Last Tuesday, FTX, the second-largest cryptocurrency exchange in the world, closed withdrawals, blaming “severe liquidity problems”. By Friday, FTX had filed for bankruptcy.
After a stupendously profitable asset bubble in 2021, the cryptocurrency industry suffered harsh reversals in 2022. A string of high-profile collapses – Terra-Luna, Three Arrows Capital, Celsius Network, Voyager Digital – lost investors a fortune, tanked prices and demolished market confidence. But FTX’s sudden collapse caught almost everyone by surprise.
FTX was founded in 2019 by Sam Bankman-Fried, the child of two Stanford academics. He had worked at quantitative trading firm Jane Street Teuntil 2017, when he struck out on his own with his Alameda Research crypto hedge fund. With Alameda as its market maker, FTX rapidly became one of the most popular crypto exchanges. Traders loved its complex futures and options products. A more restricted branch for US customers, FTX US, opened in 2020.
When bitcoin and crypto-assets hit the headlines in 2021, Bankman-Fried positioned himself as a billionaire public intellectual. Bankman-Fried would only be photographed in shorts, a T-shirt or hoodie, and untied shoes. He marketed himself to venture capitalists as a genius eccentric, beyond their comprehension. How did this mere boy of 29 hit the heights so quickly? What was his secret?
FTX marketed hard to the US public: a Super Bowl ad, sports sponsorships, even ads in fortune cookies. Bankman-Fried spent tens of millions on candidates for the US midterms. He even went to Washington, promoting his vision of crypto regulation, to create an environment where he could market FTX to large institutional investors – though this rankled others in the crypto industry, who felt that FTX was trying to freeze them out.
FTX worked hard to promote itself as a trustworthy financial institution run by a dynamic genius, in the mold of Steve Jobs or Elon Musk. In fact, the institution was operating outside all effective regulation, and was an all but hollow shell after the collapse of the crypto market. The Forbes billionaire list entry for Bankman-Fried warned that most of his fortune was “half of FTX and a share of its FTT tokens”.
FTT was an internal token created for traders on FTX – very like supermarket loyalty card points. But FTT was also a crypto-asset, traded outside FTX. It had a mark-to-market value, and people traded against it – such as Bankman-Fried’s other company, Alameda. On 2 November, an Alameda balance sheet was leaked showing that its claimed assets were substantially composed of FTT tokens. Alameda had borrowed from other crypto companies using this pile of FTX-Alameda loyalty card points. It had the FTT because FTX had needed to bail out Alameda after the collapse of Terra-Luna, and sent over its own made-up FTT tokens, claiming these were assets of value.
The crypto markets assumed that trouble at Alameda meant trouble at FTX, and customers got their cryptos out as fast as they could. FTX closed withdrawals on Tuesday. FTX’s competitor Binance announced a bailout a few hours later, but this offer was withdrawn the next day: Binance had looked at FTX’s books and seen that at least $6bn was missing. The Bahamas, where FTX is incorporated, froze FTX’s assets on Thursday; the next day, FTX filed for Chapter 11 bankruptcy in the US.
The celebrity billionaire is a perennial favorite in the US. The archetype is Jobs: eccentric, acerbic, prickly, and spent 10 years solidly delivering through the late 1990s and into the 2000s. Musk put himself forward similarly, promoting electric cars and energy transition.
When the ultra-wealthy seek the limelight, it’s a stage-managed production for publicity purposes. Sometimes it’s a Steve Jobs. Sometimes it’s an Elizabeth Holmes, dazzling the business world with charm while promoting a fraud.
Bankman-Fried promoted himself as an eccentric genius with financial acumen beyond normal minds, and policy insight to take this new asset class into the future. In reality, his image was a distraction from what was going on inside FTX: an ever-widening balance sheet hole, as FTX and Alameda, working together as a shadow bank, tried to plug the hole with customer funds. Bankman-Fried’s secret turned out to be a financial shell game.
The wider issue is that crypto is all but unregulatable. Legislators can pass lots of detailed rules for US entities, but all the trading in crypto happens in opaque and unregulated offshore casinos – such as FTX.
Further frauds will reveal themselves. When crypto goes out of fashion, new financial shenanigans will step up – fronted by an eccentric genius who nobody understands, but assume they must be as good as they say they are.
Stories of billionaire wonder children always seem too good to be true. That’s because they are.