Crypto industry’s house of cards is tumbling down fast
The reputation of FTX boss Sam Bankman-fried has been tarnished – but so have those of his backers
Where did all the money go? Why was Sam Bankman-fried on the cover of so many magazines and newspapers? What board games were they all playing in that apartment in the Bahamas and how much partner swapping was actually going on? As the FTX scandal unravels, with billions of dollars still to be tracked down and with other cryptocurrency firms likely to follow it into oblivion, there will be plenty of questions to be answered. But perhaps the biggest one will be this: why were so many of the biggest names in business, politics and the media so willing to go along with the whole charade?
In the immediate aftermath of the collapse, we have already learnt that the respected management consultancy Bain contributed to “due diligence” on the firm before an investment by Tiger Capital; that some of the leading names in venture capital, from Sequoia to Softbank, poured hundreds of millions into the enterprise; that major media brands such Propublica took money from the founder along with plenty of charities; and the likes of Sir Tony Blair and Bill Clinton were happy to pontificate at its conferences.
The capital markets will recover from the collapse of FTX. So in time will most, if not all, of the individuals trading through it, even if they lose some money. But the reputations of its cheerleaders will be permanently damaged, and perhaps fatally so – they should never have lent their weight to such a flimsy enterprise.
Less than a fortnight after its chaotic collapse, there are already signs the FTX scandal is starting to spread throughout the rest of the crypto industry.
The trader Genesis said this week that it had halted all redemptions and followed that up with a statement that bankruptcy was one of the options, not usually an encouraging sign. Other crypto traders, brokers and hedge funds may well be in trouble soon.
Surprisingly, the price of Bitcoin itself has held up rather well in the aftermath of the scandal. Yesterday, the price per coin rose back above $16,000 (£13,475) and has fallen only from $20,000 since FTX started to unravel. It’s hardly a dramatic drop by the standards of digital tokens, although it was already a long way off the $60,000 it hit last year. Investors may well hold on to their money, so long as they didn’t buy at the peak or through FTX, and have strong nerves. Bitcoin itself may survive this crisis as it has several earlier ones.
The real damage will be done to FTX’S cheerleaders and outriders. Serious questions have to be asked of all the people and institutions who helped create the fiction of Sam Bankman-fried as the boy wonder of finance. It emerged this week that the consultancy Bain reportedly contributed to the due diligence work for Tiger Capital on its investment in FTX. Seriously? After all, this is a company, which, according to John Ray, the man drafted in to clear up the mess, didn’t even have the kind of financial records in place you might expect of your local window cleaner, and where three or four billion dollars could be transferred without anyone writing it down.
True, we also don’t have high expectations of Bain. After all, it is only a couple of months since the firm was banned from doing any more work for the British Government for three years after it was caught up in a scandal in South Africa (and, just taking a wild guess here, but that probably won’t be lifted early).
Then again, what exactly was Tiger, which used to be one of the most respected hedge funds in the world, doing investing in FTX at all? Or, come to think of it, the major venture capital funds who backed Bankmanfried, such as Sequoia or Softbank, institutions that may have scored some big successes when the internet start-ups were booming, but have since shown that they have very little judgment (Japan’s Softbank was also a big investor in Wework – perhaps it should rename itself Soft Touch).
Why were so many charities willing to take the company’s money, which the founder himself admitted was nothing more than whitewashing its reputation? Propublica might pride itself on its investigative journalism, but its detective work does not seem to have extended to questioning the big cheques it was receiving from FTX and the same is true of the many other causes it supported, not least the many millions donated to Democratic candidates in the US.
Likewise, questions should be asked of its sporting partnerships, such as its sponsorship of Formula One racing, its naming rights to a sports arena in Miami and endorsements from celebrities such as the NFL star Tom Brady and the model Gisele Bundchen. And then there are the politicians for hire. True, we already knew that Clinton and Blair were a couple of hucksters who would do almost anything. Even so, agreeing to speak at an FTX conference on crypto markets earlier this year was one they should have turned down, and not just because they don’t have anything sensible to say on the subject. They lent a veneer of gravitas to an organisation that was about as solid as an ice cream left out in the desert.
Here is the important point. Bankman-fried turned out not to know very much about managing a business or building a crypto exchange. But he had a genius for a very 21st-century form of selfpromotion. He knew how to leverage altruism into cash; how to soften up the media so that hard questions were not asked; how to lure consultancies into lending him their reputations; and how to bring politicians and venture capitalists on board to create a sense of momentum.
His reputation has now come crashing back down spectacularly. But it should not be the only casualty of the scandal – the reputation of all his outriders should be every bit as damaged as his.