Crypto boy is going to jail
Welcome to the end of the beginning.
Sending a 30-year-old to jail for the rest of their life, even a pompous one that stole Billions of dollars from his customers, isn’t a cause for celebration, right? Nevertheless, I yipped a little yippee-ki-yay last week when I saw that Sam Bankman-Fried was indicted on all counts.
the ONION: Here’s Sam Bankman-Fried’s Stupid Little Face Again
I had to stop and think about why this made me happy, and I figured out it’s 3 things:
Sam Bankman-Fried (SBF) used technology for Evil. Like Lex Luthor - evil genius. If you’ve read any of my stuff you know I love technology and its potential to raise us all up. So that’s #1
He used his big head to take advantage of people that really couldn’t afford to lose their money; they invested in Crypto for promises of gains and in some cases lost all they had.
He really is an a$$ and a pompous bully. I’ve run across a few people like this who use their intellect to make people do stuff they shouldn’t or don’t want too. Not a fan.
So, in this week’s The Wirepine Weekly I’ll take you through the whole mad debacle and then we’ll take a look into the future - because while the SBF/FTX downfall is an inflection point for Crypto - I believe there is an interesting, and promising, future ahead.
Background
Sam Bankman-Fried, SBF for short, built the crypto exchange company FTX and partner crypto trading company Alameda Research. The two companies took a lot of people’s money ($16B of it from over a million customers) and spent it, leaving behind a trail of financial ruin. There is no question that SBF was the architect of the entire thing, bringing along a core group of friends from college and the like to execute the bad things at scale.
SBF and friends spent $10 Billion dollars (that’s 10 thousand million1) of customer deposits. SBF and his cabal spent lavishly on themselves, sports endorsement deals, political donations, paying too much for other companies and speculative crypto trading executed by their sister company Alameda Research. To hide their losses, SBF had Alameda pay FTX back using their own crypto-currency tokens FTT. They minted their own funny money. Massive fraud.
Why you should care
One of the things that bugged me about Crypto all up was the relentless, inescapable barrage of pundits and crypto-bros and celebrity endorsements and sports naming deals - all targeting the folks that could least afford to take those risks and ended up losing a lot. Contrast that with reddit users versus hedge funds driving up Gamestop stock - I was rooting for those guys. Gotta go see Dumb Money.
That’s what disruption should be - shake up the status quo, provide an opening for new players and groups that are marginalized, Crypto was the opposite - prey on the unsuspecting and get richer.
To make it real, let’s take a look at Celsius. Celsius is another crypto firm that went bankrupt last year. Celsius pitched itself as a safe alternative to banks without any fees plus amazing double digit returns - like the best savings account ever. Alex Mashinsky was the bad guy CEO here and he cashed out a ton of their magic crypto beans err tokens called CEL before they went bankrupt. Similar to SBF/FTX this hurt a lot of people and because the judge allowed them to write letter to consider in the bankruptcy, they have faces: Homeless, suicidal, down to last $1,000: Celsius investors beg bankruptcy judge for help.
Back to why you should care. You know the phrase
“There’s a sucker born every minute?”2
The Crypto craze needed suckers; don’t be a sucker. When I went back to grad school I knew my little programmer head didn’t understand how money makes the world go round. So I went for financial literacy - I survived one class where all we did was pour over the balance sheets in SEC filings; didn’t want to be a sucker.
The Euphoria
It’s easy to say in retrospect that Crypto was for suckers but at the time FOMO or fear of missing out was STRONG. It was the pandemic, people were looking for a distraction, and you couldn’t pick up your phone or listen to a podcast or turn on the TV or radio without seeing how everyone was cashing in on Crypto. Akin to religion - believers were convicted and they wanted you to join them. Remember Elon Musk hyping Dogecoin starting in 2019? Dogecoin was a cryptocurrency token based on a Shiba Inu dog Meme that started as a joke. Dogecoin would go up in value double digits every time Musk mentioned it. Then Musk went on SNL a few years later and talked about how it was all a hustle and sure enough then it dropped big time. At one point, Dogecoin was worth $92 billion. After FTX collapsed, it plummeted along with every other crypto coin and is now worth less than 10% of its peak value.
An ad that sticks out for me was the over-the-top Matt Damon crypto.com commercial ‘Fortune Favours the Brave.’ It was everywhere for a while - the message was don’t miss the moment - buy crypto and be forever a hero. Dang if Jason Bourne is getting into crypto sign me up!
So. Much. Hype. But if you looked hard there were also crypto skeptics documenting the fails and the losses while standing up to ridicule from the crypto mafia. Molly White remains my favorite and she continues to chronicle fail after fail on her website Web3 is Going Just Great. Molly adds up all the money lost in crypto scams via the “W3IGG Grift Counter”, today it’s at $69.5 Billion.
From boy genius to just a baby
SBF rose above the rabble as the one who had it figured out. Here are a few of the gushing media stories that built up the boy genius:
Forbes: SBF was featured on the cover of the Forbes 400 issue in 2021, with the headline “The Crypto King: How Sam Bankman Fried Built a $32 Billion Empire in Three Years.” SBF was also included in the Forbes 30 Under 30 list in 2021, under the finance category.
Time: SBF was named one of the Time 100 Most Influential People of 2021, with a profile written by Tom Brady, who praised him as a visionary and a philanthropist.
Fortune: SBF was ranked number one on the Fortune 40 Under 40 list in 2021, with the subtitle “The Billionaire Who Wants to Save the World.”
Bloomberg Businessweek: SBF was on the cover of the Bloomberg Businessweek magazine in August 2021, with the title “The Crypto Mogul Who’s Too Good to Be True,” Now there’s a title that nailed it!
