EDITOR’S NOTE: EDITOR'S NOTE: This piece has been updated since its original publication to include the arrest of Sam Bankman-Fried and other developments.
Before Sam Bankman-Fried became the poster child for rapacious speculative folly, he was the anointed emissary from the future of finance—sharing conference stages with world leaders, hobnobbing with celebrities, and donating enormous sums of cash to political parties, think tanks, and charities. You might well say that if Sam Bankman-Fried didn’t already exist, the prophets of digital-age capitalism would have invented him—except that he beat them to the punch, producing a camera-ready image of himself as a tech innovator and philanthropic visionary while erecting a vast fortune out of the great rolling grift known as cryptocurrency.
Bankman-Fried’s sudden fall from grace—which culminated in his mid-December arrest on eight criminal charges stemming from allegedly fraudulent transactions—has obscured much of the cult of personality that sprouted around him as he took his lavishly capitalized cryptocurrency exchange, FTX, into the empyrean of the investment world. Over a few manic days in November, the tousle-haired 30-year-old crypto baron saw his $15.6 billion net worth plummet to zero after a protracted run on the service’s holdings revealed lethal levels of debt exposure. In short order, FTX had filed for bankruptcy, after the unceremonious collapse of an 11th-hour deal for the rival crypto platform Binance to acquire the company.
The rapid rise and fall of Sam Bankman-Fried is a tale with many morals, but at bottom it points up the delusional character of information-age capitalism. By offering a straightforward, allegedly transparent platform to trade crypto tokens, Bankman-Fried helped shore up the reputation of a surrogate for cash that had been tarnished by volatility and outright fraud. In the process, a highly touted—and environmentally disastrous—new model of money exchange moved into the vanguard of financial innovation, attracting major investment backing and adoring press coverage.
As his fortune grew, Bankman-Fried turned to some traditional pastimes of the galactically wealthy: political donorship and philanthropy. He was the second-largest individual donor to Joe Biden’s 2020 general election campaign and, prior to the 2022 midterms, pledged to give as much as $1 billion to Democratic candidates (a promise he failed to honor, in what now looks like another telling indicator of the mirage-like quality of his crypto fortune). In his obsessively confessional tour of the mediasphere after FTX’s collapse, Bankman-Fried also disclosed that he was the third-largest Republican donor over the 2022 political cycle. In the world of philanthropy, meanwhile, Bankman-Fried made still more ambitious promises, saying that he planned to give away all of his wealth, and was setting his giving priorities in line with the hot new Silicon Valley–sanctioned movement called “effective altruism.”
But in spite of the New Economy trappings of his success, Bankman-Fried’s financial ruin is firmly aligned with the main run of investment-class thinking. His current status as a financial noncitizen stands out in striking and inverse proportion to the seriousness with which he was treated by the business press, the political establishment, and the faux-revolutionary caste of Silicon Valley market lords. As a result, the unwinding of FTX is a fable of something-for-nothing market
solutionism that should be a prime exhibit in future, saner efforts to revive and reclaim the US political economy from its current leadership cohort of hustlers and rank opportunists.
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The “Harvard Law Review” Refused to Run This Piece About Genocide in Gaza
The “Harvard Law Review” Refused to Run This Piece About Genocide in Gaza
Fittingly enough, the major elements of this fable present themselves at first glance as a case study in market-sanctioned meritocratic striving and reward. The son of two Stanford University law professors, Samuel Bankman-Fried elected to study physics at the Massachusetts Institute of Technology after flipping a coin.
Like other independent geek entrepreneurs of Valley legend, Bankman-Fried soon realized that the real action was in finance. After a Wall Street internship at the quantitative trading shop Jane Street Capital, he found that crunching numbers at a conventional brokerage didn’t sit well with his digital muse, and so he scoped out new opportunities in high-leverage, rapid-turnover trades in the volatile crypto market, founding a boutique crypto trading firm called Alameda Research in 2017 and then launching FTX, a Bahamas-based exchange dedicated to crypto assets. While many crypto investors were losing massive holdings in the market’s recent downturns, Bankman-Fried netted an enormous fortune by controlling access to crypto trading. Despite his mediagenic persona as a quasi-monastic, cubicle-bound geek who slept on a beanbag chair beside his office computer, he plowed returns from FTX’s holdings into resort-style real-estate investments in the Bahamas, to the tune of some $120 million, with a few of the properties listed in his parents’ names.
The foundations of the FTX scam were straightforward, at least at the structural level. Alameda Research essentially made money by making markets—pocketing the difference between purchase and sale prices of crypto assets on exchanges—and directing venture investments in crypto projects. FTX, on the other hand, collected fees on users’ transactions. The companies maintained an unethically close relationship; they shared bank accounts and customer information—and critically, FTX prioritized Alameda Research’s trades on its platform, allowing Bankman-Fried to play the dual role of market maker and trade broker in the crypto market. But this underhanded relationship—the accelerated layering of crypto investments that permitted FTX to achieve rapid market dominance—ultimately triggered the crisis that pushed both companies into bankruptcy.
