The supposedly responsible face of cryptocurrency turns out to have been anything but punctilious in his dealings — which should be a wake-up call to sleepy regulators and legislators alike.
Sam Bankman-Fried’s empire died young last week, when his cryptocurrency exchange FTX filed for bankruptcy. The details remain scarce, but the bottom line is this: FTX was supposed to act as a custodian of the funds customers traded via the service. Instead, it took billions of dollars of that money and lent it out, including to the trading firm Alameda Research also owned by Mr. Bankman-Fried. To make matters worse, Alameda’s assets were largely tied up in FTT, FTX’s own digital currency. Alameda used this FTT as collateral for a boatload of loans, possibly including the customer funds it received from FTX.
When a CoinDesk report revealed some of this, what ensued was a death spiral: Investors worried about FTX’s solvency scrambled to redeem their assets, sending FTT’s value plummeting. But FTX didn’t have their assets — it had the digital currency FTT and a massive loan to Alameda that the company couldn’t return, because it, too, mostly had FTT.
This could classically be called a run on the bank. The trouble is, FTX wasn’t supposed to be operating like a bank at all. The complicated details surrounding the double-dealing and bad bookkeeping aside, the larger scheme has all the appearances of an old-fashioned scam. FTX’s customers…