The Venture Capital community also fell hard for Sam; I’ve not much sympathy for them. The best story is the Sequoia Capital partner who praised SBF’s genius for playing League of Legends on his laptop during a key meeting. Sequoia Capital ultimately wrote off the $210 million they invested in FTX as a complete loss.
SBF wanted to be seen as the philanthropic Bahamas CEO in residence, caring for humanity - he professed his belief and support of a movement called Effective Altruism. SBF claimed in a blog post titled “Why I’m Giving Away My Money” that he would donate at least 90% of his net worth to effective charities.
How do you even spend that much money!?
Not on charities. The Wall Street Journal wrote it up, here’s the summary:
$5.24 Billion on Technology startups like a crypto miner in Kazakhstan for 1.15B.
$2 Billion on payments to execs including SBF. This was typically through personal loans that were never repaid.
$1 Billion on bad crypto trades at Alameda Research.
$243 Million on real estate in the Bahamas - where SBF and the Cabal holed up. Oh, SBF also bought his parents a 16.4M house there.
$86 Million in political donations - can’t have pesky government regulators messing the game up!
SBF’s parents - notable Stanford law professors - were in on the hype and also on the payroll receiving $10 Million that seems to have gone to his legal defense.
Author Michael Lewis was in the middle of writing the glowing biography of SBF called “Going Infinite” when it all went down. The bankruptcy and subsequent trial didn’t faze Lewis. He barely changed his story, but he did use the trial’s publicity to launch his book and land an interview on 60 minutes where he characterized SBF as a misunderstood wunderkind.
One thing Lewis shared in the 60 Minutes interview really hit me. Similar to Matt Damon’s crypto.com payday, SBF threw a ton of money at celebrity endorsements. Specifically:
$55 Million to Tom Brady for 20 hours a year for three years 🤯
$35 Million to Steph Curry for the same thing for three years 🤯🤯
$10 Million to Larry David of “Curb your Enthusiasm” fame 🤯🤯🤯
$135 Million for naming rights for the Miami Heat arena 🤯🤯🤯🤯
I guess I realized when a celebrity or athlete is hawking something they are getting paid. But I didn’t really internalize this - why take finance advice from an actor or a sports star that’s not in it to win it but in it to get paid? I was a fan of Steph - but he’s basically taking his $35 million in exchange for making suckers out of his fan base on something he doesn’t understand. Not cool.
My alumni was one of the suckers and unlike Matt Damon and crypto.com they even left the article up:
Cal Athletics, FTX Unveil 10-Year Landmark Relationship
Needless to say it didn’t last :/
Farewell, FTX Field: Cal suspends naming rights deal with the crypto exchange
Mistakes were made.
The Verdict
The SBF Cabal I referred to a few times all shacked up together in luxury digs in the Bahamas. The inner circle included:
Caroline Ellison who was CEO of Alameda Research and also had been involved romantically with SBF. They had a on and off thing and at the end they weren’t talking. How can you run a company when you’re not talking the the other CEO?
Gary Wang CTO and co-founder of both Alameda Research and FTX.
Nishad Singh FTX engineering director.
All three struck plea deals and testified against SBF in the trial.
Gary Wang testified on day four and he actually showed Github screenshots of code showing the trading backdoor he put in at SBF’s request. The allow_negative flag created an exception for Alameda Research’s trading accounts - unlike customer accounts, they had an unlimited line of credit for their trades. Molly White explains.
Caroline testified after Gary. SBF released diary entries from Caroline before the trial in an effort to discredit her and the New York Times published it. Not cool NYT. This appears to have been the final straw that caused the judge to take away SBFs parole where he was hanging out at his parents house in Palo Alto and put him in jail before the trial. Caroline got tearful at the end of her testimony relaying the relief she felt when FTX finally declared bankruptcy and it was over.
With such a strong case by the prosecution, the defense embraced the baby defense. SBF didn’t know what was going on, he was in over his head - look he doesn’t cut his hair, he wears shorts all the time and plays video games! He is just a smol boy. I imagine the defense bemoaning their chances over pizza and beer in their NYC hotel room binge watching Broad City when they came up with the baby defense:
SBF fought against declaring bankruptcy and when FTX was finally forced into it, he was all over the news giving interviews to anyone who would talk to him. Here’s a clip from GMA where George Stephanopoulos flew down to interview SBF in his Bahamas penthouse before he was extradited. Check from the 4:30 mark and watch SBF squirm trying to escape accountability:
These interviews came back to haunt SBF when the defense pulled a Hail Mary and put him on the stand to testify - he did very poorly under cross examination acting like a petulant … baby. I think that’s what ultimately turned the jury against him.
After around a month of testimony, the trial went to the jury last week. The Jury came back that same day with a guilty verdict on all charges. Having been in a jury room before - the only way that happens in a complex case is when there is no doubt, nothing left to talk about.
The end of the beginning
FTX’s fall and SBFs indictment mark the end of Cryptos Wild West yippee-ki-yay 🤠 But Crypto (unlike NFTs!) isn’t dead. The origins of Crypto are pure based in math and computer science with promising aspects of de-coupling currency from big financial institutions that don’t serve us all in an equitable way.
Stablecoins that are tied to a fiat currency like the US dollar are emerging as a way to bridge elements of current financial systems with crypto. Work on figuring out how to integrate crypto into established and emerging payment methods (biometrics) are starting to pop up from the likes of Visa and Microsoft. You can buy and trade crypto from established firms like Fidelity now.
Time to get back to what disruptive technology does best - shake up the status quo, create new and better ways of doing old things and provide opportunity for all of us.
Thank you Lucas
This quote is attributed to PT Barnum founder of Barnum and Bailey’s Circus