I’ve watched some interviews with Sam Bankman-Fried (SBF), formerly of FTX, now bankrupt. SBF apologizes and says he’s ultimately responsible, but he hasn’t quite described what he’s sorry for in any meaningful detail. He still seems to think he’s the good guy. There are a few reasons he might think that, but he’s ignoring the larger picture, that FTX and Alameda Research likely pumped, lied, and insider traded more than FTX rescued, and the company attempted to save an industry probably not worth salvaging.
Before anyone asked SBF for a balance sheet, FTX bailed out BlockFi. Blockfi was a young digital asset lender that managed to score hundreds of millions of dollars in investments from venture capitalists, including Bain Capital (one of the founders being Mitt Romney) and Valar Ventures (founding partner Peter Thiel). BlockFi was an exchange that promised high-interest rates by making risky loans (including loans to Alameda Research — SBF’s hedge fund closely connected to FTX). BlockFi appears to have had few risk management standards and took advantage of loose regulation and deceptively high speculative prices.
If you’ve read any of my recent posts, you know how I feel about VC companies that fail to undertake due diligence. It seems that venture capitalists have so much money now that they’ll throw around large sums at everything and anything. It just figures that destructive VC was all over crypto, not despite but because of its sheer nothingness.
In addition to taking on risk for which it had no means of covering, Blockfi had an oopsie in 2021 when it accidentally paid users over $20 million on the immutable blockchain, proving the immutable feature of bitcoin and blockchain is a bug. To prop up Blockfi, SBF gave it an extensive line of credit and an odd little option allowing FTX to purchase it. Now that BlockFi is in bankruptcy, it blames the FTX death spiral, but it was in trouble before that. BlockFi, and the entire crypto industry, were further surprised when the SEC charged the company with failing to register under the Investment Company Act of 1940 and for false and misleading statements on its website. Surprise! After all the industry blather about being free from government interference, crypto offerings and sales are regulated.
SBF also bailed out Voyager Digital. FTX promised to purchase Voyager’s assets and help pay back investors after it went bankrupt following the implosion of Terra and Luna, which followed the downfall of Three Arrows Capital. If you’re sensing a pattern, you are right. They’re all connected. Some are directly connected through loans or purchases or exchanging each other’s coins. Others are connected because crypto is entirely speculative, so they all rely on each other to pump up the price.
By righting some of the dominos before they pushed over the rest, SBF started to think of himself as the white knight who kept the crypto industry going for as long as possible. In July 2022, Business Insider referred to SBF as crypto’s central banker. BI quoted SBF saying he felt obligated to stem contagion. Contagion is an economic term for the spread of financial crises within an industry or to the regional economic or larger national or international economies.
But SBF was worried about more than generalized contagion. It suited his own interests to prop up the industry because liquidity and rising prices helped hide other problems at FTX and in crypto generally. CZ over at Binance was doing the same thing, rescuing other crypto companies and attempting to rescue FTX before he became aware of all the FTX accounting regularities. Then, CZ and SBF got into a fight over Alameda’s possible role in Voyager’s bankruptcy and SBF’s attempts at using his campaign donation clout with both parties to direct crypto regulation. Then, the CZ/SBF Twitter war escalated, breaking down the crypto industry camaraderie that kept all of it afloat.
SBF and CZ didn’t come to crypto’s rescue to be good guys. All these crypto exchanges, Bitcoin and proprietary coin sellers, and lenders depend on each other because there is no product in crypto other than the speculative buying and selling of crypto itself among all the players. Then, Binance decided to and then not to bail out FTX. FTX was too much of a mess for CZ and Binance. Ah! Someone did some due diligence, even if way after it might have helped the industry, or they already knew. CZ likely thought the Twitter war and his subsequent public beating of FTX gave him some advantage, and it probably did. He got rid of the competition, and he got to take the white hat off SBF’s head.
SBF’s legal problem is that, despite his superhero act, keeping the industry afloat as prices fell and poor risk management practices surfaced industry-wide, there was no there there at FTX either. In its bankruptcy, FTX has been accused of having no risk management, accounting standards, accountants, or audited or even complete financials. It has been accused of using deposited funds that it held as a fiduciary and were supposed to be in segregated accounts to make trades and prop up its proprietary token, FTT. It’s likely to be invested by the feds for plain old fraud, and it’s being sued in various lawsuits and class action lawsuits for making illegal offerings of securities, deceptive and unfair business practices, using customer funds to make personal investments, and misrepresenting the relationships among its various companies.
Related SBF company, Alameda Research, has been accused of insider trading or something “akin” to insider trading, although I see no such lawsuit or enforcement action pending.
With all the legal problems, SBF went on a media tour, making many comments that can and will be used against him in civil and criminal cases. Alameda Research’s Caroline Ellison has been flippant about her potential involvement, calling it wire fraud long before the crash.
SBF and all the other crypto personalities played a risky game in a surprisingly small pool of major players, overly funded by obscenely wealthy, hands-off VCs and naive retail investment gamblers pumped up by glossy, celebrity-filled television ads, all of them ignoring securities and trade regulations that were always applied even if the industry insisted it was free from pesky government control. Why? Maybe they do it because young wannabe entrepreneurs have little choice but to take big risks and are encouraged to fake it until they make it. They’re enticed or pushed to be media darlings, wunderkinds, or influencers for scammy products or fans-only pornography stars, and if they don’t, their choices are extremely limited. Fake it until you make it, or stand in line for a lonely cubicle.
Most traditional companies hire infrequently and for low-level jobs compared to the education demanded. These typical employers do little training, never talk about standards or ethics, pay little, rarely promote, rarely give out raises, haze people, short-term manage or completely fail to manage, and generally care about the bottom line exclusively. These young business people, often with large amounts of student debt, have a choice between being the victim or the perpetrator, and being the perpetrator is well-funded by VC, no questions asked. So it’s not great, but understandable why we have characters like Elizabeth Holmes, SBF, Caroline Ellison, and many, many more who chose to go big and risk bust and prison.
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