‘The largest Ponzi scheme in history’

Sen. Sherrod Brown, D-Ohio, and ranking member of the Senate Banking Committee, speaks at a Washington, DC, hearing on July 16, 2019.

Andrew Harer | Bloomberg | Getty Images

The Senate Banking Committee on Wednesday is holding a second day of hearings this week on the downfall of cryptocurrency exchange FTX, examining how the company’s implosion could impact the nascent industry.

On Tuesday, FTX’s new CEO John J. Ray testified in front of the House Financial Services Committee where he accused former executives, including founder and former CEO Sam Bankman-Fried, of embezzling customer funds.

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“This is really just old fashioned embezzlement. This is just taking money from customers and using it for your own purpose. Not sophisticated at all,” Ray said in four hours of blistering testimony before the House Financial Services Committee. “Sophisticated, perhaps in the way they are hiding something, frankly, right in front of their eyes. This is just plain old embarrassment. Old school, old school.”

US prosecutors, securities and commodities regulators say Bankman-Fried used billions of dollars of FTX customer funds for his own personal use, to invest in other ventures, to donate to politicians and PACs, and to repay billions of dollars in loans owed by Alameda Research , the cryptocurrency hedge fund he also founded.

“That’s the major breakdown, here. Funds from FTX.com, which was the exchange for non-US citizens, those funds were used at Alameda to make investments and other disbursements,” Ray told House Financial Services Chairwoman Maxine Waters, D-Calif . Bankman-Fried, who was scheduled to testify, was arrested in the Bahamas on Monday night instead. FTX filed for Chapter 11 bankruptcy last month.

Bankman-Fried was charged by federal prosecutors in the Southern District of New York for a wide variety of crimes including wire fraud, securities fraud and violating campaign finance regulations. The Securities and Exchange Commission separately charged that Bankman-Fried ran nothing less than a “brazen,” years-long fraud at his now-bankrupt crypto exchange FTX “from the start,” which allowed him to divert billions of dollars of customer funds into his own hands to grow his sprawling empire.

“This was not a case of mismanagement or poor oversight, but of intentional fraud, plain and simple,” US Attorney Damian Williams said in a statement unsealing the indictment.

Though Ray and Bankman-Fried won’t be part of the Senate Banking hearing on Wednesday, four cryptocurrency experts will be testifying instead, including Kevin O’Leary, a longtime paid FTX spokesman.

The pre-released opening remarks by the witnesses suggests that the hearing won’t just focus on FTX but how the collapse of the company may impact the industry at large.

“We need to get to the bottom of what happened at FTX, but we can’t let its collapse cause us to abandon the great promise and potential of crypto,” O’Leary says in his opening remarks.

Ben McKenzie Schenkkan, an actor who regularly speaks out on crypto, says in his prepared testimony, that the industry is a “massive speculative bubble.”

“I submit to you today that the entire cryptocurrency industry resembles nothing more than a massive speculative bubble built on a foundation of fraud,” Schenkkan said. “In my opinion, it is the largest Ponzi scheme in history by an order of magnitude.”

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