Now that Sam Bankman-Fried – known more colloquially as ‘SBF’ – has been shown comprehensively to be a fraud, the time has come to review where crypto stands, especially in light of the recent jump in Bitcoin prices.
In court, the founder of cryptocurrency exchange FTX claimed that spending clients’ fiat deposits was just part of “risk management” for his intertwined crypto hedge fund Alameda Research.
During SBF’s court testimony on October 31, prosecutor Danielle Sassoon of the Southern District of New York asked him if he believed that it was permissible to spend $8 billion of FTX customers’ fiat money.
“I thought it was folded into risk management,” he said. “As CEO of Alameda, I was concerned with their portfolio. At FTX, I was paying attention but not as much as I should have been.”
So, there you have it. He thought spending the clients’ money was managing risk. If anything, the depth of this appalling statement says everything that needs to be said about Alameda, FTX, and SBF.
It is clear from testimony at the trial that SBF only had a very hazy idea of what was actually happening within the two businesses, so clearly the people who gave him shedloads of money had absolutely no idea what it was all about.
What they did see was a guy who was a bit out of the ordinary and professed virtuous beliefs – such as “effective altruism”, whatever that is – which meant the investors were good guys to the world and in their milieu.
Look how well their investment strategy has worked out for the likes of WeWork and Klarna, amongst many others. SBF clearly played the investors, never mind the clients.
It’s a complete wilful abrogation of responsibility, honesty, and transparency that has stunned observers and regulators alike. They invested in a business run by a bit of a weirdo, based offshore – so not in any jurisdiction they might have understood – with no proper board of directors and no appropriate auditors.
There is an apocryphal story – reported speech, so don’t shout at me – that at one of the firms SBF was looking to raise investment from he was busy concentrating on a tablet. It transpired he was playing some online game.
The investor is reported to have said if SBF cared so little about the meeting, they didn’t need to even think about making the investment in him and his company – it was a certainty.
It completely underlines how much work regulators have to do to remove crypto from the wild west and bring it into the realms of serious and proper investment status. And how much some venture capital firms need to reappraise their approach to investment.
What is required from investors is long-term, patient building of businesses, not a hit-and-run strategy. That’s just one of the reasons that Warren Buffett has been so successful over the long term: he never looks for a fast buck; he wants the value of the business and its offering to flourish and prosper over time.
Returning to the present crypto landscape, all the things that have been thrown up by the trial will, I am quite certain, be under scrutiny from both the US Securities and Exchange Commission (SEC) and the Financial Conduct Authority (FCA) in the UK, amongst other jurisdictions worldwide.
From the very start of crypto, it was clear authorities and regulators were never going to allow the wild west to last very long. But, in reality, they have been very slow off the mark to legislate and regulate what is a very slippery and eel-like market.
It isn’t helped by the tales of people making fortunes overnight and by an inconsistency of definitions and different priorities. Greed and fear drive markets, and when greed is rampant it is very difficult to get people to watch what they are doing.
Longer term, I have no doubts that crypto will survive and flourish. But, to do so, people must have confidence in the investments they are making and in the due diligence regulators implement.
In the meantime, the events of the last 12 months show why it’s time for everyone to drop the rose-tinted spectacles and DYOR, as they like to say – at least while no one else is doing it for you.
If Crypto AM readers would like to know more about blockchain and crypto, please drop me a note on firstname.lastname@example.org and I will send you my book on both topics for free.
Temple Melville is CEO of The Scotcoin Project Community Interest Company (CIC)