FTX: A crypto empire swiftly implodes
The opaque world of cryptocurrency investing “has seen large financial losses before.” But nothing has ever hit the industry like the spectacular collapse of FTX, said Felix Salmon in Axios. FTX founder Sam Bankman-Fried was the face of crypto, an MIT-grad wunderkind who charmed blue-chip investors into pouring $1.8 billion into his now-bankrupt crypto exchange, which had celebrities like Tom Brady, Stephen Curry, and Larry David appearing in its ads. Now, SBF, as he is known, looks like “a crook who was embezzling his own customers’ funds” to finance risky investments by the hedge fund he also controlled, Alameda Research. “SBF’s stated dream—and that of most other crypto entrepreneurs—was for the industry to improve upon and supplant the world’s existing financial infrastructure.” In fact, behind the scenes, it was engaging in much the same grift and leveraged risk-taking that preceded the 2008 financial crisis.
“Just weeks ago, Bankman-Fried was considered crypto’s version of John Pierpont Morgan,” said Tom Maloney in Bloomberg, because of how he had stepped in to rescue other companies facing imminent collapse this spring. “The curly-haired 30-year-old” known for wearing shorts and T-shirts was worth about $16 billion, thanks to his majority stakes in FTX and Alameda (and a 7.6 percent stake in the online-trading platform Robinhood). After his resignation from FTX last week, Bankman-Fried suffered a staggering 94 percent “wealth wipeout.” It’s a huge loss for Democrats, as Bankman-Fried was also a major donor toward progressive causes. The Bahamas-based exchange and its founder could be facing serious criminal liability, said Dave Michaels in The Wall Street Journal. The Manhattan U.S. attorney’s office has begun investigating the reports about the lending of customers’ funds to Alameda; as much as $10 billion from FTX accounts may have been used to prop up the hedge fund. There are no customer-protection laws in crypto, but “using customer funds for a purpose that wasn’t disclosed can constitute fraud or embezzlement.”
The meltdown we’re seeing now could have been even worse, said Annie Lowrey in The Atlantic. “Wall Street has been desperate to pour money into crypto,” but it is “precisely because regulators in the U.S. and other countries understood crypto’s risks” that traditional financial institutions were “walled off from the current meltdown.” Without that, we’d have another 2008-scale financial crisis. Instead, most of the damage is being borne by “small-scale investors.” These investors “blindly put their trust in a panoply of intermediaries,” who behaved like traditional banks and brokers without the regulations to protect their customers, said Bloomberg in an editorial. “FTX appeared to be among the best run of these intermediaries.” It’s clear now that none “are worthy of your trust.”