Sam Bankman-Fried and FTX Collapse
There Is a Silver Lining if We Acknowledge It
One of the leading stories over the past few weeks has been that of the collapse of the FTX crypto exchange. At the center of FTX is the character who built it—Sam Bankman-Fried. He’s such a household name within the blockchain community that he is referred to by the acronym, SBF. But the acronym should really stand for, “Scam Bluffman-Fraud.”
Whether SBF will be charged with fraud, or any other criminal act, is yet to be seen. SBF’s empire—made up of a convoluted and curious organization including his crypto-exchange, FTX, his trading firm, Alameda Research, another entity, Paper Bird Inc., and others—faces a massive bankruptcy on the order of $10-$50 billion. An estimated 1 million investors (suckers) are facing total losses in the billions. SBF’s net worth went from a high of $26 billion down to an estimated $991.5 million.1 I’d say he’s still doing just fine, living free out there in the Bahamas ... for now. Where, and to whom, did all the money go before the fall? We shall see at some point, I hope.
FTX is (was?) a crypto-exchange service which operates similar to a bank. What occurred with FTX was similar to a bank run. FTX was leveraging its assets to create liquidity for other investments. It appears the catalyst for the fall was on November 2nd, when details of Alameda Research’s leaked balance sheet were published by CoinDesk.2 FTX, which lent customer funds to Alameda, apparently faces an ~$8 billion funding gap. Investors got spooked.
The guy brought in to reorganize Enron after it went into bankruptcy—John Ray—has been appointed to do the same for FTX. Apparently in his 40 years of legal and restructuring experience, Ray says3 he had never seen …
“such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”
As Joey Russo used to say, whoa!
The Appeal to Authority
SBF was touted by our “reliable” friends in the corporate press as a genius, a philanthropist, and an altruist. Earlier this year, SBF had pledged to give away 99% of his wealth.4 But apparently what he really meant was to give away 99% of your wealth. The press has a bad habit of appealing to authority (e.g., trust the experts, trust the fact checkers, trust the Twitter blue-checks, etc.). So, in my view, this collapse is a fool-me-twice-shame-on-you kind of situation here.
Here’s Brendan Doherty at Forbes, a year ago, spreading the word of SBF’s good intentions:5
“The ‘Bentham of Crypto,’ Bankman-Fried had built his operating philosophy on notions of effective altruism and utilitarianism as pioneered by Jeremy Bentham. Bankman-Fried isn’t out to just be the richest crypto billionaire. He’s out to have the largest possible positive impact on the world. And to the extent money can deliver that, he’ll keep earning it.”
The cartoonishly villainous, World Economic Forum (WEF), had invited SBF on as a “thought leader” in May of this year to talk about making the world a better place:6
“… at this year’s World Economic Forum Annual Meeting in Davos, … hear from thought leaders charting the course ahead for a more sustainable, inclusive and technologically advanced future.”
So much for that. Apparently the WEF is now embarrassed, so they pulled a “Stalin”7 and wiped the history:8
“FTX was a World Economic Forum partner. In light of last week’s events, their partnership was suspended and they were removed from the Partners section of our website,” a spokesman for the Geneva-based organization headed by Klaus Schwab told The Post on Monday.
The Gray Lady is doing the opposite of cutting ties with SBF and is, instead, continuing with paying him (presumably) to grace their audience with his presence. The New York Times’ yearly DealBook Summit is going forward on November 30th featuring SBF as a key speaker.9 But it’s only fitting considering the list of other speakers include people famous for blowing other people’s money: New York City Mayor Eric Adams, Treasury Secretary Janet Yellen, and none other than the curious Ukrainian President Volodymyr Zelensky. Sounds like a summit of altruism, right?
