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My thoughts on the FTX thing
Okay, so I generally like to keep this newsletter somewhat separate from my work life and treat it more like an artistic playground of sorts. But some crazy stuff has gone down in crypto lately and, seeing as I work in the crypto space, I wanted to comment on said craziness.
I’m guessing you’ve heard about the crash of the crypto exchange FTX since it’s been all over the news lately. The media has generally done a not-so-great job of reporting on the situation. This has been one of those times when I’ve personally experienced Knoll’s Law of Media Accuracy:
“Everything you read in the newspapers is absolutely true, except for the rare story of which you happen to have firsthand knowledge.”
I don’t log onto Facebook all that often anymore. These days, Twitter is my typical go-to social media vice. But a couple of weeks ago I was sick and found myself mindlessly poking around on my phone more than I’d like to admit.
When I opened the Facebook app, I saw a post from a friend I go way back with—a friend who has worked in tech for decades and might read this. Here’s what he wrote:
Why didn’t I “invest” money in crypto? Pretty much what happened to FTX is why. I just don’t trust it. No regulations. No standards. No oversight.
There were a couple of comments in agreement. I nearly ignored it and moved on, but instead, I took the opportunity to explain why FTX was not the same as crypto.
Below is a much longer and more detailed version of what I wrote.
FTX was not crypto.
Sure, they dealt with crypto assets. But that’s about the extent of their connection to the core tenets of crypto. Tenets such as decentralization, transparency, and trustlessness (i.e. the lack of needing trust in order to conduct a transaction since it’s all done with code).
Instead, FTX was a centralized entity (actually 130+ entities, according to their bankruptcy filing). If you had funds on FTX, you didn’t own them. FTX did. And they chose to use your funds to make wild, speculative gambles.
As Rockwell put it in a recent Invisible College event:
FTX was Jane Street traders coming to crypto, creating unregulated banks and recreating the 2008 financial crisis.
In other words, FTX was a traditional company that happened to touch crypto as part of their course of business. In addition, they dipped into customer funds, and even used their own $FTT token, to covertly cover up losses incurred earlier this year by their sister company, Alameda Research.
And now, because of their wildly speculative and almost certainly illegal actions, not only have billions of dollars of value essentially vanished, leaving their users with next to nothing, but they’ve also given crypto skeptics and regulators yet another reason to think crypto is all a scam.
The ironic thing is that this whole ordeal underscores exactly why crypto exists in the first place—being able to conduct financial transactions without the need for trusted third parties.
There’s a big difference between what Wall Street’s version of crypto is and actual crypto—Decentralized Finance (DeFi), in particular:
Throughout this whole debacle, all the truly decentralized products continued to operate perfectly. Meanwhile, most of the centralized actors building on pseudo-crypto rails are going down one by one.
FTX’s founder Sam Bankman-Fried (SBF) has gone on record in the past saying he doesn’t really care about the ethos behind crypto (links are difficult to find given the onslaught of recent news, but trust me, he has said words to that effect in the past). His recent debate with Erik Vorhees, a true crypto person and decentralization advocate, on the Bankless podcast, highlighted SBF’s shaky commitment to crypto values. The debate was an utter disaster for him.
Looking at it through a very generous lens, you could maybe have argued he was attempting to be pragmatic and appease regulators. But as more details emerged about his ties to SEC Chairman Gary Gensler and his massive political donations to both sides of the aisle, those arguments hold less and less water. What seems to actually have happened was that he tried to broker shady backroom deals in Washington using his parent’s political connections in order to carve out special treatment for FTX in upcoming regulatory legislation.
Voorhees, on the other hand, has been trying to spread the word about crypto values and how DeFi isn’t something regulators should be scared of embracing.
Before the FTX blowup, the narrative SBF pushed was that his wealth accumulation was all in service to a concept called effective altruism, a philanthropic ideology that seeks to apply evidence and reason to determine the most effective ways to benefit others. Which is to say, he presented himself as a benevolent billionaire who would give all his money away to actually meaningful charities or causes. Eventually, at least. Maybe. There’s hardly any evidence of him doing much in the way of charitable giving so far. And it seems unlikely that he will be able to do much in the future.
To really hammer home how thoroughly SBF screwed up, the interim FTX CEO John Ray III, who has 40 years of business restructuring experience, wrote this in a court filing:
“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”
AND THIS IS THE SAME GUY WHO RESTRUCTURED ENRON.
So if you see SBF in a TV interview effectively saying, “whoopsy, I made a whiddle mistake and I feel weal bad about it,” don’t fall for it. The guy just lit billions of dollars of investor deposits on fire. He has repeatedly and verifiably lied to the press and lawmakers. And we don’t even know the full extent of the damage he’s done yet. He’s a smart guy, probably too smart for his own good, and he knows exactly what he’s doing as he’s attempting to speed-run his redemption arc.
I had an AI chatbot write up a heartfelt apology letter that I wish he wrote instead:
For those of us who are deep in the crypto space, it’s easy to get exhausted by the FTX story. But we have to keep SBF’s feet to the fire and not let him off the hook. This is a Bernie Madoff-type situation, except if Madoff ran a Super Bowl commercial that literally had the word “safe” in it and gambled away deposits from everyday people like you and me.
2022 has given us too many painful reminders of the importance of decentralization and the pitfalls of lionizing the founders of centralized crypto companies.
Surprise, surprise, I didn’t convince my friend. He still doesn’t trust crypto. And with the track record of bad actors in the industry this year, I don’t blame him.
I wasn’t really trying to convince him, though. I was, in part, trying to explain why I still believe in crypto. As counterintuitive as this might seem, despite all the insanity that has occurred in 2022, I’ve become even more convinced about the importance of crypto values.
For those who are curious, I did use FTX’s exchange for U.S. customers here and there. But I didn’t have any funds on there when they filed for bankruptcy, thankfully.
Ask Me Anything (Please)
If you have questions about the FTX situation (or anything else crypto-related), you can leave a comment, send me an email at firstname.lastname@example.org, or look into joining Invisible College where we talk about this stuff all the time.
On a different note, I’d love to tackle another Hey Lyle advice column question in the next few weeks. I really should remind you about it more often. I mean, if I forget about it, I can’t expect you to remember it either. Anyway, here’s a link where you can ask me something, anything, anonymously (or not):
Okay, I’ll leave you alone now.
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