SBF is Crypto Personified

The coverage of the FTX scandal has been simultaneously an eye-opening, albeit stomach-turning, experience. Not simply because it’s one of the largest financial scandals of the last century but because the facts and circumstances of how it all went down are so batshit insane, and the disconnect between how it’s being reported and the spin involved around this episode are enough to induce vertigo. Their CEO, Sam Bankman-Fried, has spent the last few days going on an extraordinarily unhinged and ill-advised media campaign to attempt to reinterpret his corporate wrong-doings as one of gross incompetence instead of fraud. All while the crypto industry is painting him as some lone outsider and pretending they never had anything to do with him. Neither of these stories is true.

Let’s be crystal clear about this: FTX was a scam orchestrated by multiple people, and they were not lone bad actors nor an outlier in their industry, and the same actions that created this scandal are being done by others to this very day. Nevertheless, Sam was the very essence of the crypto industry personified in one young man; you could not find a better platonic ideal of the synthesis of delusion, grandiosity, and hubris that defines crypto better than Sam. The days of Usenet cypherpunks, libertarian fantasists, and the naive techno-idealism of decentralization are a relic of the crypto past; those people at least had some semblance of an ideology, albeit an incoherent one. This new generation of crypto hustlers are far more sophisticated ex-Wall Street opportunists who are playing two games simultaneously; there’s the outside game of flooding the zone with a stream of ever-changing narrative gish gallop to attract suckers into the space and telling them a story about displacing the tech hegemony or supplanting the dollar. And then there’s the inside game which isn’t about a new financial system at all; it’s simply about accumulating dollars. And Sam was incredibly shrewd in playing both games.

Indeed, Sam’s ideology was the inside game taken to its highest level of play. Sam unapologetically reveled in the notion that he was in the Ponzi business. He reveled in the notion that he was selling valueless magic beans. He reveled in anything that made him money with zero regards for the consequences of his actions and was blindly driven by his unquenchable thirst for risk and accumulation. This was not the mistake of a misguided tech whizz kid, as he would have you believe from the frankly incredible dog and pony show interview with the New York Times. The entire edifice he built over the years was predicated on a chain of cold, calculated, and premeditated actions to set up a corporate structure with no controls that would allow him to enrich himself through control fraud.

But let’s zoom out from one man’s hubris for a bit—because too much reporting on this topic misses the forest for the trees. Crypto exists for various economic and ideological reasons; broadly speaking, it’s a financial tumor grown out of a decade of low-interest rates combined with distrust in institutions arising out of the global financial crisis. However, the defining feature of crypto is that it’s all based on a lie; everything crypto portends to do is the opposite of what it does. Even the very namesake, “cryptocurrency,” is a lie because crypto isn’t money. And now, after more than a decade of this mania, there’s a whole subculture of people who do nothing but crypto myth-making, not all that dissimilar from the priestly class of Greek society. They have an entire financial pantheon of mythological technologies, deities, and heroes who all engage in bacchanalian antics that make the Olympians look relatively tame by comparison.

But to return to Earth, there are several core stories, all of which have been discredited once you peel back the myth-making and expose them to the light of rational thought. Crypto is not money, crypto is not a store of value, crypto is not a hedge against inflation, crypto is not an uncorrelated asset with the market, crypto is not building a new financial system, and crypto is not building a new internet. The only intellectually defensible position is that crypto is like art or collectibles, the digital equivalent of Pokemon cards, Beanie babies, or a tiger shark sitting in a vat of formaldehyde. The art analogy works very well in many ways because the shark in formaldehyde is also a gaudy spectacle whose only value arises from narrative and myth-making. However, Damien Hirst isn’t going off and pitching his shark as the next version of the internet, and if crypto were being marketed purely as a collectible or a garish rotting shark, there would be no concern; it would be another stupid internet nerd curio. But that’s not what’s going on here; the entire crypto industry engages in a coordinated campaign of material misrepresentation with the intent to deceive retail investors, regulators, and politicians with the sole objective of enriching themselves—in the presence of these coordinated lies and deceptions it is entirely fair to call crypto all a giant scam.

