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Op-Ed | The Nation | November 14, 2022

Money From Nothing: Sam Bankman-Fried’s Crypto Shakedown

Campaign FinanceClimatecryptocurrencyFinancial Regulation
Money From Nothing: Sam Bankman-Fried’s Crypto Shakedown

The late crypto platform FTX was a clearinghouse of info-capitalist delusion.

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As the overlapping dramas of the 2022 midterms and Elon Musk’s catastrophic acquisition of Twitter unspooled, America also witnessed the breaching of a new benchmark in the financial world: the largest-scale overnight destruction of personal wealth in modern history. In early November, Samuel Bankman-Fried, who presided over the lavishly capitalized crypto currency exchange FTX, saw his $15.6 billion net worth plummet to zero after a protracted run on the service’s holdings revealed lethal levels of debt exposure. By November 11, FTX had filed for bankruptcy, after the unceremonious collapse of an 11th-hour deal for the rival crypto platform Binance to acquire the company.

The rapid meltdown of FTX stands as one of the most gruesome chapters in the annals of investment fiascos: think of the false technological promises of Elizabeth Holmes’s Theranos grift combined with the evaporation of Bernie Madoff’s prestigious Ponzi fund. But the saga of FTX involves much more than either the vanity and hubris of Holmes’s fraud offensive or the deceptive practices of the Madoff scam. The rapid rise and fall of Bankman-Fried points up the delusional character of information-age capitalism; Far from standing as an outlying trend within the crypto investment world, Bankman-Fried’s scam was nestled at the very heart of its prevailing business model. By offering a straightforward, allegedly transparent platform to trade crypto tokens, Bankman-Fried helped shore up the tarnished reputation of a surrogate for cash that had been riddled with volatility and outright fraud. In short order, a highly touted—and environmentally disastrous—new model of money exchange moved into the vanguard of financial innovation, attracting major investment backing and fawning press coverage. Political leaders and celebrities rushed to court the new FTX empire, with Bankman-Fried readily doling out equity stakes in the company in exchange for high-profile endorsements.

As his fortune grew, Bankman-Fried turned to more traditional pastimes of the galactically wealthy: political donorship and philanthropy. He was the second-largest individual donor to Joe Biden’s 2020 general election campaign, and prior to the 2022 midterms, pledged to give as much as $1 billion to Democratic candidates (a promise he failed to honor, in what now looks like another warning sign of the mirage-like quality of his fortune). In the world of philanthropy, meanwhile, Bankman-Fried made still more ambitious promises, saying that he planned to give away all of his wealth, while setting his giving priorities with the hot new Silicon Valley–sanctioned movement of “effective altruism.”

In one sense, Bankman-Fried has made good on his pledge: His fortune is now disbursed, though not in anything like the rationally sequenced, paternalist fashion he envisioned. But the larger point here is that, unlike prior personality-driven market scams, Bankman-Fried’s financial ruin is firmly aligned with the main run of investment-class thinking. His current status as a financial noncitizen stands out in striking and in direct inverse proportion to the seriousness with which he was treated by the business press, the political establishment, and the faux-revolutionary caste of Silicon Valley market lords. As a result, the unwinding of FTX is a fable of something-for-nothing market solutionism that should be a prime exhibit in future, saner efforts to revive and reclaim the American political economy from its current leadership cohort of hustlers and rank opportunists.

Fittingly enough, the major elements of this fable all present themselves at first glance as a case study in market-sanctioned meritocratic striving and reward. Samuel Bankman-Fried was the son of two Stanford University law professors who elected to study physics at the Massachusetts Institute of Technology after flipping a coin. His elite education made little lasting impression, however—another common résumé entry and article of faith among Silicon Valley’s power elite, from Harvard dropouts Bill Gates and Mark Zuckerberg to the hard-right libertarian financial angel Peter Thiel, who pays out $100,000 stipends to ambitious young dropouts seeking to make their own fortunes. (Indeed, Bankman-Fried has gone these education disruptors one better, declaring in an interview that books are an outmoded platform: “I think, if you wrote a book, you fucked up, and it should have been a six-paragraph blog post.”)

