“Everyone goes around pretending perception reflects reality, it doesn’t, some of the decade’s greatest people will never be known, and some of its most beloved people are basically shams.”
—Sam Bankman-Fried speaking last November to Vox
On Thursday the New York Federal Court brought four new criminal charges against Sam Bankman-Fried (SBF), the now infamous founder of cryptocurrency investment platform FTX, for fraud and unlawful political contributions, to which he pleaded not guilty.
FTX’s Chapter 11 bankruptcy filing last November was one of the year’s biggest stories, ironically coinciding with the guilty verdict for Elizabeth Holmes, the fabulist who lied about having invented revolutionary medical tech with her company Theranos. Both of their careers followed a similar arc: young revolutionaries promising their technology would upend the status quo, only to be unmasked as empty scam artists.
Despite surface-level similarities, however, there are crucial distinctions between the two Silicon Valley pariahs. Holmes was revealed by whistleblowers revealing that her machines were glorified paperweights. SBF’s coverup wasn’t nearly as inventive. The cryptocurrency products he dealt in were very much real — at least, as much as a virtual token can be real. Instead, it was his business model that allowed for his predatory tactics, alleged fraud, and as much as $16 billion of customer investments to seemingly evaporate into thin air.
The ongoing SBF story is in some ways the ongoing story of cryptocurrency. And to understand cryptocurrency, one needs to understand SBF’s business model.
FTX: WTF?
Sam Bankman-Fried was an opportunist. In 2017 the ex-stock trader noticed a new market, what he called “the lowest hanging fruit.” Crypto is a purely digital currency, Bitcoin tokens being the most popular of the many currencies. Arguably its biggest appeal is its ultra-secure transactions, as once a token is in your possession, it can be transferred anywhere in the world without government oversight or middleman fees — but there’s a catch. Without central banks and federal agencies to continuously monitor it, Crypto’s value can be extremely unstable. In that sense, it’s more comparable to volatile stocks than dollars.
As recently as the late 2010s, Bitcoins were worth pennies. The first recognized bitcoin transaction in 2010 was 10,000 tokens for a couple of pizzas. That much Bitcoin is today worth roughly $300 million because the market flooded with new investors. SBF was among them, and in his market research, he noticed an opening.
If you were to buy 10 shares of stock in a company like Disney, the value is subject to change, but it’s consistent throughout the market. Your 10 shares, and someone else’s 10 shares, would be worth the same at the same time. The market for those securities is regulated by the Securities and Exchanges Commission (SEC) and would be posted by the exchange you bought it from. Bitcoin was different; it had no regulation because it was decentralized, nobody owned the network. It’s an international free for all. You can’t check the value on the NASDAQ or NYSE because crypto doesn’t have a centralized trading system.
There are also no official channels to purchase through, so anyone wanting to buy a token has to inquire through an individual exchange or broker. Those individuals set the price, and their prices can vary wildly. If there’s a gap wide enough between exchange rates, there’s an opportunity for profit. It’s referred to as “arbitrage.” Instead of buying low and selling when the value goes up, SBF realized he could make those sales simultaneously. Buy it cheap in one place, sell it for profit in another. SBF exploited one such gap between exchanges in the US and South Korea, dubbed “The Kimchi Premium,” and got filthy rich. Within a month, he’d founded Alameda Research, a fund specializing in this type of arbitrage trading.
In 2019, he decided to expand his empire. His second company, FTX, would hit the market like an atomic bomb. At its peak, it was valued at $26 billion. Its trading practices shared considerable overlap with Alameda, but it targeted a new demographic. His ideal customers were crypto novices, and he marketed FTX as a type of crypto Charles Schwab. Customers would provide their real dollars, and the company would use its expertise to invest the assets for them, and they could withdraw as they pleased. It seemed revolutionary, and it catapulted SBF into the spotlight.
EFFECTIVE ALTRUISM
SBF was so aspirational he became the subject of many media profiles and was on the cover of Forbes. In April 2022, a Bloomberg profile described him as a “Crypto Robin Hood” and painted the picture of a carefree savant saving the world from the comfort of his beanbag chair. In hindsight, the cozy relationship he maintained with the media may well have been an effort to maintain a mirage.
One of the main focuses of these many stories was his philosophy of “effective altruism.” SBF claimed he wanted to make the world a better place, but believed the most effective way to do that was by becoming a billionaire rather than toil away at a non-profit. He claimed any profit he made from FTX would be donated to charity.
This aspect of the scandal still mirrors Holmes, whose stated mission was similarly charitable: Making the world healthy. Her youth and gender added another layer of interest and colored her perception in the public zeitgeist. She became the platonic ideal of women in STEM or privatized healthcare. To that end, one could argue that Holmes attracted reporters’ attention because her story was positive and inspirational. Figures like her can help break the cycle of cynicism and news burnout. In the case of SBF, he catered to anxieties about the dire state of wealth disparity in America. His philosophy was so refreshing it was newsworthy. It didn’t hurt that interest in Bitcoin was at an all-time high.
“The media are always looking for media darlings, the uncharted path, or the David breaking up the Goliath in the industry,” says Melissa Pereira, a PR and communications expert with 20 years experience working at tech companies like Amazon and Citrix. “These entrepreneurs are more relatable to the general audience and give what many want in the industry — hope. Hope that you, too, can chart your path and leave something meaningful behind as your legacy.”
SBF was more than just cooperative with the press, he made significant contributions to their industry. He was one of the biggest financiers of the excellent investigative journalism non-profit ProPublica. The pendulum swung in the opposite direction too; Vox awarded his philanthropic foundation, Building a Stronger Future, a grant for a reporting project (now on hold). Post collapse, many dug in their heels, providing him a platform to maintain his innocence. Some crypto enthusiasts and industry professionals were enraged by this, and took to social media, accusing these outlets of minimizing the scandal to save their reputation. These tweets were replies to SBF’s first network interview post-collapse on Good Morning America.
