At the height of Sam Bankman-Fried's influence and power, there was a mostly unspoken question as to how FTX could be spending so profligately on advertisements and investments. The exchange, often cited as the third largest by volume before its epic collapse, was suspected to be unprofitable when compared to competitors. Something of an understatement, in hindsight.
Founded in 2017, and ultimately rocketing to a valuation of $32 billion, FTX had also accrued a lifetime net loss of $3.7 billion before SBF's multi-billion dollar fraud was even revealed. Those carryover losses were even offset by a wildly profitable bull market in 2021, a year that FTX tax filings show it netted $377 million in profit (Coinbase, by comparison, earned $3.6 billion profit in 2021 with over over 10x the headcount).
We now know, according to expert testimony from forensic accountants during SBF's excruciating trial, that spending by the wannabe "JP Morgan of Crypto" was funded by unsuspecting FTX customers. SBF directed a score of buyouts, acquisitions and real estate purchases, hundreds of millions of dollars in political and charitable "donations" as well as billions in venture investments and other gambles.
Money also flowed from the FTX exchange into Alameda Research's coffers, to pay off the hedge fund's massive loan obligations, finance trades and, in at least one example, pay off Alameda's losses from market making.
The whole situation has left a massive stain on the crypto industry. How did SBF get away with it for so long? Why did no one notice something was amiss or fail to speak up? Could something like this happen again?
There's a saving grace in that, in the words of FTX CEO John J. Ray III, SBF's fraud was simply "old fashioned" embezzlement. Although FTX happened to be a crypto exchange, and SBF a cryptocurrency powerbroker, the scam itself had almost nothing to do with crypto itself. (So much so that the district judge overseeing SBF's trial actually prohibited many of the conversations about crypto that SBF's defense team would have liked to have had.)
Sam Bankman-Fried was attracted to money, power and fame, but crypto was merely his means. He was never an ideological proponent of decentralization, and at times he appeared to loathe the scams and Ponzi schemes that propagated across the industry. Perhaps he felt entitled to steal from his customers because he figured he'd put the money to better use.
It's for this reason that crypto is ready to move on from FTX. Even as the trial was unfolding, many industry participants began to feel that it was a bit of a sideshow. To the extent that the industry learned anything from the FTX fraud, it's what many already knew or believed to be true: that centralized operations are anathema to crypto. It's telling, for instance, that the first lending platform to liquidate Alameda was a DeFi protocol.
Of course, as former CoinDesker Michael McSweeney wrote in a recent Blockworks op-ed, the industry will likely be irrevocably changed by SBF. In the same way that the collapse of Mt. Gox accelerated the formation of regulations around the world (in particular in Japan, where Mt. Gox was based, and in New York State with the BitLicense), legislatures have mobilized to pass laws to prevent the next FTX.
It may take years for trading volumes to reach pre-crash levels again. The recent runup in bitcoin, supported by positive advancements on the bitcoin ETF front, has been an optimistic reminder that capital is on the sidelines waiting to be deployed. And while crypto isn't exactly "cool" nowadays, it remains intriguing for the wider public.
Just like the reputational hits after the collapse of Mt. Gox, the DAO attack and the Bitfinex hack — each of which felt existential at the time — there are now generations of committed crypto traders who are more or less unaware of those stories.
The collapse of FTX will be no different: it proved crypto's worth and in time will prove its longevity.
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–D.K.
@danielgkuhn
daniel@coindesk.com
