Lessons of FTX and the SBF trial

by | Oct 2, 2023 | Banks, Blog Articles, CBDCs, Crypto, Finance

Sam Bankman-Fried, commonly known as SBF, goes on trial later this week for his role as founder and CEO in the collapse of crypto exchange FTX, in what prosecutors allege was a $40 billion fraud. Some sympathetic observers, such as Michael Lewis, the author of The Big Short and Liar’s Poker, and now biographer of SBF, paint the founder as a more-or-less innocent victim of a bank run, and perhaps even a misunderstood genius. This is too generous.

Geniuses imagine, tinker, hack, and create. Their experiments and inventions lead to innovation. Innovations attract entrepreneurs with know-how to commercially develop them. Entrepreneurs in turn attract the capital needed to build and develop new products and, occasionally, entire new industries. The prospect of abundant capital and imagined high returns inevitably attracts the promoters, scam artists, and frauds that parasitically attach themselves to every wave of technological innovation.

The lesson of the downfall of FTX and its founder is just this. FTX is not a crypto story. It is a financial crimes story. SBF and his enablers perpetuated a gigantic fraud. FTX counts as one of the largest financial frauds on record, alongside now notorious names like Bernie Madoff, Enron, and WorldCom.

Many regulators and legislators have pointed to FTX as evidence of why the crypto industry should be completely shut down or at a minimum heavily regulated. Yet what happed at FTX tells us no more about the intrinsic virtues or vices of blockchain technology and the practical uses of cryptocurrencies such as Bitcoin (BTC) or Ethereum (ETH) than these other infamous frauds tell us about the inherent value of the energy, telecommunications, or asset management industries.

Every major advance in technology has brought with it frauds and the con artists who perpetrate them. With the advent of railroads came an investment mania and a market bubble. Hundreds of companies with railroad in their name were formed and raised millions on Wall Street without ever building an engine or laying a single yard of track. In the 1920s, it was the radio and automobile industries that led to a bubble on Wall Street and hundreds of scams alongside. These included that of Charles Ponzi, from whom we get the term Ponzi scheme, where new money bails out old money until the whole pyramid collapses under its own weight. In the 1990s, the internet similarly attracted the unscrupulous alongside the sincere entrepreneurs and dedicated innovators of that era.

So far, application of the underlying use cases for crypto have been modest and largely limited to the tech community. Consumer adoption has been limited to date by overly technical requirements of use, just as PC utilization was limited until Apple came along with its friendly Mac and graphical user interface. But crypto adoption has also been constrained, especially in the U.S., by the regulatory onslaught that has only intensified following the FTX debacle. In a hostile environment, crypto is moving offshore to more welcoming jurisdictions.

Whether intentionally (BTC) or unintentionally (ETH), crypto is now competing against the dollar and other fiat currency as a form of money. Money serves as both a medium of exchange and store of value (and also as a unit of account, but never mind). As a medium of exchange, consumer adoption of crypto has been limited, but much effort is being put in by the industry to change this. As a store of value, things aren’t yet working as needed. This is because to be a good store of value, money needs to be a stable store of value. While volatility is much reduced in 2023 from previous years, crypto lacks the price stability that signals good money.

Crypto has potential to provide an alternative to the surveillance state and use of CBDCs as a tool of government control. Non-government cryptocurrencies such as Bitcoin and Ethereum are private, decentralized, stateless, trustless, and bankless, requiring no intermediary or issuing authority. And, if crypto ever becomes effective as a money alternative to fiat currency, it may help save individuals from the monetary debasement and value destruction that out-of-control deficit spending and too much debt will eventually bring to the U.S. dollar. It is, however, these very features and principles that makes crypto a threat to governments and their regulators.

I believe in and support crypto ideals. I want crypto to win long-term. I fear that regulators will prevent this, but only time will tell.

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