The meltdown began when the cryptocurrency news site CoinDesk reported that it had obtained a copy of Alameda Research’s balance sheet showing that $5.1 billion of the crypto hedge fund’s $14.6 billion asset line was held in FTT, an FTX-issued crypto token. Alameda had directed another $4 billion or so into other crypto tokens, including projects Bankman-Fried was deeply involved in. On the opposite side of the balance sheet was $8 billion in liabilities. The report immediately exposed the dangerous game both firms had been engaged in: Alameda’s $5.1 billion worth of FTT was basically paper wealth that could never be liquidated without crashing the price of the asset. Armed with these revelations of overexposure, the rival exchange Binance moved to sell off $500 million worth of FTT; this set off a flood of withdrawals that eventually triggered the liquidity crunch at FTX. And this crisis led to more devastating reports on FTX’s Ponzi-like business model, documenting a back-door portal in the company’s trading software that apparently enabled Bankman-Fried’s fraudulent handling of customers’ funds.
In his efforts to explain his actions to an often bewildered press corps, Bankman-Fried has moved to preempt charges of criminal liability, acting contrite while shifting blame to Alameda. This is a moral and legal distinction without much of a difference, however, since he also owned most of Alameda’s holdings and served as its CEO through 2021. In Bankman-Fried’s telling, FTX was just a bumbling, incompetent entity (with no risk, compliance, or accounting controls) that allowed Alameda to build an unsustainable margin position. What’s more, his alleged efforts to avoid the conflicts of interest he may have developed as the operator of both entities seemed to leave him dangerously ignorant of the size of Alameda’s position on the FTX exchange. The alibi that he operated without knowledge of Alameda’s shady dealings is a bizarre and likely untrue claim, but it hews closely to Bankman-Fried’s carefully cultivated image as a serious ethical thinker. In any event, flagrant incompetence makes for a more benign narrative template than outright fraud.
In reality, Bankman-Fried’s scheme was simple: create FTT tokens and sell them to Alameda Research at discounted rates, then steal FTX’s customer assets and lend them to Alameda Research to make risky bets in the crypto market. He would proceed to collect FTT tokens as collateral for these loans, effectively using them to replace customer assets on the FTX balance sheet. But as the world is now learning, this scheme had an enormous flaw: In order to work, the tokens traded as paper wealth across all these platforms had to maintain a steady or rising exchange value. Like the housing market circa 2007, crypto was a massive asset bubble poised to burst.
To ensure that the asset’s prices kept defying gravity, Bankman-Fried leaned on Alameda Research to continue making the FTT market by buying and selling the token at scale, effectively pumping up the token’s market worth. One recent analysis of Alameda Research’s FTT holdings shows that its $5.1 billion in FTT was equivalent to 180 percent of the total circulating supply of the token.
In crypto’s boom times, this symbiotic relationship was likely profitable for Bankman-Fried and his investors. But amid a widespread market crash, propping up the token’s price became a hopeless task. So when CoinDesk’s reporting and Binance’s FTT fire sale upended things, many FTX customers rushed to cash out their assets. That forced FTX to issue more tokens in exchange for cash to honor these requests—and sent the token’s price still lower, shifting the market-destroying dynamic into overdrive. With FTX’s main trading partner, Alameda, holding a rapidly devaluing hoard of FTT tokens that it couldn’t hope to unload without further crashing asset prices, the death spiral had set in.
Bankman-Fried has since admitted that he became nervous about the potential fallout of this fraudulent relationship on November 2. By November 6, he had begun to feel uneasy about his ability to make aggrieved customers whole. In spite of this, he posted a tweet (since deleted) on November 7 stating that “FTX has enough to cover all client holdings. We don’t invest client assets (even in treasuries). We have been processing all withdrawals and will continue to be.” Even after that claim proved to be false, Bankman-Fried continued to choose delusion over responsibility and refused to shut down the exchanges and immediately file for bankruptcy.
Shady alliances and reckless decisions are features, not bugs, of the cryptocurrency market, to quote a Silicon Valley saying. Indeed, the furtive labeling of ever-greater volumes of debt as assets has driven one disastrous crypto bubble after another. When crypto suffered a major crash this summer, shedding around $2 trillion in market value from an all-time peak of $2.9 trillion, ordinary investors were the greatest losers. Lured by the industry’s predatory advertising tactics, many late entrants to crypto speculation have seen their life savings vanish and their dreams shattered.
The array of get-rich-quick tactics in the crypto sphere are familiar to any student of standard Wall Street shakedowns; indeed, understood from a proper vantage of skeptical inquiry, crypto is a gorgeous mosaic of market scammery. There’s the rug-pull ploy, which sees crypto promoters selling off and fleeing before their hotly touted tokens depreciate into nothingness. There’s the kindred pump-and-dump scheme, in which crypto promoters bid up the value of an otherwise worthless asset before selling it off, sending its price—and the savings of the hapless ordinary investors backing the strategy—plummeting back to earth. Wash trading, which positions crypto developers at both ends of a currency transaction, is another routine mode of pumping up market prices to maximize profits for market makers at the expense of unwitting ordinary investors. This ploy accounts for nearly 90 percent of transactions on crypto exchanges, according to one recent study. All of this scammery takes place on platforms with laughably ineffective security protocols, which hackers consistently evade to steal billions of dollars of investors’ funds.
