By now you’ve likely heard about the stunning collapse of Sam Bankman-Fried’s crypto exchange, FTX, and its associated high-risk trading company, Alameda Research. I won’t attempt to fully summarize how FTX went from being worth some $32 billion to declaring bankruptcy, practically overnight. But at its core, the story is this: S.B.F., as he’s known, and the byzantine web of companies that comprised his crypto empire, hid things from investors. He reportedly lent billions of dollars linked to depositor funds from FTX to Alameda; took outsize risks with other people’s money; experienced a liquidity crunch and then a modern-day bank run when a rival crypto king, Binance’s Changpeng “CZ” Zhao, tipped the first domino by dumping his FTX tokens.
In the end, it appears S.B.F. has lost everything. His reputation, of course, is toast. His personal wealth has all but evaporated. FTX investors, employees, customers, portfolio companies, grantees—all will now have to fight for pennies on the dollar in bankruptcy court, if there’s anything left to fight over. Since declaring bankruptcy, hundreds of millions of dollars worth of funds have mysteriously disappeared from the exchange in what looks to be a hack but could be something worse.
There are two things that strike me about this collapse. The first, of course, is the familiarity of this particular scandal. Whether FTX’s troubles were more like those of Long-Term Capital Management or Bear Stearns or Madoff or Archegos Capital, we’ve been here before. But weren’t these precisely the types of hidden risks—conflicts of interest, duping investors, absconding with funds—that the brave new world of “DeFi” (decentralized finance) was supposed to rise above? Crypto, after all, was born out of the financial crisis. The Bitcoin whitepaper, released in 2008, heavily emphasized transparency and trust, which the established world of finance had failed to offer—remember synthetic CDOs?—and Bitcoin was pitched as a corrective. There could be no secret deals, no hidden risks, because it should be technically impossible to hide risk in a fully transparent, “trustless” public ledger.