Lessons from the rise and fall of Sam Bankman-Fried and FTX

Former cryptocurrency king Sam Bankman-Fried has grown quieter as he approaches his federal fraud and conspiracy trial this fall.

The MIT-educated son of professor parents, whose relaxed profile graced magazine covers as he pledged billions for “effective altruism” and political campaigns, is no longer offering excuses for how his company, FTX, collapsed last winter, leaving investors and investigators scratching for $8 billion in missing funds.

Brady Dale, who reported for CoinDesk, a website about the crypto economy, during FTX’s rise and then wrote about its collapse for online news site Axios, has put the story so far into a book, SBF: How the FTX Bankruptcy Unwound Crypto’s Very Bad Good Guy (Wiley).

Dale was at Philly’s Pen & Pencil Club on July 12 to talk about FTX’s blowup, part of Francine McKenna’s (@ReTheAuditors) summer business-books series. Dale also took questions from The Inquirer, edited here for clarity and brevity.

A lot of people claim now they knew Sam was sketchy. But they weren’t saying it then.

I was stunned when it blew up. I felt Sam was really smart, he was on the up and up, he was playing a long game. I didn’t know until everyone else found out in 2022. As I write in the book, I was in denial for an hour. Then I had to accept it.

FTX was kind of a black box — they didn’t explain a lot of what they did. But in crypto generally, you can’t function without accessing the blockchain at some point. That makes your payments known to everyone in the market.

So, a thing that exposed FTX was when people started having trouble withdrawing their money from their FTX accounts for trading crypto. No good explanation from FTX. But they looked around and found there were wallets [account apps] on the Ethereum currency blockchain that had been moving a lot of money, but suddenly quit — just as FTX people’s withdrawals had stopped.

The fact that [FTX’s withdrawal freeze and the Ethereum app shutdown] happened at the same time was a very strong sign something was wrong. It surfaced very fast. It is hard to hide it when you run out of money to pay people what they are owed, in that world.

Sam himself was very accessible. I started interacting with Sam directly during the summer of 2020, when the crypto industry began growing very rapidly with the adoption of “decentralized finance,” these places you could buy and sell their cryptocurrencies online. We called it “DeFi summer.”

I was at CoinDesk, we were writing about DeFi Summer, and that was a brand that Sam wanted to be associated with. So he made himself very accessible. He was a charming, easy person to talk to. He would always give you good quotes. He’s good at sounding like he is being frank. He wasn’t filtered. You loved for him to be a source on cryptocurrency topics.

It worked, he raised a lot of money from investors, and he started going on CNBC all the time, and Forbes. He became harder to reach, but he never shut down like [Amazon’s Jeff] Bezos or [Facebook’s Mark] Zuckerberg. And he didn’t surround himself with professional public relations people. That was an advantage for him for a long time — it’s why people went easy on him.

I don’t think we’ve learned a ton of new things since the charges were first filed. There are excellent details that have come out, but the broad strokes we knew right away. The most important thing is the $8 billion that was no longer at FTX.

There should never be a liquidity [loss of cash] issue for an exchange operator. Once they agree to go on your exchange, buying and selling crypto for example, people can trade all they want. The values of what you are trading may go up and down, but that money never leaves the exchange, until the investor wants to withdraw it.

You have to set it up to start; but once you win that fight, it’s a very easy business. Every time someone makes a trade, you (as exchange operator) get a slice; you just sit there and take in the fees.

All over! He allegedly spent on political donations, investments, property deals. But it probably was mostly lost in bad [unauthorized] trades [through FTX’s investing affiliate, Alameda Research].

I think in Sam’s mind he wanted to be the biggest philanthropist in the world and thought he had found something he could triple his winnings on. He and Alameda made some long bets. He was a risk-prone guy. But the bets went wrong.

Really crucial to FTX and Alameda was the idea that what’s probable is real — if you have a good chance of making large gains, it’s as if it’s already in your pocket. And he justified the risks because he was going to do so much good with the profits. That may be a fine way of doing things with your own money. But he was using other people’s.

Sam’s effective altruism ideas were 100% real. But I’m not saying that to excuse what he did. It makes it worse. The people who think they have the best ideas to fix the world do the worst things; they feel their goals justify them. He took it to an extreme and was too smart for his own good.

It would have been harder for FTX to do what it did if U.S. regulators had taken steps to regulate crypto more effectively. Instead they buried their heads in the sand and hoped it would all go away.

But there’s a difference between bad crypto firms [like FTX], and decentralized finance. A lot of the stuff that started in 2020 has actually worked. You can still invest in crypto. And there is a beauty to a financial system in which everything is open all the time.

I don’t think what happened at FTX is about cryptocurrency. It’s about allowing opaque companies to have too much control. And that’s what Bitcoin was supposed to critique. Yet people went right into FTX anyway.