This is the real story of crypto. Bitcoin and the more than 12,000 other cryptocurrencies have utterly failed to realize the tech-libertarian dream of decentralized peer-to-peer lending, for the simple reason that wildly speculative investment vehicles cannot serve as reliable stores of value or units of account, two classical economic functions of money.
Bankman-Fried was obviously aware of the industry’s limitations thanks to his firsthand experience propping up crypto’s paper value, so his pre-bankruptcy goal was to move past crypto and develop FTX into a financial super-app: “I want FTX to be a place where you can do anything you want with your next dollar. You can buy bitcoin. You can send money in whatever currency to any friend anywhere in the world. You can buy a banana. You can do anything you want with your money from inside FTX.”
This effort to turn FTX into a payment app is a far cry from the standard libertarian reverie about how cryptocurrencies are a key weapon in the digitally enabled war on fiat currency and the retrograde regulatory state. Indeed, Bankman-Fried’s agenda for FTX had him, prior to the exchange’s collapse, trying to peddle influence among regulators in the vein of that notorious avatar of venal self-interest, the D.C. lobbyist. In addition to setting himself up as a power donor to both major parties, Bankman-Fried had cozied up to lawmakers and hired a slate of former regulators as part of a crypto charm offensive—especially former members of the Commodity Futures Trading Commission, which oversees crypto commodities and derivatives contracts. This strategy was largely successful: The FTX team met with the CFTC 10 times over a 14-month period before both parties separately endorsed a Senate bill that would have enshrined the CFTC—a far more laissez-faire crypto regulator than the SEC—as the industry’s primary federal overseer.
Bankman-Fried’s campaign to distance himself from crypto’s reputation for unbridled scammery was also central to his other major sideline, as a champion of effective altruism. The visionary rhetoric of the EA movement allowed him to say that even though he was a major player in a fleecing operation—even Bankman-Fried has characterized crypto as a “Ponzi scheme”—he was dedicating all his profits to the greater good.
Not surprisingly, he was an especially devout adherent of one key plank of the effective-altruism gospel of wealth: the idea that the best path forward for charitable giving was to get rich quick in order to donate with maximum impact. While he was launching his fortune at Jane Street Capital, he joined the flagship charity for effective altruism, Giving What We Can, and gave away 50 percent of his income, primarily to the Centre for Effective Altruism. (Both groups were founded by the Oxford University–based movement theorist William MacAskill.) When Bankman-Fried established the FTX Foundation’s Future Fund, the now-shuttered charitable arm of his crypto empire, in February 2022, he appointed MacAskill as an adviser.
All this high-profile giving only underlined the instrumental agenda behind EA: Its real function is to lend a high-flown moral imprimatur to the preexisting preferences of big-ticket donors. Bankman-Fried acknowledged as much in an interview with fellow EA acolyte Kelsey Piper, admitting that most of his moral posturing was a public relations front and all that truly matters at the end of day is who wins.
Bankman-Fried employed the alleged principles of EA to dodge a major problem inherent in all crypto activity: its disastrous impact on climate change. By signing on to the wing of EA known as “longtermism,” he was able to claim that mitigating the climate crisis was less important than working to preserve life over a vast time frame and across seemingly intergalactic distances. Just focus on the space opera fantasias favored by self-styled Silicon Valley visionaries, and presto: The most immediate threat to existing planetary life drops off the list of priorities for charitable giving.
This is an especially destructive and self-serving line of reasoning, since the simple truth is that crypto mining—the computer-driven activity at the heart of cryptocurrency, and therefore of Bankman-Fried’s trading empire—represents a first-order threat to any sustainable plan to reduce carbon emissions.
To produce cryptocurrency, the “miners” compete to solve complex mathematical equations and verify transactions on a digital ledger, or blockchain. When a miner correctly verifies a transaction, the blockchain is updated and the miner is rewarded with new cryptocurrency. Working through these mathematical problems requires specialized computer equipment that consumes enormous amounts of electricity. Moreover, the more people mining for a given coin, the more difficult the mining becomes, further increasing the energy expended.
Bitcoin mining alone is projected to produce enough carbon emissions to increase global temperatures by more than 2°C in less than 30 years—a truly staggering figure given how little crypto circulates. In terms of its adverse climate impacts, bitcoin mining rivals other heavily polluting industries, such as livestock farming and the natural-gas energy sector.
This environmental peril brings home the unsustainable costs, to guileless investors and the planet alike, of indulging the speculative folly of crypto. Unfortunately, the investment world’s general ethos of plunder makes it unlikely to own up to these costs in any meaningful way. Our business civilization’s rickety intellectual rationales for market-rigging and billionaire-making will likely hold, unless and until we acknowledge that, throughout his extravagantly praised time in the financial spotlight, Sam Bankman-Fried was diligently courting what obscenely wealthy funders have always craved: the ever-expanding license and impunity to do as they will without answering to the public interest. We can only embark on the path toward realizing a truly sustainable and just future when we are at long last ready to distrust the disastrous agendas of geeks bearing gifts.