FTX’s Collapse Isn’t Just About Fraud. It’s About What Happens When You Live Inside the Crypto Bubble.
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Disgraced FTX founder Sam Bankman-Fried’s live interview today with the New York Times’ Andrew Sorkin at the paper’s Dealbook conference was predictably odd, with Bankman-Fried at once appearing contrite and apologetic for his many failures as FTX’s C.E.O. while also dodging any suggestion that chicanery was involved in FTX’s collapse earlier this month.
As a result, watching the interview will not give you a clearer understanding of whether, as many reports have claimed, FTX illegally (or at least unethically) funneled customer assets to Alameda Research, the crypto hedge fund SBF also founded, in a foolhardy attempt to let Alameda make big bets on crypto. But what the interview did make clear, I think, is that the story of FTX is not simply a story of corporate fraud, as many crypto advocates would like it to be. Instead, it’s a story about someone who was so thoroughly in thrall to a delusion — the delusion that crypto is the Next Big Thing — that he built and then destroyed a company in pursuit of it.
What, after all, ultimately brought FTX down was that it had made huge margin loans to Alameda, so that it could make highly-leveraged bets on other crypto assets. Some of those loans may have been funded with assets from customers who had never agreed to let their money be lent out, which would be fraud. But that’s not what wrecked FTX. Instead, what wrecked it was that it lent out far more money to Alameda than it should have, and that it then failed to call those loans, and force Alameda to liquidate its positions, when it should have. That’s why, in today’s interview, Bankman-Fried said FTX “completely failed” on risk management, and insisted that he hadn’t realized until too late how big Alameda’s positions (meaning its bets on crypto) were.
SBF’s insistence that he was in the dark about what Alameda was doing may be, of course, a totally false and self-serving statement, particularly given how closely linked the two entities were. But let’s assume, for the sake of argument, that he was telling the truth. What does it suggest about the C.E.O. of a trading exchange when he’s indifferent to the amount of risk his firm is taking on by making big margin loans to customers? I think what it suggests is…
