FTX and the end of the fairytale
It’s hard to know which we love more: Fairytale success stories or the bluffers that tell them. With FTX and Sam Bankman-Fried (‘SBF’), we had both in good measure.
Sam Bankman-Fried’s back story was a good setup for the fairytale success story: The son of two professors at Stanford Law School, he was destined for great things. Having graduated from MIT in physics and mathematics and gaining experience as an ETF trader, he founded Alameda Research, a cryptocurrency trading firm, in September 2017.
An early warning sign of what was to come came in the name, Alameda Research. Researching what, exactly? It makes it sound like it’s trying to find the cure for something. Allegedly, SBF used the moniker to avoid regulatory scrutiny. Whatever the motive, Alameda Research was the genesis of FTX, which was founded in 2019.
By any stretch of the imagination, FTX’s rise to the top of the cryptocurrency pile was meteoric. After raising $8 million in a seed round in 2019 (see its own gushing take on the raise here), it was onward and upward. By July 2021, it raised $1 billion in an investment round led by Sequoia Capital – usually a company with a finely attuned nose for sniffing out BS.
The PR Phase
In his book, Irrational Exuberance, Professor Robert Shiller notes: “The history of speculative bubbles begins roughly with the advent of newspapers.” In other words, once people start to talk about an investment, it gains a life of its own. In addition to Sequoia Capital, in 2021 FTX attracted investments from a string of celebrities.
No ordinary celebrities, either. Try Tom Brady, Gisele Bundchen, Michael Jordan, Madonna, Gwyneth Paltrow and baseball Hall-of-Famer David Ortiz. But Bankman-Fried and his team thought ‘why stop there’? In the same year, they tied up sponsorship deals with Mercedes Formula 1, Miami Heat, UC Berkeley, and the Golden State Warriors, among others.
At a certain point, there are so many big names on board that people begin to forget about checks and balances. In an October 2021 Financial Times article (see here) on FTX’s $421 million raise, the journalist writes verbatim from the FTX press release on the raise. One small detail they failed to mention was SBF cashing out $300 million shortly afterwards.
At least $80 million of that was ploughed into never-to-seen-again political donations, on both sides of the political spectrum, but mostly to the Democratic party and assorted Democratic PACs. Only George Soros donated more in the same period. By the time this spree was over, there weren’t many people batting against FTX and SBF. They were as good as untouchable.
In November 2022, a Coindesk article (no, seriously) stated that FTX’s sister company, Alameda Research, was holding a significant proportion of its assets in FTT, FTX’s native cryptocurrency token. This was the point at which Binance, a rival exchange, realized that the ‘F’ in FTX stood for fugazi, fudge, or fraud. It cashed in its investment and the rest is history.
End of the Fairytale
What’s remarkable here is that fraud on a scale like this might be ongoing were it not for an article in Coindesk. Kudos to Coindesk for bringing it to everyone’s attention, but is that where we are with regulatory oversight of cryptocurrencies? Sitting on a panel with Bill Clinton is not a substitute for regulatory oversight. The man is never too far from a panel in any case.
What emerges, again and again, is that, if the story is good enough, oversight is overlooked. In the past 15 years, we’ve seen cases just like FTX again and again. Replace SBF’s name with one of Bernie Madoff, Elizabeth Holmes, Arif Naqvi, or Adam Neumann and you begin to see a pattern: Not only do people like fairytales, but they also usually want to invest in the enchanted palace.
If there’s a common theme running through each of the cases listed, it is the lack of transparency, usually through a scheme, science, or technology that’s too complicated for the rest of us schmucks to understand. As a result, nobody wants to feel stupid by asking obvious questions, such as: ‘exactly what is the business model here?’
What’s most remarkable is that these trends seem to be speeding up rather than slowing down. The end of the fairytale used to come once every couple of decades. Holmes, Naqvi, Neumann, and SBF have all come to an end in the last five years. When the next one appears on the horizon, don’t be afraid to ask the seemingly stupid questions.