CRIMINAL CRYPTO CAPITALI$M
Editorial: The FTX saga is hard to understand, but the greed behind it isn't
2022/12/05
2022/12/05
CEO of FTX Sam Bankman-Fried testifies during a hearing before the House Financial Services Committee at Rayburn House Office Building on Capitol Hill Dec. 8, 2021, in Washington, D.C.. - Alex Wong/Getty Images North America/TNS
Back in 2001, precious few Americans could have explained what Houston-based Enron did as a company and how it got so spectacularly wealthy. But when it filed for a record-breaking bankruptcy, Americans got schooled fast about not putting their trust and money behind swaggering, fast-talking con artists. But fools and their money regrouped over the years, and along came FTX, a $32 billion cryptocurrency exchange that repeated many of Enron’s mistakes and yielded the same abysmal results. We suspect that a lot of investors who lost their shirts in the FTX failure would have trouble explaining exactly what FTX did, and that’s largely because the entire cryptocurrency industry is built on fantasy.
Even the person in charge of the company, Sam Bankman-Fried, didn’t understand it completely. “I didn’t know exactly what was going on,” he told The New York Times last week in a DealBook video interview. A year ago, Bankman-Fried was worth an estimated $26.5 billion. Today, the 30-year-old might have around $100,000 in assets. “I’ve had a bad month,” he told The Times.
The losses he and his investors suffered are far more complex to explain than what happened at Enron. That company actually dealt in a tangible asset — energy — but was guilty of creating fake companies and shuffling money-losing accounts among them to hide its financial losses. In the case of FTX, it was an exchange where people bought and sold imaginary cryptocurrency, whose value was based on nothing that anyone could see or touch. And yet millions of people around the world poured billions of real dollars into it.
When the imaginary world of cryptocurrency and FTX came crashing down, investors demanded their real, tangible money back. But it was gone. That prompted the equivalent of a bank run that exposed the myth behind everything Bankman-Fried was doing. He invented currency. When that wasn’t enough, he invented an exchange for other invented currencies. As long as everyone believed in the myth, the money poured in.
Company officers apparently used FTX assets to take out real loans to make investments in real, money-based enterprises. When the run on the bank began, they apparently began using customers’ money to pay off other customers — a Ponzi scheme, in other words. Former President Bill Clinton was among the prominent personalities who got burned by associating themselves with FTX.
To his credit, though, Clinton gave a talk at the FTX headquarters in the Bahamas reportedly warning all involved to “do right by it in the regulatory space,” meaning to make sure FTX operations abided by U.S. securities and banking regulations. Because the industry took off way before U.S. regulators could catch up, it’s not clear what they can do now to hold FTX officials legally accountable.
That shouldn’t stop Congress from trying. The internet isn’t going away anytime soon, nor will its imaginary currency market.
Back in 2001, precious few Americans could have explained what Houston-based Enron did as a company and how it got so spectacularly wealthy. But when it filed for a record-breaking bankruptcy, Americans got schooled fast about not putting their trust and money behind swaggering, fast-talking con artists. But fools and their money regrouped over the years, and along came FTX, a $32 billion cryptocurrency exchange that repeated many of Enron’s mistakes and yielded the same abysmal results. We suspect that a lot of investors who lost their shirts in the FTX failure would have trouble explaining exactly what FTX did, and that’s largely because the entire cryptocurrency industry is built on fantasy.
Even the person in charge of the company, Sam Bankman-Fried, didn’t understand it completely. “I didn’t know exactly what was going on,” he told The New York Times last week in a DealBook video interview. A year ago, Bankman-Fried was worth an estimated $26.5 billion. Today, the 30-year-old might have around $100,000 in assets. “I’ve had a bad month,” he told The Times.
The losses he and his investors suffered are far more complex to explain than what happened at Enron. That company actually dealt in a tangible asset — energy — but was guilty of creating fake companies and shuffling money-losing accounts among them to hide its financial losses. In the case of FTX, it was an exchange where people bought and sold imaginary cryptocurrency, whose value was based on nothing that anyone could see or touch. And yet millions of people around the world poured billions of real dollars into it.
When the imaginary world of cryptocurrency and FTX came crashing down, investors demanded their real, tangible money back. But it was gone. That prompted the equivalent of a bank run that exposed the myth behind everything Bankman-Fried was doing. He invented currency. When that wasn’t enough, he invented an exchange for other invented currencies. As long as everyone believed in the myth, the money poured in.
Company officers apparently used FTX assets to take out real loans to make investments in real, money-based enterprises. When the run on the bank began, they apparently began using customers’ money to pay off other customers — a Ponzi scheme, in other words. Former President Bill Clinton was among the prominent personalities who got burned by associating themselves with FTX.
To his credit, though, Clinton gave a talk at the FTX headquarters in the Bahamas reportedly warning all involved to “do right by it in the regulatory space,” meaning to make sure FTX operations abided by U.S. securities and banking regulations. Because the industry took off way before U.S. regulators could catch up, it’s not clear what they can do now to hold FTX officials legally accountable.
That shouldn’t stop Congress from trying. The internet isn’t going away anytime soon, nor will its imaginary currency market.
The Justice Dept. has requested an independent investigation into the collapse of FTX, formerly the second-largest cryptocurrency trading platform in the world. Miami-Dade county is seeking a new naming partner for the FTX Arena, shown here. Photo by B137/Wikimedia Commons
Dec. 2 (UPI) -- The Department of Justice has requested an independent review of the circumstances leading to the implosion of the cryptocurrency exchange FTX, which filed for bankruptcy in November after failing to maintain adequate liquidity to match investments.
"The questions at stake here are simply too large and too important to be left to an internal investigation," U.S. Trustee Andrew Vara said in a filing in Delaware federal bankruptcy court Thursday.
John Ray III, who replaced FTX founder Sam Bankman-Fried as CEO in November, is conducting an internal investigation into the company's collapse. Ray previously oversaw the return of some investor assets during the liquidation of Enron.
FTX was the worlds second-largest cryptocurrency trading platform until it was reveled that it lacked the funds to match investments.
"Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here," Ray wrote in FTX's bankruptcy filing in November.
While the Department of Justice said it did not dispute Ray's "qualifications, competence or good faith," it believes his role in the company may prevent him from representing the interests of all investors.
"An examiner could -- and should -- investigate the substantial and serious allegations of fraud, dishonesty, incompetence, misconduct and mismanagement," Vera wrote in Thursday's filing.
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