It’s Sam Bankman-Fried’s Trial. But It’s Crypto’s Colonoscopy.
This is part of Slate’s daily coverage of the intricacies and intrigues of the Sam Bankman-Fried trial, from the consequential to the absurd. Sign up for the Slatest to get our latest updates on the trial and the state of the tech industry—and the rest of the day’s top stories—and support our work when you join Slate Plus.
In some obvious ways, the trial of Sam Bankman-Fried, which starts in New York this week, is only about the defendant. Bankman-Fried’s cryptocurrency exchange FTX sank off the coast of the Bahamas in late 2022, taking billions of dollars in customer funds with it. The young founder and CEO, the feds say, lied to both his customers and his lenders. The U.S. attorney for the Southern District of New York has filed a range of fraud and money laundering charges against him that carry more than a century of potential prison time (more likely, he’s probably facing a decade or two). Prosecutors have already gotten a slew of plea agreements from his underlings, who admitted to committing crimes together at a web of companies that Bankman-Fried ran. Much of what the government says happened at FTX is so cartoonish, so specific, that it does not read like an indictment of anyone or anything other than Bankman-Fried and his old pals. Anyone, in any walk of life, can be a fraud.
But Bankman-Fried’s alleged misdeeds are inextricable from the industry that built him up, let him thrive, and ultimately gave him the space to detonate himself. SBF exists because crypto exists, and his failures and alleged criminality left a crater that might as well have the little Bitcoin symbol stamped in the middle of it. For Bankman-Fried, the trial is a chance to stay out of prison. For the industry and technology that made him famous, it’s more like a colonoscopy in front of the national press. The elements of the crypto ecosystem that allowed the FTX disaster to happen are features, not bugs, and the trial of crypto’s most famous 31-year-old disgrace will also be a public examination of the industry that bred him and then watched him humble himself.
FTX might sound, at first, like a regular business clown show rather than a crypto clown show. A read through the lawsuit that the company’s bankruptcy executives filed against SBF’s parents (of all people) in September draws out that argument well. FTX spent lavishly on perks and salaries and pet political donations meant to benefit people who didn’t deserve them. It could’ve done that if it were a crypto exchange, or a commercial bank, or an NFL team, or a well-capitalized pizzeria. FTX lost other people’s money in a possibly inappropriate way. Plenty of respectable financial institutions that deal in dollars and euros and pounds have done the same. FTX was run by a young, irresponsible founder who got too big for his britches and drove the thing into the ground. A zillion companies have met the same fate.
But the meltdown of FTX, at root, happened because FTX and its doomed sister hedge fund, Alameda Research, were in the crypto business. The mechanics of the companies’ collapse carry an aura of being complicated, and the more granular elements are complicated. But what happened here is pretty simple from 30,000 feet: FTX allegedly took its customers’ crypto deposits and gave them to SBF’s hedge fund, which made speculative bets with unassuming depositors’ deposits. That hedge fund invested a lot of the money in made-up crypto tokens that were not just minted by FTX, but whose value was tied directly to confidence in FTX’s continued operation and success. The paper value of those coins was not real, and not only in the sense that anyone who holds a big enough stash of any asset will need to accept a markdown if it actually wants to sell all of it. No, SBF had his customers’ money outside his crypto exchange and tied up in coins that barely traded at all. Analogy time: Imagine your friend Buster sells you a bag of air. He calls it a “BusterCoin,” and because you believe in your friend, you pay him $10. He then fills 9,999,999 more plastic bags with air. The last one traded at $10, so the total value of all of Buster’s BusterCoins is now, in Buster’s view, $100 million.* That is pretty much how FTX’s balance sheet worked, only the “values” were in billions. All of the other gory, funny, criminal details are secondary.
People can commit all sorts of crimes using the U.S. dollar or any other fiat currency. They can even commit crimes on currency exchanges. But humanity has not yet devised a way to do anything with dollars quite like what SBF did with his SamCoins. And when SBF’s biggest rival started knocking down dominoes, SBF’s depositors had no backstop. They got into crypto because they thought it would help them. Perhaps they didn’t think they’d need the Federal Deposit Insurance Corporation. The FDIC comes to the rescue when it promises bank customers it will, and sometimes even when it doesn’t. But taxpayers do not backstop crypto speculation. They don’t backstop investments at all, it’s true, but then again, crypto isn’t supposed to be an investment product. It’s supposed to be currency. The future of money! The industry relies on that distinction when it tells politicians and regulators that its companies aren’t offering unregistered securities and breaking U.S. law every second of every day.
If anyone in crypto billed themselves as the kind of actors who wouldn’t incinerate, misallocate, or steal customers’ money, it was Bankman-Fried and FTX. When SBF touted his company as a family business, and when FTX called itself “a safe and easy way to get into crypto” on its many advertisements, they were pointing in a specific direction: Here were the good guys in an ocean of financial miscreants. Even what’s now maybe the most infamous commercial in financial history, that Larry David Super Bowl ad, hit viewers over the head with the idea. Crypto might seem complex or even a little dangerous, and a skeptic might like to just skip it. But with the safety and ease of FTX, a company that would later lose or just steal companies’ money and halt deposits, these skeptics could feel comfortable giving crypto a try.
There might be a trustworthy crypto company. I don’t know. Coinbase is an American public company, so a lot of its financials are subject to quarterly public inspection. That’s a big difference from FTX, which ran to the Bahamas in the apparent (and apparently misguided) hope that it could do whatever it wanted from there. FTX had been the world’s second biggest crypto exchange after Binance, which doesn’t say what country it’s based in and is (like Coinbase, actually) in a legal fight with U.S. regulators. The Securities and Exchange Commission says Binance is breaking several laws and says it has the company’s chief compliance officer telling another compliance staffer in writing that “we are operating as a fking unlicensed securities exchange in the USA bro.” Now Binance is in some degree of trouble, and its fight with American regulators has weakened it. These companies do not appear to have done what Bankman-Fried did, at least. Their assets don’t seem to be mostly things they made up. There are countless smaller crypto projects and exchanges. Surely some of the people running them are true believers who are out to enrich not just themselves but anyone else who believes.
The biggest crypto execs and celebrities believe that they are the industry’s adults in the room, here to offer a better and trustier product than Bankman-Fried did. Coinbase CEO Brian Armstrong and Binance CEO Changpeng Zhao had some of the toughest words for SBF after his many bills came due. Hopefully that’s true, because big exchanges wield enormous influence over everybody’s crypto. They’re the ones with the advertising budgets to attract new people to crypto, and they’re the ones whose design and display choices can most obviously affect how a given crypto product trades. A savvy employee of an NFT marketplace realized that point and turned it into a creative bit of insider trading, which the same U.S. attorney who charged Bankman-Fried unfortunately noticed.
When Bankman-Fried goes on trial, prosecutors will tell a story about what happens when one of the people holding the money turns out to be an arsonist. The prosecutors trying to put away Bankman-Fried will not likely convince the nation, via nightly news clips, articles, and social media excerpts, that every big player in crypto is a crook. But they might encourage a different realization: If crypto is a sandbox where someone as ridiculous as Bankman-Fried can do so much damage, it might be best to play elsewhere.