Like the other independent geek entrepreneurs of Valley legend, Bankman-Fried soon realized that the real action was in finance. After he graduated from MIT in 2014, he worked on Wall Street at the quantitative trading shop Jane Street Capital. But crunching numbers at a conventional brokerage firm didn’t sit well with his digital muse; in short order, he scoped out new opportunities in high-leveraged, rapid-turnover trades in the volatile crypto market. He first founded a boutique crypto trading firm called Alameda Research and then launched FTX, a Bahamian-based exchange dedicated to crypto assets. While many crypto investors had lost massive holdings in the market’s recent downturns, Bankman-Fried netted an enormous fortune by controlling access to crypto trading.

At the most basic level, Alameda Research made money by making markets—pocketing the difference between purchase and sale prices of crypto assets on exchanges—and steering venture investments into crypto projects. FTX, on the other hand, collects fees on users’ transactions. Throughout their meteoric rise, the two companies maintained an unethically close relationship; FTX prioritized Alameda Research’s trades on its platform, allowing Bankman-Fried to play dual roles of market maker and trade facilitator in the crypto market. But this underhanded relationship—the accelerated layering of crypto investments that permitted FTX to achieve rapid market dominance—ultimately triggered the crisis that pushed both companies into bankruptcy.

A copy of Alameda Research’s balance sheet obtained by Coindesk earlier in the month showed that $5.8 billion of the crypto hedge fund’s $14.6 billion asset line was held in FTT, an FTX-issued crypto token. Alameda directed another $4 billion or so into other crypto tokens, including projects Bankman-Fried was deeply involved in. On the opposite side of the balance sheet was $8 billion in liabilities.

The Coindesk report immediately revealed the dangerous game both firms had been engaging in: Alameda’s $5.8 billion worth of FTT was basically paper wealth that could never be liquidated without crashing the price of the asset. Armed with these revelations of overexposure, rival exchange Binance moved to sell off $500 million worth of FTT; this set off a flood of withdrawals triggering the eventual liquidity crunch at FTX. And this crisis, in turn, led to more devastating reports on FTX’s Ponzi-like business model, documenting a backdoor portal in the company’s trading software that apparently enabled Bankman-Fried’s fraudulent handling of customer’s funds.

Bankman-Fried’s scheme was simple: create FTT tokens and sell them to Alameda Research at discounted rates; then steal FTX’s customers’ assets and loan them to Alameda Research to make risky bets in the crypto market. He would then collect FTT tokens as collateral for these loans, effectively using them to replace customer assets on the FTX balance sheet. But as the world is now learning, this scheme had one enormous flaw: In order to work, the tokens traded as paper wealth across all these platforms had to maintain a steady or rising exchange value.

To ensure that, Bankman-Fried leaned on Alameda Research to continue making the FTT market by buying and selling the token at scale, effectively pumping the price. As a result, one recent analysis of Alameda Research’s FTT holdings shows that $5.8 billion worth of FTT was equivalent to 180 percent of the total circulating supply of the token.

In crypto’s boom times, this circuitous relationship was likely profitable for Bankman-Fried and his investors. But amid a widespread market crash, propping up the token’s price became a nearly hopeless task. So when Coindesk’s reporting and Binance’s FTT fire sale upended things, many FTX customers rushed to cash out their assets. That then forced FTX to issue more tokens in exchange for fiat to honor these requests—and sent the token’s price still lower, setting the market-destroying dynamic into overdrive.

It was at this point that the whole scheme blew up in Bankman-Fried’s face. There was no way for FTX to meet withdrawal requests without crashing the token price to zero. But there was also no way to call on Alameda Research to repay its loan to FTX, since it was largely a speculative paper transaction. With FTX’s main trading partner holding on to a rapidly devaluing horde of FTT tokens that it couldn’t hope to unload without further crashing asset prices, things were locked into a death spiral.

To quote a suitable Silicon Valley truism, these sorts of shady alliances in the crypto market are very much a feature, not a bug. And it’s the furtive labeling of ever greater sums of debt as assets in their own right that has driven one disastrous crypto bubble after another. When the crypto market suffered a major crash this summer, shedding around $2 trillion in market value from an all-time peak of $2.9 trillion, ordinary investors were the greatest losers. Lured by the industry’s predatory advertising tactics, many late entrants into the crypto speculation have seen their life savings vanish and their dreams shattered.

