Sam Bankman-Fried, FTX, and the beginning of the crypto ice age

A few months ago, cryptocurrency exchange FTX was valued at around $32 billion. Its brand has been plastered to the Miami Heat arena and to refereeing the World Series. Tom Brady pitched it during the Super Bowl.

FTX is currently bankrupt. Over a million creditors may have lost money. FTX founder Sam Bankman-Fried also faces potential civil or criminal liability.

The FTX crash has shocked the financial and business world, but it’s especially bad for the future of cryptocurrencies. Bankman-Fried, or ‘SBF’ as he was known in Cryptoland, was a boy wonder in the industry and the friendly face who led the charge for integrating crypto into the traditional financial system.

Liz Hoffman, Business and Finance Editor at Semafor, said: today, explain Host Sean Rameswaram says Bankman-Fried’s stigma will likely delay its integration efforts for years, if not more. “I think we talk a lot about crypto winter,” she said.

Below is an excerpt of the conversation, edited for length and clarity.There’s a lot more in the full podcast, so listen up today, explain Apple Podcasts, Google Podcasts, Spotify, Stitcher, and wherever you can get podcasts.

Sean Rameswaram

Liz, I think a lot of people around the world who haven’t invested in crypto feel like everything is smoke and mirrors and too wild a western. But you say these are the two biggest players in crypto. How is this so fake?

Liz Hoffman

It’s like a story as old as finance. This is exactly what happened to him at Lehman Brothers in 2000. For example, we got rid of wallets and tokens and weird crypto terms. This is exactly what happened at Lehman Brothers. That’s exactly what happened at Washington Mutual. That’s exactly what happened in 1929, people got on their skis and got out.

As you know, no financial institution keeps their customers’ money in lockboxes. That’s not how it works. they rent it out. They invest in things. But there are all these rules that try to keep them on track. When they come to the bank tomorrow and say, “I want my money back,” they should have some money on hand. Failure to do so will lead to mass panic. And that’s basically what happened here. It’s a little unclear where the money went and whether or not the crime was at the root, but the way this has been unraveled is only very basic financial stuff.

The Crypto Brothers claim to live outside the system. It will be egalitarian, utopian, and wonderful. ” But no escape velocity. Gravity still applies. And then they faced a very basic problem: they ran out of money.

Sean Rameswaram

And you’re comparing this to Lehman Brothers and Washington Mutual, the Great Recession. who’s going to mess around here?

Liz Hoffman

There are two people who mess up, and they both end up pretty badly. So the analogy that works here is I’m a kid in his ’80s and his ’90s — Chuck E. Cheese.

You gave them money, bought tokens when you walked in the door, used tokens for all kinds of fun stuff at Chuck E. Cheese. If you had a lot of tokens — if you were like a superpower user of Chuck E. Cheese — always Going there, I would have had a lot of net worth stored in Chuck E. Cheese tokens. If Chuck E. Cheese goes bankrupt, you’re going to lose a lot of money because you’re holding all these tokens that you intended to use in your system or exchange for cash and they’re worthless. That’s the people who bought the FTX tokens, so the Crypto Brothers, right? Mostly outside the US, I should say.

Another group is the owners of Chuck E. Cheese. These are FTX investors. And they were raising money from Silicon Valley heavyweights. One of those big venture capital firms, Sequoia, in which he invested last week at a valuation of $32 billion, wrote down the stake to zero.

Sean Rameswaram

Wow.

Liz Hoffman

So they will lose money. Their investors are pension funds and university endowments. So there are some knock-on effects here. I don’t want to downplay the losses real investors suffer. That said, I don’t think this is anything like contagion. I don’t think this will spill over into the wider economy. One of the reasons is that, by design, cryptocurrencies are not built into the economy. Crypto entrepreneurs despise the traditional economy and the traditional financial system so much that they mostly live outside of it.

The problem with Lehman is that AIG and those companies in 2008 were incredibly embedded in the normal financial system in a way people didn’t appreciate. Everyone is like, “Oh, AIG is like an investment bank. They’re doing Wall Street stuff.” It turns out that there were depositors and customers throughout the financial system. Everything was heavily intertwined. I had a lot of debt. So when the thread was pulled, the whole sweater frayed. I think we talk a lot about crypto winter. This is probably a crypto ice age and people will lose money. And the industry as a whole — to the extent you deem it worth the long term. I’m still agnostic about it. I don’t know—today is a very bad day for it.

Sean Rameswaram

Do you think the government is paying attention to this? Could cryptocurrencies become more regulated as a result of this massive fallout?

Liz Hoffman

Yes, I wish the government had paid more attention a year ago. This was a little jump ball in Washington DC. It was a little unclear who was looking at it.”No, this is like a stock or bond with a different name. It should be regulated just like any security you buy or sell.” “It looks like gold or a cow. It’s like a commodity.” No one can know exactly what it was. As a result, it was not so tightly regulated.

There were some things I couldn’t do. It was not possible to sell the token to US investors. [Bankman-Fried’s] The client was overseas. But I think there’s a very good argument that regulators were asleep in front of the switch and were very slow to act. I think that will change soon.

Sean Rameswaram

How do you think Krypto will recover from this moment when it felt confirmed that the emperor was indeed undressed?

Liz Hoffman

Naked emperor. Hmm, maybe not.

Sean Rameswaram

Oh!

Liz Hoffman

Fundamentally, technology has value, the financial system is incredibly inefficient, it’s silly, it relies on a lot of paper and a lot of trust, and you can build There is an argument. A more efficient kind of unreliable system whose code does the work that hundreds of thousands of people in the financial system do. I think there’s some value there, and I think the underlying technology is probably here and will continue to evolve. I’m not sure if these silly tokens are needed.

So I think the technology has some good parts and they’re fine. You know, let’s go back to 2001. Many stupid dotcom companies were washed away, but the foundations of fiber optic cable, broadband and e-commerce were laid. And Amazon was the winner. But eventually someone will come in and see the wreckage and say, These are good works. I’d happily put real institutional adult money behind it.

(Disclosure: This past August, Bankman-Fried’s philanthropic foundation, Building a Stronger Future, awarded Vox’s Future Perfect a grant for its 2023 reporting project, which is currently on hold. )