Scam Bankrun-Fraud

It’s been an interesting month in what was already an interesting year for cryptocurrency — and its even goofier, dumber cousin the NFT — and the collapse of FTX was the cherry on top of the unregulated, speculative cupcake.

It wasn’t even a year ago, that the Super Bowl was riddled with ads for all sorts of cryptocurrency products, including NFTs. Everyone said this smacked of a Petz.com situation, referring to the collapse of the dot-com bubble at the turn of the millennium. The logic being that an expensive Super Bowl ad was the last gasp of a business concept stuck in a bubble, desperately looking for new customers.

This turned out to be correct, except disaster struck even sooner for the money 2.0 / web 3.0 crowd. Starting with a plunge in interest in NFTs — basically dropping off a cliff at the end of February and never recovering — the collapse of crypto currencies and even whole exchanges soon followed. It turns out fortune did not favour the ape-heavy investor…

For a while, it looked as though FTX might be one of the ones that made it through the leaner times, as they moved in to prop up other failing exchanges. Then, suddenly FTX was in the same position as almost everyone else they had scooped up. Crypto.com went from sponsoring UFC fighter uniforms and naming sports arenas to pausing withdrawals and slashing staff.

Then things started to get really interesting. FTX rival, Binance, liquidated their holdings of currency (FTT tokens) issued by FTX, which sparked a run on the bank. The panic accelerated, as more and more users tried to pull their assets from the troubled exchange.

There were talks of an emergency buyout Binance, including a public letter of intent (basically a Strongly Worded Maybe), but the offer was retracted almost as quickly as it was made, following a due diligence process prior to the proposed acquisition. This was the final nail in the coffin.

FTX filed for Chapter 11 bankruptcy protection on November 11th, 2022, as did the approximately 134 other associated entities under the FTX umbrella. This was followed by former FTX founder and CEO Sam Bankman-Fried (SBF) deciding to try and post his way through this, as customers began asking such obvious questions as “where is my fucking money?” and “my money, motherfucker, where is it?”

The answer, it turns out, was: gone, the money was all gone.

Then, in the most galling display I’ve personally seen, SBF attempted to openly fundraise more money! (I don’t exactly know what the proper response to losing ~$50 billion is, but it’s almost certainly not “I’m gonna need some more of your money to fix this.”)

At this point, the company has been placed under the control of John J Ray, best known as the man tasked with cleaning up the collapse of Enron back in the mid-2000s. You know things are going well when, already, statements like “FTX is a different sort of animal” and “a complete failure of corporate controls” have been offered up in legal settings…

The full details will eventually come out, but the short version is that FTX, like every actor in the crypto world, was hugely over-leveraged — and effectively a massive scam. The cash assets appear to have been used to fund personal purchases for executives, and many of the crypto assets were tokens with very low circulation and inflated values. (Holding a million tokens you created out of nothing, of which you’ve sold very few at the price of, for example, $1 does not mean you have a million dollars in value when no one actually uses them. Except in the crypto world, apparently!)

FTX is just the biggest example of what has happened everywhere else in the crypto world, with the added bonus of being helmed by a figurehead who was eager to be thrust into the spotlight. SBF had been getting a lot of attention for his efforts funding the Democratic party, lobbying to keep financial regulators from scrutinizing the crypto industry (and FTX specifically) too closely, and touting a “philosophy” called Effective Altruism.

There is a lot of (tedious) reading one could do on the subject of Effective Altruism, but it boils down to this central idea: its practitioner needs to acquire as many resources as possible, as quickly as possible, and as unburdened by external restraints as possible, in order to best serve humanity as a whole. If this sounds like self-serving horseshit to you, then congratulations — you are a lot more discerning than a bunch of access journalists.

The sheer magnitude of the FTX collapse has possibly spurred regulators into action, finally forcing them to take notice of the cryptocurrency world — and its farcical resemblance to the scandal-ridden days of finance prior to the Glass-Steagal act of the 1920s. The county of Miami-Dade has already sought to remove the FTX branding from the arena the Miami Heat play in, terminating a naming-rights deal that is just a little over 1 year old. Bitcoin itself continues to trend downward as well, signaling a waning interest in crypto currency as a whole.

The fallout from the FTX collapse will take a long time to catalog and process. The long-term prospects for the crypto world seem murky. While I still argue there is no inherent demand or practical use for it as it exists today, if nothing else I think the Sunk Cost Fallacy will keep the dream alive. You’re also going to need to be asleep to believe it, though. Digital currency adoption by world governments will absolutely happen in my lifetime — and it’s not going to use the god damn blockchain — but I digress…

I’ll go so far as to predict very little, if anything actually happens to SBF as a result of this situation. The preliminary information indicates that wide-scale fraud and corporate negligence occurred, but sorting out who did what will take a long time and, frankly, SBF’s family seems too connected to reap any consequences. As it stands, SBF will still be speaking at an event run by the New York Times.

As the recent prison sentencing of Elizabeth Holmes reminds us all, you only get in trouble if you lose the wrong people’s money. If SBF didn’t run afoul of this then we’ll probably be hearing some new pitch from him far sooner than you would expect.

It would be funny and wholly unsurprising if a bunch of celebrities got in more trouble than SBF over the collapse of FTX.

Derek Avatar