Chronicle: A cryptocurrency billionaire implodes, showing the whole field is built on quicksand

For a moment there, Sam Bankman-Fried looked like the real thing.

Now 30, the MIT graduate had become the most visible and credible billionaire in the cryptocurrency ecosystem, with an estimated fortune of over $26 billion at his peak.

Bankman-Fried looked like a political kingmaker, contributing nearly $900,000 to the Democratic National Committee in May 2022 alone.

He presented himself as a philanthropically-minded plutocrat, pledging to donate 99% of his wealth to good causes and giving more than $100 million this year ‘to alleviate global poverty’, providing assistance to poor countries battling the pandemic and global warming, as he told a House committee in May.

His Bahamas-based company, FTX, was financially backed by major institutional and venture capitalists such as BlackRock, SoftBank and Sequoia Capital.

FTX purchased the arena naming rights from the NBA Miami Heat; to employ NFL quarterback Tom Brady and his then-wife, model Gisele Bündchen, as spokespersons; and to display its badge on Major League Baseball umpire uniforms.

During the cryptocurrency meltdown earlier this year, Bankman-Fried’s trading company Alameda helped bail out several struggling crypto companies, including BlockFi and Voyager (the latter of which filed for bankruptcy before going bankrupt). be able to withdraw more than $75 million of the $200-million loan that Bankman-Fried has offered the company).

In the space of a few weeks in June, Bankman-Fried committed about $1 billion in bailout funds, according to a Bloomberg estimate. The outlay led some crypto devotees to speculate that he wanted to consolidate the industry into his own hands. Others have compared it to JP Morgan, which orchestrated a bailout of the securities industry during the financial crash of 1907.

It’s a comparison Bankman-Fried coyly welcomed, describing his bailouts as akin to a utility: “Something I thought was the right thing for the industry.”

Through it all, Bankman-Fried projected an aw-shucks boy persona, even appearing on stage in front of an August audience at a Bloomberg crypto conference with his signature shock of unkempt curly hair and wearing a t -shirt and shorts.

At that conference – which took place in the teeth of the crypto meltdown – he even acknowledged, in his own charming and unassuming way, the void at the heart of the entire crypto system: No one has yet explained what are bitcoin and other virtual currencies used for. in the real world.

“Certainly the decline in asset prices,” he said, “is a strong sign that in crypto…things were way too light on use cases, and there’s a lot of gestures from the hand.”

Now it turns out that Bankman-Fried and his companies are the ones looking for a bailout, with financial catastrophe looming if they fail.

On Tuesday, FTX agreed to be taken over by Binance, the world’s largest crypto trading firm, after an increase in withdrawal requests from FTX depositors prompted the exchange to disclose a “backlog” in processing requests. . On Wednesday, however, Binance backed out of the deal, having apparently discovered an insurmountable financial hole in FTX’s books.

The development raises doubts about the survival of Bankman-Fried’s empire, which once seemed almost impregnable. How this will affect depositors and investors in his business is unclear, but clearly not encouraging.

Bankman-Fried had tweeted a promise that all depositors would be fully covered once Binance completes its due diligence review of FTX’s books.

Bankman-Fried’s personal fortune was slain in just a few days of turmoil. Bloomberg currently puts it at around $1 billion, based on eradicating the value of FTX, Alameda, and their self-created virtual currency token, FTT.

These recent developments should give lawmakers, such as Sens, pause. Kirsten Gillibrand (DN.Y.) and Cynthia Lummis (R-Wyo.), who joined the crypto industry’s push for more lenient regulations.

“Crypto people say crypto is somehow ‘different’ or ‘special’ because it’s a technology, so it deserves to have its own special regulatory regime, which means a much lighter touch” , says Yevgeny Shrago, who tracks the industry for the nonprofit public interest group Public Citizen. “There’s been a lot of momentum for this on Capitol Hill because crypto has had a lot of well-funded lobbyists showing up.”

