ADVERTISEMENT

Sam Bankman-Fried, FTX, and the Beginning of the Cryptocurrency Ice Age

ADVERTISEMENT

A few months ago, cryptocurrency exchange FTX was valued at approx $32 billion. Its brand is affixed to Miami Heat Arenaand on Referees during the World Championships. Tom Brady was walking around in it during the Super Bowl.

ADVERTISEMENT

Now, FTX is entering bankruptcy. more than million creditors They could lose their money. FTX founder Sam Bankman-Fried faces a team Possibility of criminal charges.

The stunning collapse of FTX has sent shockwaves through the financial and business world, but it is particularly bad for the future of cryptocurrency. Bankman-Fried – or “SBF” as he’s known in the cryptocurrency world – was the industry’s boy wonder, and the friendly face who spearheaded the integration of cryptocurrencies into the traditional financial system.

said Liz Hoffman, business and finance editor at Semaphore Explain today Sean Rameswaram adding that, with Bankman-Fried to shame, integration efforts will likely be set back years, if not longer. “I think, you know, we talk a lot about crypto winter,” she said.

Below is an excerpt from the conversation, edited for length and clarity. There’s a lot more to the full podcast, so tune in Explain today Wherever you get podcasts, including Apple PodcastAnd the Google PodcastAnd the SpotifyAnd the stitcher.


Sean Rameswaram

Liz, I think a lot of people in the world who don’t invest in cryptocurrency feel like it’s just smoke and mirrors and a very wild west. And this story kind of confirms that. But you tell us these two are the two biggest players in crypto. How is this all so fake?

Liz Hoffman

It’s like a tale as old as finance. This is exactly what happened with Lehman Brothers in 2000 – like removing wallets, tokens, and weird crypto jargon. This is exactly what happened with Lehman Brothers. This is exactly what happened with Washington Mutual. It’s exactly what happened in 1929, that people got off their sleds. There was a loss of confidence in the system, and it was a bank run.

As you know, no financial institution has its customers’ money in a safe deposit box. This is not how it works. They lend it. They invest in things. But there are all these rules out there trying to keep it on the rails. They’re supposed to have a certain amount on hand that if you show up at the bank tomorrow and say, “I’d like my deposit back,” they’ll give it to you. If they couldn’t, it would cause a great panic. And that’s basically what happened here. It’s a little unclear where the money went and if there was underlying criminality involved, but the way you unraveled this is just very basic financial stuff.

The Crypto Brothers claim they live outside the system, like, “You bunch of schmucks, you’re being lied to and used by the man, and we’re creating this whole new financial system from the ground up that’s equitable and utopian and it’s going to be great.” But there is no escape velocity. Gravity still applies. And they were wiped out because of a very basic problem, which was that they ran out of money.

Sean Rameswaram

And you compare this to Lehman Brothers and Washington Mutual, and that means the Great Recession. Who spoils here and how is he screwed up?

Liz Hoffman

There are two groups of people who get spoiled, and they both spoil hard. I mean, an analogy that might come in handy here – I’m an ’80s-’90s kid – Chuck E. Cheese.

You’ll give them money, you’ll buy tokens when you walk in the door, and then you’ll use the tokens for all kinds of fun things at Chuck E. Cheese. And when you left, if you left the codes, you could return them, and they’d give you some money back. If you have a set of codes – if you’re like a Chuck E. Cheese superpower user – you’ve kept a set of your net worth in Chuck E. Cheese codes because you go there all the time. If Chuck E. Cheese goes bankrupt, you lose a lot of money because you’re keeping all those tokens that you intended to use in the system or to exchange cash and they’re worthless. These are the people who bought FTX tokens, so crypto bros, right? I have to say pretty much outside of the US.

The other group are the people who own Chuck E. Cheese. These are FTX investors. And they collected the money from someone in Silicon Valley. These large venture capital firms, among them, Sequoialast week invested in this at a valuation of $ 32 billion, reduced the stake to zero.

Sean Rameswaram

Fabulous.

Liz Hoffman

So they will lose money. Its investors are pension funds and university endowments. So there is some detrimental effect here. I do not want to underestimate the losses that real investors will incur. Having said that, I don’t think this is the same as an infection. I don’t think that extends to the broader economy. This is partly because, by design, cryptocurrency was not tied to the economy. Cryptocurrency entrepreneurs are so disdainful of the traditional economy and the traditional financial system that they largely live outside of it.

The thing about Lehman is that — and you know, AIG and those companies in 2008 — is that they were incredibly connected to the normal financial system in ways that people didn’t appreciate. Everyone said, “Oh, AIG is just an investment bank. They do their thing on Wall Street.” but not. It turns out that they have depositors and customers all over the financial system. It was all very intertwined. There was a lot of debt. Thus when the string was pulled the tunic was completely unraveled. I don’t see that happening here. I think we talk a lot about crypto winter. I think this is probably a crypto ice age coming, and people are going to lose their money. And the entire industry — to the extent you believe it has long-term value. I’m still kind of on the fence about that. I don’t know – this is a very bad day for that.

Sean Rameswaram

Do we think the government cares about this? Is there a potential for cryptography to become more regulated as a result of this massive ramification?

Liz Hoffman

Yes, and I think the government really wishes it had paid more attention a year ago. This was a little Washington, D.C. bouncing ball. It wasn’t a little clear who was supposed to be looking at it, because there was one school of thought which was, “No, this is like a stock or a bond by another name. It should be regulated like any security you buy or sell.” The other, “It looks more like gold or cattle. It’s more than just a commodity.” No one could really know what it was. The result is that it is not very regulated.

There were certain things you couldn’t do. You cannot market tokens to US investors, which is why most [Bankman-Fried’s] Customers were abroad. But I think there’s a very good argument to be made that the regulators were asleep at the switch, too slow to act. I think that will change very quickly.

Sean Rameswaram

How do you think cryptocurrency is recovering from this moment where, I don’t know, it felt like it was confirmed that the emperor didn’t actually have any clothes on?

Liz Hoffman

The emperor is very naked. Hmmm, there’s a chance that won’t happen.

Sean Rameswaram

Oh!

Liz Hoffman

There’s an argument to be made that there is, fundamentally, value in technology, that the financial system is incredibly inefficient, that it’s just plain stupid and relies on a lot of paperwork and a lot of trust, and that you can build a more efficient kind of untrusted system where the code performs. The jobs that hundreds of thousands of people do in the financial system. I think there’s some value in that, and I think the underlying technology will likely continue to exist and evolve here. I’m not sure there is any need for these tokens.

So there are some really good pieces of technology, and I think they’re going to be good. You know, we go back to 2001: a lot of stupid Internet companies were wiped out, but they laid the foundations for fiber optic cable, broadband, and e-commerce. And Amazon was the winner there. But eventually someone will come along and look at the wreckage and say, “You know what? These are the good bits. I’m willing to put some real institutional money behind them,” and they’ll start rebuilding.

ADVERTISEMENT
ADVERTISEMENT
%d bloggers like this: