The collapse of the crypto platform FTX sent shockwaves through the blockchain community during the last few weeks of 2022. Billions of dollars of investor’s money literally disappeared into thin air with little hope for any recourse.
Those of us who have been around the poker industry for more than a decade will clearly remember the Full Tilt Poker scandal where players also thought their money had evaporated one morning in April 2011.
These two cases have a remarkable number of similarities and the lessons that should be learned from both also cover much of the same ground.
The Collapse of Full Tilt Poker and the AftermathOn the morning of April 15, 2011, poker players logged into Full Tilt Poker and saw that the site domain had been claimed by the US Department of Justice.
While concerning, there was little anxiety to begin with as most users assumed that what was one of the biggest sites would have player’s funds and simply return them when the moment was right. It soon became clear that this case wasn’t going to be straightforward as U.S. attorney Preet Bharara made it his personal crusade to go after the company and its directors.
For those not familiar with this case, following the signing of the Unlawful Internet Gambling Enforcement Act of 2006, most sites took the precautionary step of barring U.S.-based customers but PokerStars, Full Tilt Poker and Ultimate Bet did not, assuming they were untouchable.
PokerStars has always been clear about its policy of holding player’s funds separately from company accounts but nobody really asked questions about the other major sites. Now we were about to get a hard lesson.
In the months following the closure of Full Tilt Poker, we learned that the firm did not have enough liquidity to return all of the player’s balances after directors siphoned off tens of millions of dollars into their own pockets.
The Daily Mail reported the following five months later: “An online poker company run by famed poker champions was a giant Ponzi scheme, federal investigators claimed today. Department of Justice officials said Full Tilt Poker took hundreds of millions of dollars from members' accounts to pay out hefty salaries to executives. Among the board members, world champion players, Howard Lederer and Christopher Ferguson, are accused of 'picking the pockets of loyal customers'. Over the last four years, the company allegedly used $444million of player funds to pay board members and other owners.”
Preet Bharara said: “Full Tilt insiders lined their own pockets with funds picked from the pockets of their most loyal customers while blithely lying to both players and the public alike about the safety and security of the money deposited with the company.”
In March, 2011, the month before the site’s closure, the company only had $60 million of a total balance sheet for player’s funds showing $390 million.
One lesson for poker players here was that sites which segregate players' funds suddenly looked a more attractive option, but there are others which also apply to financial investors such as FTX users.
A Lax Approach to Following the LawWhen the Black Friday calamity hit, online poker was barely more than a decade old. We didn’t yet understand what could possibly go wrong. Yet with hindsight, it should have been easy to spot that a company we all knew was breaking the law might not be following responsible business practices in other areas.
Why did so many players trust Full Tilt Poker? Possibly because the poker boom had kept the game so profitable and people just didn’t want to believe that it would ever change.
For FTX, we now know that the business was run by people who were not remotely experienced enough and there are now calls for the prosecution of Sam Bankman-Fried (SBF), FTX’s founder, for what is being touted as irresponsible business practices.
As well as starting up FTX, SBF also owned a hedge fund called Alameda Research which held a large number of FTT crypto coins, the native coin for the FTX platform. FTX then used client’s funds for other investments assuming that the FTT at Almeda was good collateral until the coin collapsed leaving FTX with a huge liability it is unable to pay.
Where the law stands on this is unclear, but it is a fact that SBF was at the helm of both companies and acted irresponsibly. FTX’s terms of service even says that cryptocurrency present in the customer’s accounts is “not the property of FTX, and shall not be used in FTX trading,” adding that it will never treat customer funds as belonging to FTX.
Eleven years ago, the poker community learned that no matter how big a company is, if it runs in a fly-by-night fashion a calamity is likely to happen. The cryptocurrency sector is now reeling and learning the same lesson.
Don’t Risk More than You Can Afford to LoseGamblers and investors are often warned that they should never risk more than they can lose. This type of risk also applies to holding assets in a single place. With the U.S.-based players being subject to stringent tax regulations, many of those players chose to keep their entire bankrolls on a single site, many of them choosing Full Tilt Poker. Many crypto investors also stuck with FTX because it seemed like the easy option.
It’s not good practice to store funds like this in both cases, but in the case of FTX users, many will now be kicking themselves for not holding their own blockchain keys and having the responsibility themselves given the chance to avoid this calamity.
Risk can also be reduced in the online poker world by choosing properly licensed sites over offshore ones. In the financial world, crypto is still a burgeoning industry that is known to be volatile but using platforms that are licensed by a financial conduct body is a sensible step, even at the cost of what might be a more attractive fee structure.
When the Law Comes KnockingAt the time of writing, Sam Bankman-Fried has just been arrested at his Bahamas home following an extradition request by the United States government. The 30-year-old American is facing a long list of charges including conspiracy to commit wire fraud and securities fraud and standalone charges of securities fraud, wire fraud and money laundering.
Social media is now awash with talk of a prison sentence of many decades, but will it be so simple?
Full Tilt Poker CEO Ray Bitar gave a federal judge a sob story of a terminal heart condition and $40,000,000 back which allowed him to stay out of prison. Miraculously, this health issue sorted itself out and Bitar is now enjoying life as a married man.
Howard Lederer and Chris Ferguson paid a $1.25 million and $2.35 million settlement respectively with the Department of Justice and also never spent a single day behind bars.