment. The announcement attracted a lot of press attention. It is possible that more people would have paid attention at the Texas warning sign last month, they may have considered withdrawing their money on the company earlier than this month.

The main reason for the crash is a clash of crypto kings. FTX leader Sam Bankman-Fried, dubbed SBF, thought he could get a bailout from Binance leader Changpeng Zhao, known as CZ. Binance is the world’s largest crypto exchange. It was a battle of titans, SBF versus CZ.

As CZ exited, he tweeted, “Our industry is in its infancy and every time a project fails publicly, it hurts every user and every platform.”

Withdrawals at FTX came so hard and fast that the company couldn’t cover them. It was like the scene in It’s a beautiful life where everyone wants their money from Bailey Savings & Loan.

How did it happen? The short answer is: SBF created a cryptocurrency called FTT, which is part of Alameda Research. He ran both companies. The pairing of the sister companies created a conflict of interest that led to the meltdown.

The Wall Street Journal reported that FTX lent more than half of its clients’ money to Alameda to make up a $10 billion shortfall.

When investors called for their money, it wasn’t there.

The FTX trading app
The FTX trading app will still appear in the Apple App Store, but will no longer be downloaded now that the company is closed.(Screenshot by Dave Lieber)
Joe Rotunda, Executive Director of Enforcement, Texas State Securities Board.
Joe Rotunda, Executive Director of Enforcement, Texas State Securities Board.(via Twitter)

FTX, which stands for Futures Exchange, crashed and burned into bankruptcy. The company has been described as the second largest exchange in the world, which, like Binance, means you can use it to buy, sell or store cryptocurrencies.

In the bankruptcy papers, FTX did not list its assets, liabilities, or creditors.

King of Crypto?

This is not any Crypto company is doing badly. FTX is or was the crypto company with a golden reputation. It was created and run by the rock star of the crypto world – SBF. But what a strange cat this boy is.

The 30-year-old baby-faced, shaggy-haired crypto billionaire is a US citizen operating out of a resort penthouse in the Bahamas.

While others wore suits and ties, he wore baggy shorts and a T-shirt.

FTX's Sam Bankman-Fried, a crypto saga like no other.
FTX’s Sam Bankman-Fried, a crypto saga like no other.(Photo by SAUL LOEB/AFP via Getty Images)

During business meetings, other participants could hear the constant clicking of a computer mouse. Turns out, SBF liked playing the League of Legends game whenever he could, even during high-level business meetings.

Described as a genius boy, wizard and child prodigy, he quickly bought his way into the “in” crowd.

He donated millions to Democratic candidates this year, including about $1 million for losing gubernatorial candidate Beto O’Rourke’s campaign.

He bought naming rights so the Miami Heat basketball team now plays at FTX Arena.

The FTX Arena, where the Miami Heat basketball team plays.  FTX crashed and filed for bankruptcy...
The FTX Arena, where the Miami Heat basketball team plays. FTX crashed and filed for bankruptcy, hitting the crypto world with its biggest scandal.(Marta Lavandier / ASSOCIATED PRESS)

He brought former President Bill Clinton and former British Prime Minister Tony Blair to a crypto conference he hosted in the Bahamas. He sponsored a Formula 1 racing car. And Major League Baseball umpires wore an FTX patch on their uniforms during games.

Major League Baseball umpires wore the FTX logo on their game uniforms during the 2022 season.
Major League Baseball umpires wore the FTX logo on their game uniforms during the 2022 season. FTX failed and filed for bankruptcy.(Bruce Kluckhohn / ASSOCIATED PRESS)

FTX commercials included “Seinfeld” creator Larry David and superstar athletes Tom Brady, Shaquille O’Neal, Stephen Curry and Naomi Osaka.

SBF has made so much money so quickly that its downfall is Shakespearean in less than a week. He quit his company and lost much of his personal wealth worth billions.

There are many stumbles and falls in the world of finance, but few happen so quickly and hurt so many.

Details are not yet known to us

SBF has not been accused of any wrongdoing. The investigation is being conducted by the US Attorney’s Office in New York and the Securities Exchange Commission.

This is probably one of the best financial stories of the year. FTX had a stellar reputation that made high profile investors feel comfortable investing and storing crypto. SBF was reputable and trustworthy. For example, he has been the crypto go-to for lobbying Congress and testifying in committee hearings for stricter regulations.

Much to the dismay of his competitors, he negotiated cryptocurrency rules with the government. CZ in particular felt left out and disagreed with SBF’s regulatory strategy, according to various reports.

How much has SBF lost from its fortune, which was listed by Forbes at $24 billion not too long ago? We do not know it. How much was FTX worth? We do not know yet. How many investors have lost money? The same thing. Much of this should have been included in the bankruptcy records.

Too much power?

There are some ironies here.

The first is that the crypto world is meant to be decentralized, without a central leader. If that’s the case, then how did SBF accumulate so much power that it was able to crash the market?

Second, remember the FTX Super Bowl commercial where Larry David poofed inventions like the wheel, a toilet and electric lights? He was wrong on all of them, of course.

But when he was shown FTX, he correctly (although not yet at this point) said, “Er, I don’t think so. And I’m never wrong about this stuff. Never.” (David is one of several celebrities who have been sued in a class-action lawsuit for supporting FTX.)

As for Rotunda and his cell phone experiment, his Texas office was backed by similar securities agencies in Kentucky and Alabama.

In a released statement, he said, “We want Texans to have the opportunity to invest in where they want to invest. We want to make sure they are protected and that is why we are trying to get companies to comply. The whole goal is to protect Texas.”

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