The fall of crypto wunderkind Sam Bankman-Fried: A modern morality tale

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Two fraud trials start in New York this week and of course Donald Trump’s is grabbing the front pages. But the case against Sam Bankman-Fried, former CEO of the FTX cryptocurrency banking giant, will be fascinating for several reasons, mostly unrelated to the mystical, near impenetrable properties of cryptocurrency. Bankman-Fried’s alleged crimes were deeply mundane. He is accused of stealing customers’ money and using it as his personal piggy bank. Even the methods he is accused of using were boringly old school. The prosecution will claim he raided billions of dollars from customers’ FTX accounts via “secret loans” and funnelled them into his crypto trading firm Alameda. Then he spent the money on stuff that billionaire tech bros fantasise about, like changing the world in their image. He explored the possibility of paying Trump not to run for president, according to Michael Lewis’s new book. The team returned with the news that $5 billion might do it. Allegedly. The purported genius didn’t merely leech into the standing army of social media fanboys; he penetrated the most prestigious clubs, banks, boardrooms and high-end business periodicals. His first television interview in 2021 saw him at his trading desk in the usual slobby T-shirt and cargo shorts. Crypto Wunderkind, read the Bloomberg chyron, while the numbers on the screen showed that, in just the past year, Bitcoin’s price had risen by more than 500 per cent. Meanwhile, his eyes darted left and right only occasionally colliding with his interviewers’ gaze. This was because he was simultaneously playing a video game. On live TV. A detailed description of his Zoom meeting with Anna Wintour – where her efforts to persuade him to both fund and attend the Met Gala collided heavily with a video game – is worth the price of the book. It ended, inevitably, in a no-show but only Wintour’s team almost uniquely, made a fuss. Everyone else sucked it up because he was the wunderkind. [ Sam Bankman-Fried’s fraud trial to begin jury selection ] He made the cover of Forbes that year with the coverline “Only Zuck has been as rich ($23 billion!) this young (29!)”. Fortune hedged with “The next Warren Buffett?”. To quote your wussy old financial adviser: if it sounds too good to be true, it probably is. Last December, following FTX’s calamitous implosion, the new CEO and bankruptcy expert John J Ray told a House committee that he had “never seen such an utter lack of record keeping” at a company. The few rules that existed were obviously made to be broken. Owners and senior management controlled all the accounts and could move money and assets at will, undetected by customers. “The collapse of FTX appears to stem from absolute concentration of control in the hands of a small group of grossly inexperienced and unsophisticated individuals . . . ,” said Ray. Yet while pumping billions of venture capital into FTX and – presumably – performing heavy due diligence on their investments, gigantic firms such as Sequoia Capital, BlackRock and Temasek apparently failed to spot any problem. On panels and at business pitches the wunderkind in the cargo shorts beside them was engrossed in League of Legends. It took a news site, CoinDesk, to notice that Alameda was holding a substantial number of crypto coin issued by FTX. Virtually overnight the empire valued at $32 billion crumbled to sand. A lot of crypto was missing by then of course, squirrelled away in “a cold wallet” or even a hot one, since the handlers were so inept. Or possibly “in a thumb drive that we just don’t have knowledge or possession of“, said Ray, neatly summing up the blinding problem with cryptocurrency in the first place. Which leads to another notable element in the Bankman-Fried story. His mindset and motivation are being dissected in a sympathetic, nuanced, thoroughgoing way not usually granted to ex-wunderkind billionaire alleged con artists. [ Former ‘crypto king’ Sam Bankman-Fried prepares for fight of his life in US trial ] Among other things it might be said that he was lucky in his victims. Who banks hundreds of millions in cryptocurrency? According to court papers, FTX’s 50 biggest customers were owed nearly $3.1 billion and its customers were largely based offshore in the Cayman and Virgin Islands. Those islands accounted for a third of customers between them. The next two biggest customers bases were China and the UK. FTX’s client list should be interesting if it ever sees the light of day. For years the tech industry rewarded disruption and breaking things, but traditional finance had also hopped on board the crypto train. It’s worth remembering that the FTX crash may have been sparked by fraud but it was a sell-off in the value of its own fake money that triggered the bank run. The legendary investor Charlie Munger called it out in 2021, as Bankman-Fried was reaching his pomp: “It’s partly fraud and partly delusion . . . the delusion may be more extreme even than the fraud,” he said, describing the professionals going into trading crypto as “just disgusting . . . Somebody else is trading turds and you decide ‘I can’t be left out’”. So was Bankman-Fried a clueless man-child whose allergy to grown-up rules and risk management led him astray (with liabilities of $8 billion, oops)? Or a calculating criminal running an offshore exchange largely outside US regulators’ jurisdiction who set out to defraud his shadowy clients and launder funds? Time will tell. He is not without insight. His fear of Trump’s destructiveness was well-founded, but the portrait of his messy, permanently distracted, arrogant mindset is disturbing precisely because of the wunderkind’s sense of his own omnipotence. It is of a piece with the notion that the billionaire techbro must be synonymous with genius, uniquely gifted to solve the world’s problems and recreate it in his image. The most fascinating part of this story is how the cool celebrities and the financiers bought it in its entirety. This is where the self-interrogation should begin.

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