The media wasn’t the only place where his altruism was effective in getting him fame and legitimacy. SBF was intimately involved with politics on the federal level. The new 12-count indictment (unsealed in the U.S. District Court in Manhattan) alleges hundreds of unlawful campaign contributions. It uses the phrase “straw donor,” which means he and other executives unlawfully took customer assets and donated them in their own names. The SEC also filed a complaint claiming SBF was using customers’ investments as his “personal piggy bank.”
These funds went to both political parties (though SBF publically aligned himself with Democrats) who had influence over crypto regulation in DC. He was also regularly called upon to testify before congress as an industry expert, so often that CNBC referred to him as the “crypto darling of Washington, D.C.” Funnily enough, SBF’s downfall has put the freewheeling nature of crypto — and therefore, possibly, its future — in peril; President Joe Biden’s White House is now calling for stricter regulatory policy across all niches of crypto.
NOT YOUR KEYS, NOT YOUR CRYPTO
One fascinating aspect of crypto is that anyone can invent their own token to put on the market. Like Garlicoin, inspired by garlic bread memes on Reddit. FTX invented one called FTT, and used it as the centerpiece of the exchange.
On Nov. 2, 2022, Coindesk, a crypto news publication, investigated the balance sheet of SBF’s first company, Alameda Research. They published a shocking report alleging almost all of Alameda’s assets were in FTT, the FTX exclusive token. This was problematic because FTX and Alameda were supposed to be separate entities, and this indicated a strong possibility they were sharing funds.
The CEO of Binance, a rival crypto exchange, Changpeng Zhao, was disturbed by the report. He also is commonly referred to as CZ (the crypto world loves abbreviations). He tweeted on Nov. 6 his plans to dump his position in FTX and any FTT, which set off a bank run. Panicked customers’ trust in FTX was destroyed, and they rushed to pull out their investments before FTX froze withdrawals.
Many were left empty-handed as there weren’t enough cash assets to pay customers back. On Nov. 10, the Financial Times published FTX’s balance sheet showing the company had negative $8 billion in a messy fiat account (“fiat” is government-backed currencies like the dollar or euro), and had $9 billion in liabilities. SBF was no longer a hero and not even a villain. He was a clown. A point perhaps best illustrated by the company’s in-house “therapist” publicizing the details of SBF’s disappointing sex life afterwards. Many mainstream newspapers like the New York Times reported this timeline at length.
Widely unreported, however, were the warning signs, which are crucial to stopping the next inevitable crypto scam. Brian Lovett has 20 years of experience in the ad tech industry and is an experienced crypto miner. He questioned SBF’s authority from the beginning.
“We see this in every advanced field of technology,” Lovett says. “So-called experts emerge that resonate with a broad audience, and therefore gain popularity propelling their status. Since this industry is relatively young, it becomes difficult to separate the true ‘experts’ from those simply seeking financial reward.”
Financial reward being the critical difference. Before he was a con man, SBF was a businessman. This fact should encourage scrutiny into not only the product but also a business’s practices. The most obvious clue that FTX’s model was doomed to fail was how they handled their keys.
Keys are long strings of letters and numbers that resemble keysmash. Those letters and numbers do serve a purpose, but for now, just consider it the closest you’ll see here to a physical dollar. It’s a claim of ownership, security over your investment. If you have a key, you can get real-time updates on how your stake is being valued, transfer it, or sell it. This is what you own instead of a physical token — or physical currency. Most reputable investment platforms give the customer custody of their keys in a dedicated virtual wallet.
FTX was different. SBF withheld all of the keys, so customers had no control over the assets. They were none the wiser to which type of coin they even had, which in most cases was FTT. Given his target demographic was new investors, they likely didn’t know they were meant to have them, and gave complete control to the exchange. When that exchange started to break down, they were screwed, but didn’t know it until it was too late.
“[FTX] gained popularity because they make it easy for new investors to get in on the action, but they can be dangerous since you no longer have control of your cryptocurrency keys.” Lovett explains. “We have a saying, ‘Not your keys, not your crypto’ for this very reason. If you, as the individual, don’t hold the cryptographic keys to your wallet, you are at risk of losing everything. I wish more reporting and education surrounded those topics.”
When the price of Bitcoin began to crash, SBF’s first company and arbitrage initiative, Alameda Research, needed quick cash. He liquidated his customers’ investments to pour into Alameda and replaced them with FTT. Remember, the value of any given coin depends on the confidence people have in it. When the company’s liquidity problems were exposed and people lost trust, FTT plummeted. Steve Greenberg, the founder of Thin Client Computing, has years of experience in crypto mining. He explains that FTT also lacked guardrails that would’ve protected consumers. This glaring flaw was overlooked while the media were calling SBF “the next Warren Buffet.”
“Mainstream media reporting on cryptocurrency lacks meaningful differentiation between different classes of cryptocurrencies and therefore fundamentally misrepresents it entirely,” Greenberg says. “For example, Bitcoin is a decentralized network with no central control that relies on Proof of Work to secure the network. FTX is and has always been a fake asset with none of these fundamental attributes.”
As crypto-currency continues to gain prominence, it can seem hopeless to try and regulate such a confusing product, but the responsibility remains to protect consumers. To prevent the next scam artist, the press and the consumer must all demand and demonstrate transparency. The media must perform rigorous investigations into these companies’ policies, and when they’re duped, address any misinformation quickly and thoroughly. As a consumer, if you’re willing to put your savings into one of these trusts, demand a key to the vault.
Alexa Wilson started a cryptocurrency start-up (Axela Mining) in 2017, which taught young women how to build their own mining progarms.