Coming back to FTX, the blind spot and fundamental question that seems to be overlooked so frequently in the press is why FTX was incorporated in the Bahamas in the first place. If you’re a financial services company serving US persons, you incorporate in Delaware like every other major US company. Yet, crypto investors consistently say they lack “regulatory clarity” in the United States, which is a hilariously bald-faced lie, and whichever lobbyist invented that phrase should win an Emmy for their acting. Crypto investors don’t transact offshore because there’s not enough regulatory clarity; it’s that they don’t like the regulatory clarity that already exists! FTX was operating an illegal derivatives exchange serving US persons in bold defiance of the law. And this was not an accident; their corporate structure is a byzantine rats nest of shell companies and pass-through entities set up explicitly for regulatory evasion. This incident was not a bumbling accident of one misguided entrepreneur; this was the coordinated work of hundreds of lawyers, dozens of other crypto firms, and years of planning with the deliberate intent of breaking the law.

The open secret in crypto—and the Wall Street Journal has done some excellent reporting on this—is that Americans can easily bypass measures that seek to block them from crypto derivatives exchanges outside the remit of the American regulatory perimeter. US-domiciled hedge funds and market makers have their traders VPN into servers in the Cayman Islands, Seychelles, or Panama to trade crypto derivatives that are illegal in the United States and bypass geofencing. This setup is done with a wink and a nod, with offshore crypto exchanges even posting instructions on their websites on how to evade regulatory controls. The amount of coordinated and deliberate scofflawing in the crypto industry is unprecedented.

Even the term crypto “exchange” is problematic because crypto exchanges don’t trade real financial assets representing a stake in tangible goods or claims on actual companies. They trade magic beans. And to make matters worse, they effectively operate as fractional-reserve bucket shops that trade notional positions on magic beans. For those that don’t know, bucket shops were a type of brokerage firm that operated in the 1920s. These firms allowed investors to place bets on the movement of stock prices without actually buying the underlying securities. Instead of purchasing the stocks, the bucket shop would record the customer’s bet in their ledger and shuffle money between customers to create the illusion of liquidity. This means they would often intentionally match customers who had placed bets on opposite sides of a trade, ensuring that one customer would win while the other lost. This allowed the bucket shop to collect commissions from both sides of the trade without having actually bought or sold any securities. FTX, and every other crypto exchange for that matter, are magic bean bucket shops, but the issue is that they present with the veneer of being an actual broker-dealer operating on a real market. Sam’s claim that “we were a real company” operating a real market is objectively false; markets exist to balance supply and demand for goods and services and allocate capital towards productive activity. With crypto, there are no goods, no services, and no productive activity; it is what the economist James Tobin described as n-th degree speculation.

“We are throwing more and more of our resources, including the cream of our youth, into financial activities remote from the production of goods and services, into activities that generate high private rewards disproportionate to their social productivity. I suspect that the immense power of the computer is being harnessed to this ‘paper economy’, not to do the same transactions more economically but to balloon the quantity and variety of financial exchanges. For this reason perhaps, high technology has so far yielded disappointing results in economy-wide productivity. I fear that, as Keynes saw even in his day, the advantages of the liquidity and negotiability of financial instruments come at the cost of facilitating nth-degree speculation which is short-sighted and inefficient.”

Nth-degree speculation untethered to any economic activity already has a word: gambling. What Sam was running was a casino draped in financial flippery. He was LARPing market capitalism, creating a simulacrum of the stock market, and then engaging in a coordinated and deliberate multi-million dollar marketing campaign to tell the public that it was a “safe and easy way” to get into the future of investing, all when he never offered investments at all. If you set up an office to look like a faux-medical clinic and, as a layperson, start treating patients with snake oil, you go straight to jail. This is incredibly illegal. So why are we allowing these faux brokerages selling magic beans to exist any more than we allow fake medical clinics? And again, this was not just FTX; this is a coordinated and deliberate campaign from across the entire industry—with some help from some rather credulous media outlets—to legitimize magic beans as a real investment.

And their campaign was not limited just to cringe-inducing Superbowl advertisements. Their plan was nothing less than to buy off Congress to rewrite the entire laws of the land in their favor. And they almost got away with it. The industry hired the former Chair of the House Ag Committee, a previous Chief of Staff of the CFTC, a previous CFTC Commissioner, and four ex-Senators, along with an army of former staffers and lobbying firms, to whisper in the ears of Congress how magic beans are the future of American prosperity. Shockingly the crypto industry’s campaign donations exceeded that of the entire American military-industrial complex. When you’re spending that much on a deliberate and coordinated campaign to influence politics, there is an evident and tactical campaign to push their agenda on the Hill. If you are not at the table in DC, you are on the menu. And Sam was very good at getting a seat at the top table, and now politicians will have to grapple with the uncomfortable fact that they were wining and dining with the millennial Madoff, and we should not forget those who did come election time.