Of course, SBF’s version of philanthropy and altruism is one that focuses on empowerment of the State, giving money to the sociopaths in DC and elsewhere. SBF has given his (your?) money to fund purportedly pandemic-related causes, research into artificial intelligence, climate change mitigation, and among other things, space-focused research into the “governance of space.”10
SBF was the second largest individual Democratic donor to the Joe Biden 2020 campaign (behind George Soros) and gave ~$40 million to Democratic House and Senate candidates in this most recent 2022 election cycle.11 He established the duplicitously named super PAC, "Protect Our Future."12 No wonder the establishment loved him.
Of course, capturing the political class is a devilishly smart move, but it's not altruism, nor is it philanthropy. This version of philanthropy reminds me of an episode of Always Sunny in Philadelphia, where Charlie claims to be a philanthropist to impress a date, but in all of his ignorance, pronounces the word as, “full-on-rapist.”
Straight from the horse’s mouth, we hear the obvious ... SBF admits it's all just a facade:13
“I had to be [really good at talking about ethics.] It’s what reputations are made of, to some extent. I feel bad for those who get fucked by it … by this dumb game we woke westerners play where we say all the right shiboleths (sic) and so everyone likes us.”
The Regulatory Reaction to Crypto
How will the regulators react to the FTX collapse? The government’s natural reaction is to control. The fall of FTX presents an opportunity for governments to present their own Central Bank Digital Currencies (CBDCs). Governments will tell the people things like, “you see, mere mortal citizens, you must entrust us—your benevolent overlords—to protect you in the realm of digital assets, unless you want to lose all of your money again.”
As I wrote last year, governments’ desire to unleash CBDCs is there awaiting the perfect opportunity. And this is a great opportunity for them, unfortunately, since investors are fearful.
Well, you should know by now that you can’t trust the regulators. They serve only to give a false sense of security to investors. Remember that Bernie Madoff was arrested and charged with masterminding a Ponzi scheme involving ~$65 billion. Note that Harry Markopolos had been writing to the SEC for years warning that Madoff was running a Ponzi scheme.14 What did the SEC do? Well, nothing. In fact, the SEC esteemed Madoff as chairman of the Nasdaq Stock Market and Madoff sat on SEC advisory committees!15 Talk about moral hazard. Madoff was also known for being a philanthropist and a major contributor to candidates of the Democrat Party. Interesting correlations, to say the least.
Is There a Silver Lining?
There is a silver lining to the collapse of FTX … if we choose to acknowledge it. The silver lining is that we all have the opportunity to learn … again … that the Austrian economists are right.
The FTX collapse is an inevitable result of when the hang-over of easy monetary policy kicks in. As interest rates rise and money supply growth slows, borrowing costs increase and leveraged bubbles start to pop.16 The FTX debacle is a parallel to what is happening on a grander scale with fractional-reserve banking throughout the world. When that bubble pops, it ain't goin' to be pretty.
Jeff Deist and Bob Murphy showed the following clip on the Human Action Podcast.17 It shows Caitlin Long (pioneer of full-reserve Bitcoin bank, Avanti) educating the audience at a Bitcoin conference in 2021 about the difference between commodity credit vs. circulation credit (i.e., leverage).
Ludwig von Mises distinguished between the two types of credit: credit that is backed by savings (commodity) vs. credit that is backed by essentially nothing (circulation). It is circulation credit that plays the key role in the boom-bust cycle.
Caitlin was arguing against circulation credit (leverage). And, well, guess who argued in the favor of expanded leverage? None other than Mr. Scam Bluffman-Fraud. Watch below.
“A fool and their leveraged Bitcoin are soon parted.” - Caitlin Long
As details continue to emerge, the absurdity of the whole FTX affair will become clear. Hindsight is 20/20, as they say, but the red flags were there. Will the people acknowledge the Austrians and see the parallels of the FTX collapse to the entire worldwide fractional-reserve banking system?
We all should listen to Caitlin Long. She told her audience to read their Mises and learn about circulation credit. Take this opportunity to acknowledge the silver lining and do just that—read Mises to understand what causes this sort of madness and how to stop it.
Good find (the video on leverage)!