SBF, the FTX “Crypto Messiah”
Everyone was under the spell of the crypto messiah, but none of the star-studded multimillionaire investors bothered to conduct any due diligence
History has always produced masterful rogues who seek riches by swindling others. During the 18th century Scotsman, John Law, a gambler who killed a man in a duel over a married woman, escaped from prison, and in 1716 wound up in France and established the Banque Royale that could print money to pay government expenses. Law created the Mississippi Company that issued shares with proceeds going directly to the French government to pay down debt. Throughout Law got a cut of the action that allowed him to buy estates, mansions, and diamonds and declare himself, “the richest man who’s ever been.”
In 2000, as Enron started to fall apart, its CEO Jeffrey Skilling demanded the firm use market-to-market accounting that would represent “true economic value.” The company’s assets kept growing and reported profits that had yet to be earned and losses were never reported. According to Forbes, Enron generated huge revenue numbers by buying and selling the same products over and over. Enron stock traded at $90.75 at its peak on December 2, 2001, but after the accounting scandal was uncovered its stock hit $0.26. Shareholders lost $74 billion in what would become known as the largest corporate fraud in US history.
When I heard about crypto messiah Sam Bankman Fried, known as SBF, and what was transpiring with his companies FTX and Alameda Research it sounded like a future episode on American Greed. SBF is a member of society’s privileged class, both parents are successful law professors and he studied at the Massachusetts Institute of Technology, majoring in physics. By age 30 he was worth $30 billion, hanging out with Bill Clinton and Tony Blair, and according to one of his investors Sequoia Capital he had the Midas touch, believing that he would become a “sure-fire trillionaire.” He was branded as a visionary who would make trading crypto as easy as shopping on Amazon.
SBF’s public persona was that of the poster boy for woke politics. He wore tee shirts, played video games while in meetings, and was an altruist whose life’s goal was to make as much money as possible and then give it away. He called it “effective altruism” that involved giving money to climate and bioterror initiatives and money to his brother to conduct pandemic research.
He started a political super PAC called Protect Our Future and made $40 million in political donations during the midterms, the bulk of which went to Democratic committees and candidates. He got venture capital money from Silicon Valley, Sequoia Capital, Softbank, Ontario Teachers, and paid celebrities to endorse and invest in FTX: quarterback Tom Brady & his ex-wife Gisele Bundchen whose value in FTX according to Forbes reached $50 million, basketball superstar Steph Curry, and tennis player Osaka; Shark Tank Kevin O’Leary, who once believed crypto to be worthless, joined SBF’s cult and upon losing his crypto investment cried wolf and demanded regulation. SBF was investing in and rescuing failed crypto projects and was given the nickname crypto’s J.P. Morgan.
Everyone was under the spell of the crypto messiah and believed his operation to be legitimate, but none of the star-studded multimillionaire investors bothered to conduct any due diligence where they could have discovered that FTX had neither a board of directors nor an accounting department.
The fall from the mountaintop began when CoinDesk published a story raising questions about the solvency of Alameda Research and FTX. Alameda research, SBF’s trading platform, had much of its $14 billion in assets tied to FTT token coins that were created by FTX. The FTT token was not backed by any currency, or indeed anything at all. According to Cory Klippstein, CEO of Swan Bitcoin: “It’s fascinating to see that the majority of the net equity in the Alameda business is FTX’s own centrally controlled and printed out of thin air token.”
FTX filed for bankruptcy after its larger rival Binance walked away from a proposed acquisition. It is alleged that SBF transferred $8 billion of customer funds to his trading platform Alameda Research and the money was used to make risky trades. Customer money to the tune of $1 billion-plus has vanished. John Ray III, FTX’s new CEO said in a sworn statement: “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information.”
SBF laughed off any sense of ethics and exploited an industry with no regulatory framework and free money set at zero interest rates, making it easy for him to connect with venture capital firms, pension funds, and other millionaires desperate for the next big thing and who were tired of the modest returns of stocks and bonds. The risk appetite of both investors and SBF were mutually inclusive: SBF was willing to accept very high risk to create “an enormously valuable existence” for himself, and the Silicon Valley investors who poured $2 billion into FTX with “no strings attached” wanted to be taken to the promised land of unlimited riches.
The curtain is closing on another era of central bank monetary extravagance as interest rates rise and recession rears its ugly head. Crypto has lost $2 trillion, companies are going under, and thousands of creditors wait to find out if any scraps remain. Investigators have one tough job ahead as SBF used auto-delete software that erased any of his communication.
The only potential value in the crypto house of cards is the blockchain technology that runs crypto platforms, as there is the potential that technological innovation could change the way financial services and supply chains operate. As for SBF, he continues to deny federal allegations that he misappropriated $8 billion in customer assets and claims that FTX US remains solvent and that the collapse of his hedge fund Alameda Research was a result of market forces. The 30-year-old former multi-billionaire—whose net worth has reached net zero—awaits a trial on fraud, money laundering, and campaign finance charges.
To understand the mindset of SBF, the great American journalist, essayist, and cultural critic H.L. Mencken said it best: the “urge to save humanity is almost always a false-face for the urge to rule it. Power is what all messiahs really seek: not the chance to serve.”