But even at the level of corporate board rooms, the subtle thing about modern corporate frauds is that there’s seldom one malicious Brian Cox-like impresario twisting his mustache, skulking in the background working some grand plan as you see on television. Instead, corrupt executives understand how to abuse institutional psychology to get other employees to perform actions on their behalf by subtly creating a criminogenic system of incentives and a lack of checks and balances in which subordinates execute individual components of fraud, often without explicit knowledge, thus leaving the executive’s hands clean. This phenomenon is so common in corporate life that we even have a word for it: control fraud. An executive is uniquely positioned to coordinate a series of seemingly independently innocuous actions which allow them to engage in accounting fraud, embezzle money, mislabel accounts or otherwise defraud investors, shareholders, and the public at large. These schemes often run unchecked because, in meetings inside these fraudulent firms, employees look around the room and see reputable people, lawyers, accountants, and venture capitalists. There’s the implicit assumption that one of these reputable people has done their due diligence because otherwise, we wouldn’t be sitting in the room together having the meeting in the first place.

The Enron scandal that FTX is most often compared to saw the top executives engage in fraud where almost all of what the company did was entirely legal and by the books. Enron was one of the first examples of so­-called legal fraud in which many of the individual actions were independently legal, despite the cumulative result being one of a clear objective to deceive. FTX was not just a purpose-built vehicle for control fraud; it was the Ferrari of control fraud. When it came time for Sam to embezzle, he simply wrote himself a $1 billion check, and the corporate structure he had purpose-built around him had no controls to stop that. Bernie Madoff and Kenneth Lay could only have dreamed of this level of control fraud. And this was all enabled by the simple fact that investors and politicians were so blinded by the misdirection of the so-called “innovation” that they didn’t see they were being swindled by a conman. Crypto and techno-obscurantism give rise to a whole new flavor of distributed control fraud which is going to become increasingly common; where instead of criminogenic incentive structure and lack of corporate controls, instead crypto, smart contracts, and Ponzinomics will increasingly be used to misdirect and obscure fraud without the involvement of any single legally culpable actor. And unless regulators are prepared to become simultaneous experts in law and computer science—which, spoiler alert, they aren’t—this could lead to a very dark era where a whole new generation of white-collar criminals blame their corporate malfeasance on “digital asset risk management” and decentralized networks while walking away scot-free with billions stolen from the public. This phenomenon is already happening today, and again Sam is simply the perfect personification of an industry deliberately and purposefully built for a new generation of distributed control fraud—which our democratic institutions are woefully unprepared to handle.

After fourteen years, the inescapable truth remains: crypto is still a solution in search of a problem; unless the problem is committing fraud. We have no clear use case for this technology other than pure naked speculation on some now 21,000+ flavors of magic beans. And the negative externalities of letting the bean farm continue to grow are becoming increasingly impossible to rationalize. Most of the more honest and lucid crypto advocates don’t even try to justify it anymore and fall back on the crutch of financial nihilism—a view where nothing in late capitalism has any value whatsoever, so we should all have fun playing dog-meme-themed-roulette while the Titanic sinks. The historian Kenneth Galbraith described our situation in his book A Short History of Financial Euphoria, which contains a line about these speculative benders that continues to haunt me:

“The euphoric episode is protected and sustained by the will of those who are involved, in order to justify the circumstances that are making them rich. And it is equally protected by the will to ignore, exorcise, or condemn those who express doubts.”

A bit more fear, uncertainty, and doubt about crypto is necessary from everyone doing sense-making on this topic. However, we should all be prepared for the crypto lobby to crank their token-operated reality distortion field to eleven in an attempt to rewrite history and post hoc paint the FTX scandal as somehow unique and distinct from their self-professed platonic ideal of a “decentralized” financial system. Yet behind the technobabble and media spin, the fundamental truth remains that SBF and crypto are two sides of the same imaginary coin. Everything that Sam was doing, the crypto industry is currently doing; they just don’t want you to know about it.