Sex, Drugs, Celebrities and Fraud Cover up Broader Systemic Failure in FTX's Collapse.

If you aren't concerned you should be!

FTX is the story that has it all Sex, Drugs, Celebrities, and Fraud. Only Rock n’ Roll is missing! That said, I’ve waited for the dust surrounding the FTX scandal to settle and the full impact of FTX’s failure to be digested by the system before writing.

I still think we will have more crypto failures to announce shortly, as the industry has not yet come clean with its full losses. The crypto industry has been consistently opaque with its losses, so why should now be any different? Genesis is trying to raise a US$ 1 bn capital injection while client redemptions are on hold, and rumors of bankruptcy certainly add to the sense of unease. So does Binance’s US$ 2bn crypto recovery fund, which already has 150 applicants before launch!

The coverage of FTX is absorbing as much of it focuses on Sex, Lies, Celebrities, and Fraud. The inner circle FTX team’s polyamorous relationships and amphetamine use cover sex and drugs. At the same time, FTX’s use of celebrity endorsements to promote their services brings Hollywood into the picture and the lawsuits. As to fraud, Sam Bankman-Fried (SBF) blatantly stole US$10 bn in client funds and will now go down in fame with the likes of Bernie Madoff despite his belief in “effective altruism.”

The articles I’ve read over the past week did surprise me a bit. So few have considered that beyond SBF’s lies, a propensity to steal, and virtue signaling, the story goes deeper and says something about society.

Systemic failure

It would be easy to stick with the straightforward narrative that SBF and a tight inner circle stole client funds and were incapable of basic bookkeeping. This level of bumbling incompetance was even more surprising given that in the months before the collapse, they were hailed as geniuses and “polymaths.” That story, while undoubtedly accurate, absolves society from any responsibility for the FTX failure. However, the truth is a bit different. FTX didn’t fail just because SBF made the conscious decision to steal client funds but because of a systemic failure in checks and balances that is not unique to crypto but best exemplified by crypto.

Let’s look at what societal systems had to fail for the FTX collapse to occur.

-Regulators

The Bahamas regulators were out of their depth with FTX! But they aren’t the biggest problem, and we’ll get to them later. Why is it that since Bitcoin’s launch in 2009 regulators across the globe have been incapable of coming up with even the most basic regulatory framework for crypto? Take the US as an example. The turf battles between the SEC and the CTFC over crypto regulation are a thing of legend. What concerns me is that while regulators fight, their citizens are exposed to an ever more risky and emboldened crypto market. That crypto can’t “self-regulate” or rely on “code-is-law” is a given, so why have regulators stalled for so long?

The depth of the systemic problems are nicely captured by regulators’ inability to agree on crypto regulation. Note the article is from 2018.

This is why FTX isn’t just a story of SBF stealing but of regulators enabling FTX to operate without the most basic regulatory control. That regulators permitted this for so long makes them complicit in FTX's failure. While regulators now claim they are coming after crypto with regulatory guns blazing, it shouldn’t take a US$10bn disaster to get them to move. Why is this important? Regulators are equally slow in regulating AI, algorithms, data privacy, the metaverse, and so many other factions of our new digital life. Will each require a catastrophe for regulators to move?

-The smart money

It beggars belief that the biggest and most sophisticated investors and asset managers in the world pumped money into FTX without the slightest bit of due diligence or governance oversight. FTX investors,,known as “the smart money,” fell victim toto their hubris and were fleeced. While none of these investors have opened up to the media about what went wrong, it appears that all were so taken by FTX, the latest new flashy toy, that they couldn’t reach for their wallets fast enough.

One likely assumed that the other checked up on FTX, so they didn’t have to. Can’t you imagine the conversation? “Softbank bought in, so we don’t have to check.” That so many investors were fooled isn’t bad, but reveals a stunning lack of discipline.

Tombstones are highly prized within the finance community and the Financial Times awarded this to all who invested in FTX. “Minted in virtual plastic from 100 percent blockchain, this precious keepsake gives eternal remembrance of crypto’s biggest scandal of the year so far. “

Compared to crypto, “the smart money” asset managers were supposed to be the adults in the room, but all failed miserably. That they would invest so much with so little investigation should scare the Hell out of us all. These asset managers are likely running some of your pension money; don’t they have a greater responsibility? In the aftermath of FTX, where are the investigations asking whether new-venture funding has sufficient control? You won’t find many.

-The Bahamas

In my earlier passage on regulators, I spared The Bahamas’ regulators from much of the blame. Don’t worry; I haven’t forgotten them. The Bahamas and other islands in the neighboring Caribbean are famous for setting up the financial infrastructure used in multiple financial meltdowns. Offshore special purpose vehicles (SPVs) were used to bring down Enron, but most importantly, offshore commercial paper conduits kicked off the 2008 Global Financial Crisis. I built about ten offshore SPV’s in my days as an investment banker. I’m not tilting at windmills by holding The Bahamas accountable for all of their “wholesale” commercial transactions that connect the financial sector. However, I hold them responsible for retail client-facing entities that operate internationally, as did FTX.

How are millions in corporate funds used to buy private houses in employee names? In a small place where everyone knows everyone else’s business, it is inconceivable that no one knew that FTX was leaking money. I readily admit that this is speculation, not proof.

