What Did We Learn From Sam Bankman-Fried's Downfall?

Sam Bankman-Fried, convicted of an epic fraud that precipitated the collapse of his FTX exchange, might go down in history as the individual who did the most to undermine the crypto market’s credibility. If so, he will also have done investors and the broader financial system a valuable service.

The story that emerged in the Manhattan US District Court has been illuminating. Bankman-Fried portrayed himself as the crypto world’s model citizen and savior, striking multi-million-dollar marketing deals with the likes of Tom Brady and Major League Baseball, advising Congress on regulation and bailing out lesser competitors. Meanwhile, according to the executives closest to him, he was perpetrating a vast scam — exempting his own hedge fund from FTX’s collateral rules at customers’ expense and doctoring financial statements to cover up billions of dollars in misappropriated funds. His best defense was that he was too clueless to be held criminally responsible.

His co-conspirators — several of whom made cooperation deals with prosecutors in the case — did their part to advance the fraud along the way. Judges should consider the scale of that criminality when deciding what sentences to hand down, and ensure that Bankman-Fried’s accomplices are held fully accountable.

The trial also underscored the credulousness with which millions of crypto believers entrusted their money to outfits such as FTX. These are the same kinds of problematic financial intermediaries that blockchain technology was supposed to displace, only worse: They’re relatively opaque, they combine functions (such as trading and holding customer funds) that create powerful conflicts of interest, and they don’t face the requirements for safety, soundness, and investor protection that traditional intermediaries such as banks and stock exchanges do. Yet the likes of Binance, Coinbase and Kraken still handle billions of dollars’ worth of trades every day.

If anything good comes of crypto, it’ll have little to do with the market as it currently exists. With none of the real-world cash flows that accrue to stocks or bonds, most tokens are fundamentally worthless — unless you’re looking to launder money, send funds to Hamas, manipulate markets or engage in zero-sum speculation. Eventually, institutions such as central banks might employ the underlying technology to make money easier to use and send across borders. But if so, Bitcoin holders won’t be the primary beneficiaries.

In that regard, at least, Bankman-Fried’s downfall may yet have some benefits. If he had been less of a gambler — if he had settled for merely collecting fees, rather than making extreme one-way bets — FTX could’ve survived much longer and the crypto market could have grown much larger. As numbers kept going up, systemically important financial institutions might’ve found lending against crypto irresistible — such that when the bubble finally burst, the repercussions would’ve been much worse.

The perpetrators of this fraud were many, and Bankman-Fried should not be considered the sole villain. But as this cautionary tale winds down, the hope is that legislators and regulators will establish the safeguards necessary to protect investors, block criminals and curb any systemic risks in crypto. In the meantime, those who wish to warn people away might need only three letters: FTX.

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