Commentary: Sam Bankman-Fried's 25-year jail sentence is a warning to crypto

PARIS: The sentencing of cryptocurrency wunderkind turned convicted fraudster Sam Bankman-Fried to 25 years in jail along with the forfeiture of more than US$11 billion looks like a fair outcome.

While not as harsh as the request from prosecutors for as much as 50 years, it should stand as a clear deterrent for aspiring fraudsters both in traditional finance and its decentralised offshoots. And given crypto is still in the midst of a much-needed clean-up, that matters.

To recap, the 32-year-old Bankman-Fried was convicted of fraud, conspiracy and several other offences last year after the spectacular collapse of his crypto exchange FTX revealed an US$8 billion hole of missing customer funds under his watch.

The jury wasn’t swayed by the one-time billionaire’s defence that he’d fallen victim to a market downturn, largely because the evidence was so overwhelming and his defense so contradictory. His former lieutenants’ testimony was as damning as his own lack of remorse and history of statements like: “F*** regulators.”

LITTLE SYMPATHY

The hope of Bankman-Fried’s lawyers was that some mitigating factors might help tilt the balance in favour of a sentence of just six and a half years in jail (more like "pharma bro" Martin Shkreli than Ponzi scheme mastermind Bernie Madoff). 

One was his relatively young age and character, portrayed as a “beautiful puzzle” - a smart, well-meaning outcast held back by mental health issues and whose real goal was not self-enrichment but philanthropy. Another was the optimism that the FTX bankruptcy process might repay customers in full, aided by a rebound in crypto prices and the firm’s stake in assets such as artificial intelligence start-up Anthropic. 

Neither of these arguments really made much headway, thankfully. US District Court Judge Lewis A Kaplan made clear that talk of FTX customers being made whole was "misleading" and "speculative", and didn’t negate the losses that Bankman-Fried’s crimes inflicted on his victims (whose stories of financial ruin have been widely publicised). 

The justification that this was doing bad in the pursuit of doing good, or that the crypto mogul was somehow caught up in events beyond his control, received little sympathy. Kaplan said Bankman-Fried had given false testimony, committed witness tampering and had pursued power and influence. And, fundamentally, had shown little remorse for serious crimes.

INDUSTRY YET TO COMPLETE ITS CLEAN-UP

Now, to be sure, the sentence of 25 years fell short of what prosecutors had hoped for when comparing Bankman-Fried to Madoff, who was sentenced to 150 years after his Ponzi scheme collapsed.

And it’s pretty amusing to note that some of the more hawkish voices after the sentencing came from crypto industry representatives, who are determined to erase the memory of FTX and other bad actors from investors’ minds as the industry rebounds to new heights.

It has to be said that Madoff is an outlier, and 25 years is high up in the white-collar rogues’ gallery, and still meets the criteria of serving as a deterrent while also taking other factors into account like age and the nature of the crimes.

And, more importantly, it sends a message to an industry that’s still yet to complete the clean-up it sorely needs. Bankman-Fried’s one-time arch-rival, Binance boss Changpeng “CZ” Zhao, is due to be sentenced on anti-money laundering failures soon.

A civil fraud trial has started over fallen tycoon Do Kwon, who was arrested in Montenegro last year after the collapse of his cryptocurrency two years ago. And Bloomberg News on Thursday (Mar 28) reported the United States and United Kingdom are reviewing more than US$20 billion of crypto transactions that passed through a Russia-based virtual exchange. 

Misconduct happens when the perceived benefits outweigh the costs (and the risk of detection). Bankman-Fried’s sentencing sends a clear warning that aspiring crypto fraudsters should heed.