I do think that the Bahamas owes the world a duty of care to ensure that those client-facing entities, like their native banking system, have at least de-minimus regulation. FTX operates in the Bahamas completely unchecked, so the Bahamas must bear some responsibility. Yet, Prime Minister Philip Davis claims, “Based on the analysis and understanding of the FTX liquidity crisis to date, we have not identified any deficiencies in our regulatory framework that could have avoided this.” Is this credible? Not in the least.

“FTX’s presence in the Bahamas has demonstrated that the Bahamas is open for business to the crypto world,” Prime Minister Philip Davis told CoinDesk. Post FTX, Davis says that there were no regulatory deficiencies found! Really?

-Crypto press for asking no questions!

If the blame for the FTX explosion were to be meted out like punishment in Dante’s inferno with its famed nine circles of Hell, then the crypto press would be in one of the innermost circles! My take is that they would be at Level 8, which is reserved for those who do not give false advice, but people who used their position to advise others to engage in fraud.

My discussion with CoinDesk senior editor David Z. Morris. I like David but called out Coindesk’s lack of critical review of Terra. I presented him with evidence, a one-year google search list of Coindesk headlines about Terra. All of them were positive, even fawning! Unfortunately, there was not much critical thinking on whether Terra’s 20% interest rate was real or its algorithm was sound.

The crypto press’s inability to investigate even the most absurd crypto endeavors never ceases to amaze me. Take Terra’s 20% interest as an example; CoinDesk, one of the leading crypto publications, published nothing remotely curious about Terra’s absurd 20% interest rate or even more absurd algorithmic structure. Similarly, for FTX, no one dared even ask the most basic questions. Compare this with the banking industry, where questions about risk, back office, and compliance are the norm. This is why the crypto press fully deserves the eighth tier of Hell; they encouraged the entire world to trust in crypto organizations that they didn’t even try to vet. Were they journalists or cheerleaders? You decide.

-Washington

Of all of SBF’s accomplishments, his ability to buy his way into the Washington power elite made him potentially the most dangerous. We should be grateful that the FTX crash happened now before he corrupted Washington even more.

This section is short. A chart and a picture say it all. What can I add to the known fact that Washington’s power elite can be bought?

SBF buying his way into Washington just reinforces the perception that government is for sale.

My favorite SBF picture of all time. It illustrates quite nicely what money can buy!

-Hero worship and the Twitterverse

Our culture of hero worship is also to blame. The desire for mythical heroes is at an all-time high, and when confronted by a world at war and under economic stress, who can blame people? Figures like SBF, Do Kwon, and Alex Mashinsky call out to us as larger-than-life figures that prove that “getting rich quick” is a thing. The enabler for this is the Twitterverse where no bad crypto deal goes unsung. I understand that Twitter is a tool for good and bad, but the impact of crypto influencers who promote whatever coin pays them is a problem. Couple that with a crypto press that never met a coin they didn’t like, and you’ve got a recipe for cultural disaster. There is no one to put the brakes on or urge caution. When people did claim that Terra’s algorithmic stablecoin was destined to fail, they were treated as mal-contents, their voices drowned out, and their results rarely published.

-The aftermath: “real crypto”

It was just one evil man; this wasn’t “the real crypto.” I don’t buy it and you shouldn’t either. I’ve tried to show in the sections above that it wasn’t just FTX that led to this failure but a systemic failure that should concern us all.

Really? Crypto is doing just fine and didn’t fail?

The culture of greed and theft that made crypto explode in 2021 is causing its downfall in 2022.

What passed for the “real crypto” one year ago was Terra Luna, Three Arrows Capital, Celsius Network, and FTX! As long as they were paying high yields, all were crypto heroes and every bit the “real crypto.” Now because they all failed spectacularly and were “centralized,” we are told that only DeFi companies can be the mantle bearers for “the real crypto.” Meanwhile, DeFi bridges this year bled roughly US$2bn in lost funds is that “real” enough?

Yes, crypto has a right to exist, as does DeFi and blockchain, but the entire ecosystem needs to be upgraded, and regulations are required for the whole industry. Self-regulation, as is being suggested by Binance through the use of Merkel Trees for “proof of reserves,” won’t cut it. Reserve guarantees are great, but without strict audits of liabilities, they are meaningless and take us further into the Wild West.

FTX failed due to SBF stealing customer assets. This is undeniable, but it doesn’t end there. Unless we acknowledge that FTX was part of a broader systemic failure, we will be doomed to repeat this catastrophe again. The greater crypto ecosystem failed to protect people’s money. To all who believe in crypto as more just or somehow more equitable than banks, let that sink in. The FTX failure wasn’t just SBF, and until we acknowledge this, it can’t be fixed.

See how deep the “cashless” rabbit hole goes!

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Rich Turrin is the international best-selling author of "Cashless - China's Digital Currency Revolution" and "Innovation Lab Excellence." He is number 4 on Onalytica's prestigious Top 50 Fintech Influencer list and an award-winning executive previously heading fintech teams at IBM following a twenty-year career in investment banking. Living in Shanghai for the last decade, Rich experienced China going cashless first-hand. Rich is an independent consultant whose views on China's astounding fintech developments are widely sought by international media and private clients.

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