The recent crash in crypto stocks, he says, could wipe out much of the funding for this political influence peddling; the crash brought the price of bitcoin, the iconic cryptocurrency, down to under $17,000 from its peak, reached almost exactly a year ago, of nearly $70,000.

Existing laws and regulations on the books of the Securities Exchange Commission, Consumer Financial Protection Board, Commodity Futures Trading Commission and other government agencies should be sufficient to curb the excesses of crypto companies, says Shrago; what Congress should do is provide these regulators with the financial resources they need to keep an eye on the industry.

As for Bankman-Fried’s elevation to the rank of JP Morgan, what seems to elude those making the analogy is that Morgan had to step in to save the financial markets in 1907 because the markets were working out of control. with almost no government regulation and oversight and no provision. for consumer protection. Consequently, panicked depositors staged frequent runs on their banks.

This situation ended when the government finally assumed its responsibilities from the 1930s – creating a solvent Federal Reserve System and imposing consumer and investor-friendly regulations, among other things.

To characterize Bankman-Fried as a Morgan-like savior is to acknowledge that the cryptosystem is, at its core, a dysfunctional and clearly consumer-unfriendly Wild West.

Although the cryptocurrency space may seem incredibly opaque and high-tech to outsiders, the events that brought FTX to its meltdown have an old-fashioned feel. They boil down to a run on the bank not unlike those that plagued banks at the time.

The company’s troubles began on Nov. 2, when crypto news service CoinDesk published an analysis of a leaked Alameda balance sheet showing that its $14.6 billion disclosed assets included some $6 billion. in FTT.

As CoinDesk explained, “Bankman-Fried trading giant Alameda is built on a foundation largely of a coin invented by a sister company, not an independent asset like fiat currency or another crypto”.

Four days after the balance sheet report, Binance CEO Changpeng Zhao (known commercially as “CZ”) announced that his company would liquidate its entire 23 million FTT token portfolio, so valued at approximately $529 million.

Zhao attributed his decision to “recent revelations that have come to light”, apparently a reference to the CoinDesk disclosure. His statement seemed to fit into a long history of contention over the cryptocurrency dispute between him and Bankman-Fried.

A $6 billion torrent of FTX client withdrawal orders over three days followed Zhao’s announcement, creating what Zhao called a “significant liquidity crisis” at FTX, prompting its bid to take over the small company and cover its obligations to clients.

At first, Bankman-Fried and his associates tried to downplay the impact of the CoinDesk article. The report’s balance sheet was for ‘a subset of our corporate entities’, CEO of Alameda, Carolina Ellison tweetedadding that the company had more than $10 billion in assets that CoinDesk had not counted.

After Zhao announced his FTT sales, Ellison proposed, tweet again, for “buy everything from you today for $22!” (The FTT token, which was priced at $85 in September 2021, was most recently quoted at $3.55 by Coinbase, a crypto exchange.)

Right now, the crypto meltdown, including the Bankman-Fried implosion, hasn’t even caused a ripple in conventional financial markets, largely because the crypto market is still relatively small compared to traditional stock and bond markets, and traditional banks have generally avoided .

Yet, crypto enthusiasts still have ambitions to become a bigger factor, if not supplant conventional currencies and financial instruments. Fidelity Investments even has a system in place for workers to invest in crypto through their 401k retirement plans. (Employers should always allow it, and the Department of Labor, which oversees such plans, warns against it.)

As of now, there seems to be little left of Bankman-Fried’s personal ambitions other than the fragments of his regulatory proposal, presented so confidently to the House Agriculture Committee on May 12. . He called her “safe and conservative”. a model that would promote “competition and innovation” in American financial markets.

In response, Terrence A. Duffy, CEO of CME Group, the world’s largest financial derivatives market, warned that the Bankman-Fried model was a light regulatory regime that would “inject significant systemic risk into the US financial system.” .

It is fair to say that Duffy, no less than Bankman-Fried, spoke for his own interests. But it’s also fair to say that given the current circumstances, crypto skeptics have the better case.