Inside the courtroom: Why 'fiat@' will be key to the SBF trial

Journalists, crypto investors, curious citizens and even Martin Shkreli showed up to the lower Manhattan courtroom on Wednesday to hear opening arguments in a trial that will concern a question asked all too often in crypto: Is Sam Bankman-Fried merely a failure, or was his aim to commit fraud from the very beginning? 

The answer to that question will likely hinge on a bank account central to the narrative from both sides. Before FTX had its own bank account, customers would wire funds to an account held by sister trading firm Alameda Research at Silvergate Bank. While the money stayed in Alameda Research’s account, the resulting debit was tracked internally in FTX's database in an accounting entry called "fiat@." 

Over time, the balance in fiat@ went to -$8 billion, reflecting an $8 billion debt owed by Alameda to FTX, according to the testimony of FTX senior developer Adam Yedidia on Tuesday, who coded the fiat@ system. Furthermore, due to a bug in the system introduced by Yedidia, the fiat@ entry at the time the bug was fixed mistakenly showed a $16 billion debt Alameda owed to FTX. Though the extra $8 billion was merely a side effect of the faulty code, the existence of the bug begs an important question: Who in Sam Bankman-Fried’s inner circle saw that enormous “-$16 billion” figure, and when?

Two views on fiat@

In the prosecution's telling, Sam Bankman-Fried's empire was "built on lies," engineered to steal "billions of dollars from thousands of victims." Fiat@, as Assistant U.S. Attorney Thane Rehn argued, was one of the core mechanisms for the fraud, as it represented FTX's victims "sending the money right into the defendant’s pocket." Then, Bankman-Fried spent those "billions of dollars that he took…without their consent or approval" on real estate, political donations, nonprofit work, or otherwise "as he pleased." After the bank run, "all that was left in FTX was what amounted to an IOU from Alameda," Rehn stated, again seemingly referencing the fiat@ account. 

The defense begged to differ, with Bankman-Fried attorney Mark Cohen arguing in his opening statement that the government's framing of both the defendant and fiat@ were inconsistent with the evidence. In Cohen's telling, Bankman-Fried always acted in "good faith" and made "reasonable" decisions for his businesses which, like many chaotic startups, resembled employees "building the plane while flying in it." 

With a clever reframing, Cohen was able to integrate fiat@ into his narrative as well. Rather than describing fiat@ as a debt Alameda owed to FTX, Cohen argued that fiat@ represented a loan from FTX to Alameda, one that Bankman-Fried "reasonably believed" he was free to make, given Alameda was well-collateralized at the time. 

As crypto prices began to slide in the summer of 2022, several of Alameda’s loans were recalled, which Cohen stated Bankman-Fried paid in full on time. "How could they be victims of fraud if they were paid back this way?" Cohen wondered aloud. Yet, the fiat@ liability remained, possibly because FTX didn't have a Chief Risk Officer, as Cohen also stated. 

Cohen admitted that fiat@ should've been dealt with but hadn't by the time the FTX "plane" was "about to fly into the perfect storm" — a series of market crashes that wiped out Alameda’s asset value, leaving it unable to repay the fiat@ liability to customers. Cohen also stated that Alameda Research CEO Caroline Ellison failed to prepare for those crashes by hedging, despite Bankman-Fried's suggestion that she do so.

Will the jury understand?

Cohen's complex rebuttal to the government's simple narrative had mixed results among the observers in the courtroom. One observer who works in communications for a crypto firm said the prosecution's opening statement was "very easy to understand for a non-crypto audience" but that Cohen introduced "more complexity I wasn’t aware of."

Another observer, who works in tech but not crypto, said she thought the government's narrative held up even after the defense's opening statement.

Bankman-Fried himself didn't appear to pay rapt attention to the opening statements, instead continuing to review documents and type on his laptop, as he has for most of his time in the courtroom.

And what was Martin Shkreli doing in the courtroom? 

Today, following jury selection, members of the public were allowed in the courtroom for the first time. Bankman-Fried's parents, Joseph Bankman and Barbara Fried, were present. The backstory behind how the well-connected couple may have played a role in their son's meteoric rise is a point of lingering interest.

Martin Shkreli, the disgraced former pharmaceutical executive who was sentenced to seven years in prison for securities fraud, was seated in an overflow room. It wasn't immediately clear why he was there, but he has expressed interest in the case. 

"It's like the OJ case for startups, finance, VC, crypto," he wrote on X. "There are those who can look away from a train crash. This crash interests me and it will be over shortly."

He declined to comment to The Block when asked about the opening statements. We'll be back in the courthouse tomorrow for continuing coverage of the trial. 

Updated on October 6, 12:10 am to include details from Adam Yedidia's testimony.