Crypto

Crypto’s Enron Moment Has Arrived

When I speak with Sam Bankman-Fried three weeks ago was crypto’s golden boy. Worth around $15 billion, this eccentric 30-year-old has run one of the biggest empires in the industry. In recent years, he has rubbed shoulders with Bill Clinton, appeared on the cover of Fortune magazine, and turned into a three-letter acronym: SBF. Near the end of our rambling 90-minute interview, Bankman-Fried dropped an offhand hint about the state of his finances. “The truth is,” he said, “most of my wealth is not liquid right now.” As to why his once-generous political donations had dried up in recent months, he offered a mysterious koan: “There are constraints on what I can donate, in the short term.

That turned out to be an extreme understatement. This week, Bankman-Fried lost virtually his entire fortune in a single day, in what Bloomberg called “one of the greatest wealth destructions in history.” The largest companies he once oversaw, crypto exchange FTX and hedge fund Alameda Research, became nearly insolvent overnight and have since filed for bankruptcy, with “approximately 130 additional affiliatesunder the aegis of Bankman-Fried. On Friday, in an irony that no one missed, John J. Ray III, the attorney who oversaw the liquidation of Enron, was the new CEO of FTX.

Crypto crashes have become the norm for the course. But even for an industry notorious for its volatility, SBF’s downfall was a cascade of cold water. Bankman-Fried, after all, was supposed to be the gentle crypto prodigy, the pro-regulation prophet who would finally bring crypto into the mainstream. Indeed, SBF has placed particular emphasis on the idea that you can trust its exchange in an industry notorious for its gamblers and scammers; as if to make that message even clearer, FTX paid to sponsor MLB umpires—those supposed arbiters of truth and fairness—as opposed to its players. In an article that has since been deleted from the internetVenture capital firm Sequoia has hailed SBF as a surefire “future billionaire,” thanks in part to the breadth of its vision for a future where bitcoin trading is as easy and popular as shopping on Amazon.

But now, crypto feels less ready for the mainstream than it has in years. Even though the crypto has slipped into a bear market in recent months, there was still the dream of crypto as it was originally conceived in the aftermath of the 2008 financial crisis: part of the raison d’être of blockchain was to weed out greedy bankers and create greater trust between parties to transactions. Now, in 2022, the crypto markets are controlled by an industry that has proven time and again how similar it truly is to the existing financial system. Before this year’s crash, it felt like a good chunk of the public was starting to trust this industry. SBF’s antics have rolled back time, and what looked like winter is starting to look more like an ice age.

Imagine your debit card suddenly stopped working because your bank executives were doing high-risk transactions with your money while you were trying to pay for groceries – that’s roughly analogous to what Bankman-Fried is accused of having succeeded. (Bankman-Fried did not respond to a request for comment.)

The fall started with a story from CoinDesk journalist Ian Allison suggesting that SBF companies were much more interconnected than anyone knew. Rather than store value in dollars and debt, Bankman-Fried’s empire has kept money in an internal cryptocurrency, which, of course, only works as long as the currency remains stable. It turns out that FTX rival Binance, run by the richest man in crypto, Chinese billionaire Changpeng Zhao, had a few billion dollars worth of the cryptocurrency on its own balance sheet. After the CoinDesk report, Zhao said he planned to throw everything away.

The dominoes fell from there. Following Zhao’s chess move, FTX struggled to pay withdrawals to clients. Suddenly, a company that was once worth $32 billion found itself $8 billion in the hole. Zhao initially said Binance would buy FTX for scrap, but backed off once he took a look at the books. FTX has never been a bank; customers will be lucky to get even a fraction of their money back in bankruptcy court over the next few years, and it seems possible that SBF could face serious legal repercussions.

Several major crypto firms have collapsed over the past year, but Bankman-Fried and his team were meant to be the adults in the room, trying to legitimize crypto by rehabilitating its reputation as a stubbornly immature industry. But it turns out that there are no adults and no room. The collapse of the SBF empire should be a wake-up call not just for the industry that enabled it, but also for the millions of people who have decided to take a chance on a few dollars worth of crypto over the past few years. last two years. Centralized exchanges like FTX, supposedly the easiest way for retail investors to navigate their way into crypto, still come with a huge amount of risk. When these companies go bankrupt, as they now seem to do every couple of months, they take your money with them.

But the problem is more fundamental than losing a little money. Crypto was built on the idea that you shouldn’t have to trust banks with your money, that people should be able to hold it themselves, hopefully somewhere a little safer than a mattress. And although you can still technically do it, there is no guarantee that the value of your tokens will not one day fall to zero, thanks to the actions of a few rogue billionaires with outsized effects on the market. This is, obviously, a terrible deal and an apparent betrayal of that dream of crypto-utopianism – the vision of a future without shady middlemen.

Even the legions of crypto-skeptics, now basking in the I told you so, would recognize that even as recently as last spring, the industry was crackling with some kind of potential energy. “We are so early,” a popular crypto mantra goes, with the idea being that despite the whole system shaking, despite the constant feeling that everything could crash at any moment, there will come a time when crypto really arrived. The fall of Sam Bankman-Fried, and the more than likely fall of many more companies in the immediate future, has undermined much of that hope. Now, it’s hard to imagine a short- or even medium-term future where crypto has only a fraction of the influence it had six months ago.

Crypto will always persist in one form or another, but the future of crypto as an institution – as something that could one day destabilize big banks, or at least operate alongside them – has never been less certain. .

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