The array of get-rich-quick tactics in the crypto sphere are familiar to any student of standard Wall Street shakedowns; indeed, understood from a proper vantage of skeptical inquiry, crypto is a gorgeous mosaic of market flimflam. There’s the rug-pull ploy that sends developers fleeing as their hotly touted crypto tokens depreciate into nothingness. There’s the kindred pump-and-dump scheme that has crypto promoters bid up the value of an otherwise worthless asset before selling off the asset at its new overvalued position, sending the asset prices—and the hapless ordinary investors backing the strategy—plummeting abruptly back to earth. Wash trading—which positions crypto developers at both ends of a currency transaction—is another routine mode of pumping up market prices to maximize profits for market makers at the expense of unwitting ordinary investors. This tactic alone accounts for fully 90 percent of transactions on crypto exchanges, according to one recent study. All this rampant—and frequently illegal—hustling takes place on platforms with laughably ineffective security protocols, which hackers consistently evade to steal billions of dollars of investors’ funds.

This is the real story of crypto. Bitcoin and the 12,000 other cryptocurrencies have failed utterly to realize the tech-libertarian dream of decentralized peer-to-peer lending, for the simple reason that wildly speculative investment vehicles cannot serve as reliable stores of value or units of account, two classical economic functions of money.

It was thus entirely foreseeable that FTX should have come undone in the way it has; establishing a central clearing house for shady financial transactions creates the sort of perfect-storm conditions that triggered the 2008 crash in mortgage-backed derivatives. And indeed, early reports on the extent of FTX’s exposure suggests that the fallout will not be confined to Bankman-Fried’s now-toxic holdings. In addition to Alameda, other Silicon Valley financial titans, including Sequoia Capital, Softbank and Altimeter Capital Management, were deeply entwined with FTX. In some cases, it was a two-way relationship—Bankman-Fried holds a $200 million investment in two Sequoia Capital funds through Alameda Research.

Bankman-Fried had obviously been aware of the industry’s limitations, so his pre-bankruptcy goal was to move past crypto and develop FTX into a financial super app: “I want FTX to be a place where you can do anything you want with your next dollar. You can buy bitcoin. You can send money in whatever currency to any friend anywhere in the world. You can buy a banana. You can do anything you want with your money from inside FTX.”

This effort to monetize FTX into a payment app is a far cry from the standard libertarian reveries detailing how crypto-currencies are a key weapon in the arsenal of the digitally enabled war on fiat currency and the retrograde regulatory state. Indeed, Bankman-Fried’s FTX agenda had him, prior to his appointment with his market nemesis, trying to game relations with the administrative state, in the vein of that most notorious avatar of venal self-interest on autopilot: the DC lobbyist. In addition to setting himself up as a Democratic party power-donor, Bankman-Fried had cozied up to sitting lawmakers, and hired a slate of onetime regulators on a crypto charm offensive—especially former members of the Commodity Futures Trading Commission, which has oversight authority over crypto commodities and derivatives contracts.

Bankman-Fried’s campaign to distance himself from crypto’s reputation for unbridled scamming was also central to his other major sideline, as a champion of “effective altruism.” The visionary rhetoric of the effective altruism movement allowed him to say, even though he was a major player in a shakedown operation—even Bankman-Fried has characterized crypto as a “Ponzi scheme”—that he was dedicating all his market gains to the greater good.

Not surprisingly, he was an especially ardent convert to one key plank of the effective altruism gospel of wealth: the idea that the best path forward for charitable giving was to get rich quick. As he explained on the website for the FTX Future Fund, his now-shuttered charitable arm, he “set out to make as much money as he could, in order to give away everything he earned to charity.” While he was launching his fortune at Jane Street Capital, he joined the flagship charity for effective altruism, Giving What We Can, and donated 50 percent of his income, primarily to Oxford University’s Centre for Effective Altruism. (Both groups were founded by the Oxford-based movement theorist William MacAskill.) When he established the FTX Future Fund in February 2022, he appointed MacAskill as an adviser; that crypto-branded charity has granted $13.9 million to the Centre for Effective Altruism and $700,000 to Giving What We Can. He even justified bailing on his high-profile promise to bankroll much of the 2022 congressional Democratic field by arguing that it wouldn’t have been a rational or effective commitment of resources—an analysis scarcely borne out by the actual course of the midterms, which broke strongly in favor of the Democrats.

