Crypto Crash - CWG Speakers

SBF: The Crypto Charlatan?

Last Thursday, Sam Bankman-Fried (SBF) was found guilty on all charges. It took jurors just a few hours to give their verdict on seven counts of fraud and conspiracy. He will be sentenced in March. It marks the end of a whirlwind four years for the former crypto mogul. After establishing FTX in 2019, SBF quickly became the respectable face of digital currency. Lauded by politicians and once predicted to become the world’s first trillionaire, SBF now faces decades in jail following the unravelling of his crypto exchange last year.


A CoinDesk scoop revealed FTX’s liquidity issues last November. About $8bn in customer funds had been lent to SBF’s separate trading firm, Alameda Research. Investors raced to withdraw funds in the subsequent panic and the exchange collapsed. Before Thursday’s verdict, SBF’s criminal culpability was debated. Michael Lewis suggests a lack of “adult supervision” was FTX’s undoing and that mistakes, rather than criminal intent, are to blame. We examine this against Tom Wright’s case that “it was a fraud from the start”. Finally, we look at what this means for crypto’s future. The reputational damage is severe but bitcoin is up over 100% in 2023. Is there still a place for the asset in traditional portfolios? 


Michael Lewis’ latest book, “Going Infinite”, has been criticised for providing an overly-sympathetic profile of SBF. Lewis contends that SBF had a great legitimate business. He argues that “if there hadn’t been a run on customer deposits (at FTX), they’d still be sitting there making tons of money.” The book buys into the image of SBF as a chaotic genius with the intellect and audacity to reshape the world. Lewis believes that SBF was truly committed to the philosophy of Effective Altruism (make lots of money then use it for good). He writes approvingly of SBF’s more outlandish ideas like paying Donald Trump $5bn not to run for office again. 

Tech start-ups often tread a fine line between criminality and ingenuity. Entrepreneurs are praised when they ‘move fast and break things’. Lewis sees SBF as part of this tradition. He is a big-picture thinker who once described 60,000 unread emails as a good day. Coupled with a disregard for compliance officers, we see a figure who simply gets lost in the complexity and scale of the operation he is suddenly running. Of the missing $8bn in customer funds, lawyers say they have now recovered $7bn. Is improper bookkeeping rather than criminal enterprise to blame? 


Tom Wright argues this is irrelevant. Crypto exchanges are not fractional reserve banks. A lot of customer funds have been recouped by selling Alameda’s positions in venture capital investments. Some of these, such as its $500m bet on Anthropic, have been highly successful. But the Department of Justice (DOJ) ruled this could not be used in court to suggest FTX customers would be made whole. The DOJ said it was “immaterial whether some of those investments might ultimately have been profitable” as they were made with misappropriated customer deposits. From day one, Wright says, FTX was “immediately co-mingling customer funds with Alameda funds”. 


Wright’s podcast, Crypto Kingpins, features exclusive interviews with SBF’s great crypto rival, Changpeng Zhao (CZ). The Binance founder inspired SBF to set up his own exchange and CZ was an early supporter of his competitor. Their relationship deteriorated as SBF tried to exert regulatory pressure on Binance. As he amassed political influence through lavish donations, he implied the rival exchange was a front for nefarious political and criminal forces. These donations, along with the huge endorsement deals agreed with sports teams and celebrities, aroused CZ’s suspicions. Where was the money coming from? CZ exacted his revenge when the run on FTX started. He sold his substantial holding of FTX tokens, plunging the company into bankruptcy. 

CZ’s actions may have triggered FTX’s downfall. But it was only SBF’s negligence (Lewis) or deceit (Wright) that enabled him to do so. The DOJ has emphatically taken the latter view. Following the verdict, prosecutor Damian Williams said, “while the cryptocurrency industry might be new…this kind of corruption is as old as time.” 


SBF was damned by the testimony of former associates: Nishad Singh, Gary Wang and Caroline Ellison. They all agreed that $8bn had gone missing under his watch and direction. SBF’s pleas of ignorance were undermined by conflicting statements made in the past. His corporate crimes are not unprecedented but they may do irrevocable damage to an industry already tainted by corruption. Who can you trust when its white knight is found guilty of such malfeasance? 


Others are bullish about the industry’s potential. Leo Mizuhara, CEO of decentralised-finance asset manager Hashnote, says “I think the crypto industry is looking at the conviction with a sigh of relief… They see this as part of a cleansing of bad actors and purge of bad representation of the industry.” Optimists point out that SBF was not a ‘crypto bro’. He preyed on the sector because it was an unregulated industry he could exploit. Now this is changing. And there is good news for these believers. Bitcoin is up 110% year-to-date and the US Securities and Exchange Commission (SEC) is expected to approve the first bitcoin ETF this month.         

SBF once believed he had a 5% chance of becoming President. He would be one of history’s great visionaries and philanthropists. Instead, his legacy will be one of infamy, keeping company with other fraudsters like Elizabeth Holmes and Bernie Madoff. Will crypto go the same way? Since the ‘crypto winter’ of 2022, it has gone quiet. Many assumed its fortunes had followed its former saviour. But there has been a quiet resurgence. Is this just a ‘dead cat bounce’ or the start of a more dignified second act? 



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