A Crypto Catastrophe: The Extraordinary Fall of FTX and Sam Bankman-Fried

Derek shares his thoughts on the collapse of cryptocurrency exchange FTX and the disgrace of its founder, Sam Bankman-Fried, before welcoming veteran financial journalist William D. Cohan to discuss the history of financial fraud, what’s next for FTX, the media relationship with CEO royalty, and his new book, Power failureabout the rise and fall of GE.

Presenter: Derek Thompson
Host: William D. Cohan
Producer: Devon Manze

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To open today’s show, Derek talks about his initial admiration for Sam Bankman-Fried—and laments that many people may have misplaced trust in SBF.

Derek Thompson: Today’s episode is about a cryptographic implosion that stunned the world, or at least, stunned me. As listeners of this podcast know, I’m not exactly the biggest cryptocurrency booster in the world. I consider myself a skeptic who tries not to write off technologies I don’t fully understand. But of all the people in the cryptocurrency landscape, the one I was perhaps most interested in, even in some ways the most affected, was Sam Bankman-Fried. He went to SBF. SBF is the founder of a cryptocurrency exchange, FTX, and a hedge fund, Alameda Research. Sam was a wacky nerd with wild hair who wore cargo shorts and T-shirts to conferences, and was a fixture of media events. He has appeared on the cover of magazines such as Fortune and Forbes. He donated to Democratic candidates. He subscribes to a philosophy known as effective altruism, which is a kind of utilitarian movement that seeks to do the most for most people now and in the future.

And he has expressed interest in donating all of his money to a range of charities, from malaria prevention to AI safety. Some magazines had called him the next Warren Buffett. Others have gone even further. As cryptocurrencies have fallen in value over the past year, SBF has bailed out several projects, which has struck some as something of an echo of the Golden Age robber barons who stepped in to prop up the financial sector during the end crises. from the 1800s. People called it the JP Morgan of cryptocurrencies, or the JPEG Morgan. And his company was a fixture even in sports. FTX has spent $135 million on the naming rights to FTX Arena, where the Miami Heat play. They paid millions of dollars for a Super Bowl commercial starring Larry David. They have attracted investment not only from blue chip venture capital firms like Sequoia, but also from Tom Brady, Gisele [Bündchen]Steph Curry, and then it all fell apart.

A month ago, FTX and SBF were the darlings of cryptocurrencies, and now it’s total cluster shit. After a report circulated a couple of weeks ago that this exchange’s balance sheets were heavily composed of tokens that were essentially made-up cryptocurrencies or mathematically sophisticated promissory notes, there was a run on the bank that left FTX down by several billion of dollars. A rival exchange called Binance initially offered to buy them, but later pulled out and the company filed for bankruptcy. SBF’s $16 billion wealth was wiped out in a matter of days. We don’t know the full form of bankruptcy here yet, but it looks a lot like fraud, and this is the part where I have to make a confession, or a few confessions.

I met and interviewed Sam. I liked him. I thought it was a fascinating, weird, clever, playfully clever game of answering questions about the intersection of cryptocurrency, the greater good, the nature of capitalism. I liked that he talked about cryptocurrencies not like a true believer but rather like a guy who planted a drill in the ground, found $1 billion worth of oil, and decided he didn’t care much about oil, but he’d like to absorb it and donate it to better causes. That was a really interesting perspective from the world’s richest 29-year-old. Another confession: the movement that SBF has joined, Effective Altruism, is one I’ve respected for a long time. In fact, when I lived in New York City for several years, one of my roommates was a philosopher named Will MacAskill, who is now a leader of that movement, Effective Altruism, and was until recently something of an advisor. moral for Bankman-Fritto.

I knew Will. I knew Will trusted SBF. And so, while I’ve never written or podcasted or had any money or any financial relationship with FTX, I’ve admired Sam’s quirk from afar. I admired the causes he gave to, including and especially pandemic preparedness. And now, like many people, I think he may have been a fraud. I want to point out that we still don’t know exactly what happened, but at least one plausible scenario is that SBF was responsible for both a trading platform, FTX, and a hedge fund. This meant that he had access to client funds that he could bet with. And when the hedge fund has made a string of bad investments, it may have moved client funds to fill that hole. This is incredibly bad. He might meet the legal definition of outright fraud, and it makes me feel like this guy I admired from afar might be less of a JP Morgan and more like a quirky Elizabeth Holmes, the former CEO of Theranos.

If you recall, Holmes had a bathing suit, black turtleneck, red lipstick. SBF also had a costume. Frizzy hair, ruffled clothes. Holmes covered up his fraud with bravado and confidence. SBF hid behind this delusion that they were in for the joke, that they partially understood that some cryptocurrency valuations were based on some kind of infinite Ponzi scheme. Where Holmes seduced with grandeur, SBF may have seduced by being disarming. I don’t know, maybe there’s still a lot of stuff we still don’t know about this. Maybe there’s a more innocent explanation, but I don’t think there is right now. I think people have been fooled. Now, there are so many lessons we can draw from an implosion like this, an Icarus story like this. I think one of the lessons is the dangerous power of stories.

When SBF was raising money from Sequoia, which is one of the most popular and successful venture capital firms on the planet, it reportedly wowed the entire VC movement, the entire VC team, while playing a video game on a screen separate. So at the same time, the fact that he could get millions in funding from savvy investors while playing a video game, was seen as a sign of incredible genius, right? The ability of him to do nine things at the same time, which is an important characteristic for a founder. But now, in retrospect, it appears that Sequoia gave their money to a guy who was either too much in his head or, worse, was so indifferent to the immorality of his entire enterprise that he couldn’t be bothered to give investors all of it. his attention. Another lesson is that we media suck at allocating our trust.

We idolize wealth. We idolize people who weave mainstream success and radical personality quirks together. We Hollywood make complicated characters and fail to ask the tough questions, questions like, “Hey, Sam, you run a trading exchange that has a dark and complex relationship with a hedge fund. Are we sure this is correct, or is this deal an obvious invitation to duplicity and fraud?

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