But that’s the real point of effective altruism, operationally speaking: to lend a high-flown moral imprimatur to the preexisting preferences of big-ticket donors. Bankman-Fried did, after all, find the bandwidth to fund a handful of vanity candidacies assembled under the banner of effective altruism—none of whom survived the general election. He also employed the alleged mandates of “effective” priority setting in the charitable world to skirt a major liability of all crypto activity: its disastrous impact on climate change. In enthusiastically signing on with the wing of effective altruism known as “longtermism,” Bankman-Fried was able to claim that the rapidly accelerating climate crisis was of less overall import than the prospects of preserving life over a far longer, and seemingly intergalactic, time frame. Just focus on the space opera fantasias favored among self-styled Silicon Valley visionaries, and presto: The most pressing emergency for existing planetary life falls off the priority list.

Here, too, the elaborate constructs of effective altruism serve to mask a far more venal and self-interested state of affairs. The simple truth of the matter is that crypto mining—the computer-driven activity at the heart of Bankman-Fried’s trading empire—represents a first-order threat to any sustainable plan to mitigate carbon emissions.

In crypto markets, individuals or pools of “miners” compete to solve complex mathematical equations and verify transaction identifiers. When a miner correctly verifies the transaction identifier, the blockchain behind crypto transactions is updated and the miner is rewarded with new cryptocurrency. Working through these mathematical problems requires specialized computer equipment that consumes enormous amounts of electricity. Moreover, the more people mining for a given coin, the more difficult mining becomes, further increasing the energy expended.

Bitcoin alone is projected to produce enough carbon emissions to push warming above 2° C in less than 30 years. This is truly staggering for a system that barely even factors into the global share of cashless transactions. A recently released report in Nature shows that “each BTC created in 2021 resulted in $11,314 in climate damages, on average, with total global damages of all coins mined in 2021 exceeding $3.7 billion.” Measured in terms of adverse climate impacts, Bitcoin mining sits in the same category as other heavily polluting industries such as livestock farming and the natural-gas energy sector.

The harm crypto does to the planet is yet one more reason Bankman-Fried’s former trading empire should go unmourned into the good night. Yet it’s far from clear that the overlapping moral lessons of FTX’s market implosion will be heeded by the financial world. Binance, the trading platform that was poised to acquire the distressed FTX operation, still enables all the signature trespasses and abuses of the broader crypto market—and, of course, the underlying activity of crypto mining will go on jeopardizing the planet’s longer-term habitability.

Meanwhile, in the short-term scheme of things that effective altruists profess to scorn, their world-conquering movement may face some additional and unwelcome market reckonings, especially with Bankman-Fried’s high-profile commitments off the table. Adherents have already begun framing the FTX debacle as a teachable moment for the community. As news of Bankman-Fried’s decidedly non-altruistic career spread, MacAskill moved swiftly to offer a conditioned disavowal of his chief funder’s conduct, arguing that the movement’s homegrown billionaire “entirely abandoned the principles of the effective altruism community.” The movement’s other notable billionaire recruit, Facebook cofounder Dustin Moskovitz, took up the same defensive line of reasoning, vowing to try “and harden [effective altruism] against other bad actors.” How such bad actors were able to get such prominent footing in a movement that confidently claims it has hit upon the best of all possible models for pragmatic action remains a paradox that has yet to find a bold enough theorist to explain.

Still, the rickety intellectual rationale for market-rigging and billionaire-making will likely hold, unless and until we acknowledge that, in all phases of his extravagantly praised tour in the financial spotlight, Sam Bankman-Fried had been diligently courting what obscenely wealthy funders have always craved: the ever-expanding license and impunity to do as they will. The specter of a streamlined and rationalized model of charitable giving was very much part and parcel of that project—not, as its many influential and well-funded champions would have it, a way to “give back” to a plundered commons, or design a supercharged new philanthropic regime of market-driven, and market-mandated social reforms. We can only embark on the path toward realizing a truly sustainable and just future when we are at long last ready to distrust the disastrous agendas of geeks bearing gifts.

Campaign FinanceClimatecryptocurrencyFinancial Regulation

More articles by Timi Iwayemi

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