Sam Bankman-Fried’s crypto-gold turned to dust

At its core, cryptocurrency is a valuable tool based on innovative technology. But as wave after wave of scandal engulfs the industry will it ever throw off its disreputable image?

Sam Bankman-Fried, founder and CEO of FTX, testifies during the House Financial Services Committee.
Sam Bankman-Fried, founder and CEO of FTX, testifies during the House Financial Services Committee. Credit: Sipa US / Alamy Stock Photo

Another week, another crypto-catastrophe which resulted in billions of dollars magically disappearing. Crypto stories are complicated, and sometimes technical descriptions can obfuscate what’s going on. It’s often quite simple. Case in point is Sam Bankman-Fried and his crypto-exchange FTX, which was worth £32 billion in January this year and filed for bankruptcy last week. For the non-crypto people — in other words, 95 per cent of us — what happened was this.

FTX was a crypto exchange site. They’re like foreign exchange trading sites. People deposit their sterling or dollars and trade them for bitcoin or ethereum, or one of the thousands of other crypto currencies. FTX was well designed and reliable, and quickly became the second biggest crypto exchange site in the world. Bankman-Fried, the 30-year-old son of highly regarded lawyers, became the face of responsible, grown-up crypto-trading. The vegan wunderkind became the biggest donor to the Democratic Party, and FTX landed big-name celebrities to push the company, including comedian Larry David.

Pretty soon FTX held billions of dollars of investors’ money, mostly in bitcoin, ethereum, and their own crypto currency, FTT. It seems investor funds — possibly as much as $10 billion — rather than being held safely and security, were in fact being lent to a hedge fund called Alameda, which was also controlled by Bankman-Fried.

For various long-winded reasons the price of FTT coins started to fall, which caused panic selling, causing the price to fall further. The problem? Alameda had (it is thought) turned some of that loan into FTT. According to internal accounting documents published by the Financial Times this week, FTX had also turned many of its customers’ funds into FTT and assorted other cryptocurrencies. When FTT’s price collapsed, the funds went up in smoke, just at the moment those customers wanted their money back. Bankman-Fried tried to borrow money to honour the growing number of withdrawal requests, and failed. FTX ran out of money and paused operations. Journalists piled in. The story is still unfolding. But over a million people have lost a lot of money. Pretty simple really! You don’t need to be a financial genius like Sam to understand it.

Several analysts called this crypto’s Lehman’s moment. I’m less sure. This is the fourth, or maybe fifth, so-called crypto Lehman moment in almost a decade. It usually bounces back. There are too many smart people working on it to collapse entirely: initiatives include more secure ‘decentralised’ exchange sites which some expect will grow quickly in the next couple of years as a result of this latest scandal. And although it’s cocooned in hype and smothered in greed, the core technology behind crypto is interesting and potentially useful. Nevertheless it is definitely another enormous blow. There will be a sustained fall in the price of most crypto-assets. Serious investors must be asking themselves if this was happening at the world’s second largest exchange, what else don’t we know? Certainly many non-crypto normies might reasonably conclude that everything crypto is a giant scam, and mainstream adoption feels further away than ever. ‘We’ve been set back a few years’, admitted Changpeng Zhao, aka CZ, the chief executive of FTX’s largest rival exchange, Binance. We might also see a long-promised tightening of regulations, possibly on how customer funds should be handled, along with stricter rules on advertising.

In the long run that might be what the sector needs. But whatever happens, I guarantee we will see another FTX soon, for two main reasons.

I’ve spent the last four years exposing the biggest ever crypto scam, OneCoin. OneCoin’s founder, Dr Ruja Ignatova has been on the run since late 2017 and was recently added to the FBI’s Ten Most Wanted List. She conned roughly one million people out of at least €4 billion. On the face of it FTX and OneCoin are very different. Although both founders had impeccable credentials (Ruja from Oxford University, Sam from MIT) OneCoin was really a multi-level marketing pyramid scheme, while FTX looks a lot more like misuse of investor funds. But similar dynamics were at play in both and show no sign of stopping.

The first is the willingness of the influential and famous, from sports stars such as Tom Brady to former world leaders including Tony Blair and Bill Clinton to promote cryptocurrencies to their many fans and followers.

For ordinary investors who, reasonably, do not understand cryptocurrency’s finer details, such as blockchain technology or tokenisation, brand associations are a better signal of trust than some technical white paper. Surely— we ask — these successful people know what they are doing? It is doubtful this misplaced trust in celebrities will change, meaning all crypto-companies, good and bad, will always have an air of credibility about them.

But secondly, and more importantly, is the all-consuming ‘fear of missing out’ (FOMO); a powerful drug that clouds judgement and addles the brain. FOMO is so powerful in crypto because some 21-year-olds, say, really do become millionaires in a month by buying digital coins at the right moment. Many of us have a friend of a friend who bought bitcoin in 2012 and now drives a Lamborghini. And we wonder: why not me too? FOMO drove a million people to invest in the scam currency OneCoin, despite the many obvious red flags. Sophisticated Silicon Valley investors may think they’re smarter than average, but they too suffer from the same cognitive biases – think fraudulent heathcare tech firm Theranos. Crypto-FOMO is not going to vanish along with FTX.

Which is why, I’m sorry to say, that in a few months time the story of FTX will have faded. And you’ll be once more reading about some other poor investor who thought this time they’d really struck gold, but had, in fact, blown their life savings on a good old-fashioned Ponzi scheme.


Jamie Bartlett