You’ve probably been following the news that FTX, one of the largest cryptocurrency exchanges in the world, is in hot water. And frankly that characterization is an insult to hot water.
FTX has already filed for bankruptcy. Potentially $10 billion or more of customer money is at risk. The new CEO states that the company’s internal controls were “a complete failure”.
And the company’s founder, Sam Bankman-Fried, has proven himself to be, at a minimum, an irresponsible, reckless child, if not a full-blown fraudster.
It’s easy to lay the blame exclusively on him. And he clearly deserves a lot of it.
But a failure (if not fraud) of this size cannot be perpetrated by a single individual. Even Bernie Madoff had accomplices. Or people who should have noticed but were totally negligent at their jobs.
In fact the Madoff scandal is a great example. Madoff’s firm had to undergo routine regulatory examinations. And yet, year after year, the Securities and Exchange Commission completely failed to notice the rampant fraud.
In the aftermath of the Madoff scandal, a US Department of Justice investigation concluded that in the SIXTEEN YEAR period between 1992 and 2008, the SEC had “more than ample information” and that they “could have uncovered the Ponzi scheme well before Madoff confessed.”
The report further blames the regulatory agency’s failure on “systematic breakdowns in which the SEC conducted its examinations and investigation.”
Talk about being asleep at the wheel...
In the case of FTX, there were also a lot of people who failed to notice what was happening.
Most notably, Sam Bankman-Fried became the #6 biggest political donor in the United States; 99.6% of his contributions went to progressive candidates.
Did any of those politicians really scrutinize where the money came from? Did any of them ask for audited financial statements to make sure the money was clean… or to make sure that the guy wasn’t spending his customers’ money?
Apparently not. Politicians happily cashed the checks and didn’t ask any questions.
This is an outrageous failure. Politicians constantly pass rules and regulations making financial compliance far more onerous for everyone else.
(If you don’t believe me, try going down to your local bank and withdrawing $25,000 in cash… and see how quickly they treat you like a criminal suspect. You’ll be there all day filling out forms and justifying your actions.)
But do they apply those same rules to themselves? Absolutely not. They just take the donations. It’s a despicable double standard.
Also culpable in this massive failure are the prominent venture capital firms who enabled this overgrown man-child to go rogue.
Sam Bankman-Fried raised at least $1 billion from investors, including firms like Softbank and Sequoia Capital.
Softbank, of course, is infamous for its enormous investment in WeWork, effectively encouraging CEO Adam Neumann to recklessly spend other people’s money.
It seems that Softbank didn’t learn its lesson, because they once again dumped a mountain of cash on a guy who is even worse than Neumann.
More importantly, however, Sequoia and Softbank are hard core, sophisticated investors. They have huge teams of lawyers, bankers, and analysts. And, even though FTX is a private company, as investors they would have had access to the company’s financial statements.
In other words, they should have seen the impropriety. They should have seen it, and they should have done something about it.
But they didn’t. They stood by once again in silence, enabling Bankman-Fried’s irresponsibility.
Despite this colossal failure of a major player in the crypto sector, however, it’s important to separate FTX (the company) from crypto (the idea, and the asset class).
In my view, FTX isn’t even a crypto business. It’s a financial institution, little different than Bank of America.
Whenever you make a deposit at Bank of America, that money becomes BOA’s asset. In other words,