Over the past year, a white knight appeared as many crypto companies imploded and losses mounted. Sam Bankman-Fried, the 30-year-old CEO of crypto exchange FTX, helped bail out distressed crypto companies like BlockFi and Voyager. In an industry that has been tainted by scammers and greed, Bankman-Fried seemed more honorable than most. He even claimed that he wanted to give almost all his money away.
It all ended so quickly. In a single day, FTX lost 94% of its wealth, with the agency’s CEO and CIO announcing their resignation. This is just the beginning-Crypto lender BlockFi announced that it will be halting client account withdrawals to address technical issues after FTX filed for bankruptcy.
The answer is absolutely nobody. Crypto should be decentralized and transparent, not run by a single person who only wants to capitalize on it. Bankman-Fried’s rise and fall show just how far the industry has strayed from its original intent. The crypto world today is dominated by opaque entities that are only interested in their own success. FTX and its leader would be a great example of this.
Cryptocurrencies like Bitcoin were meant to change the world. Bitcoin, the first major cryptocurrency, came into the world with the goal of bringing economic freedom and democracy to people who didn’t have it before. Some examples of this would be in banking systems and government representation. One other major issue that cryptocurrencies solve is trust–there is no need to trust anyone when using bitcoin because all transactions are recorded on a decentralized ledger known as a blockchain. This allows everyone to see what’s happening, and nobody can fraudulently alter the data.
However, FTX’s sister company Alameda was not transparent. Everything seemed fine until my colleague Ian Allison, a journalist at CoinDesk, published an article last week teasing out the fact that the Alameda balance sheet is largely made up of FTT tokens created by FTX. The close ties between FTX and Alameda have raised questions about the stability of the latter.
A journalist revealed Alameda’s financial weaknesses, not through smart, public blockchain technology. Soon after, one of the world’s highest-ranking crypto influencers made an announcement to liquidate their FTX holdings on a public group chat. That same day Binance announced that it had signed an official letter of intent to acquire FTX. However, later Binance decided to back out of the plan for unknown reasons.
Further research showed that FTX lent more than half of its customers’ money to Bankman-Fried’s other company, Alameda. In other words, he used his customers’ deposits for one company to make risky bets with a different company.
Bankman-Fried said he takes full responsibility for his mistakes. In a long Twitter thread this week, he wrote: “I was CEO, which means that *I* was responsible for making sure that things went well. *I*, ultimately, should have been on top of everything. I clearly failed in that. I’m sorry.”
As I so eloquently stated in the opening paragraph, decentralized technology is not meant to work this way. The entire idea of a decentralized system is to remove a single point of failure and decrease the risk of human error. And yet, FTX would be far from the first crypto company led by an overseer to suddenly deflate. Other examples include Alex Mashinsky, the founder and CEO of the crypto lending platform Celsius- I won’t mention his name again because it’s irrelevant; he was just one example that you could Google- and Do Kwon, who co-founded the company that created TerraUSD, a so-called algorithmic stablecoin that was ostensibly supposed to trade at $1 USD. Both figureheads had large followings- I’m sure you can guess what happened next – many followers lost money. To answer your question: these were two trustworthy founders with good intentions and solid records! Nevertheless, they had less power than their followers gave them credit for… how does this make sense?
Vitalik Buterin and the Ethereum Foundation have decided to change how Ethereum succeeds. Instead of relying on a single leader or a small group, they will decentralize decision-making by enabling anyone who has held ER for at least a year to vote for changes in the protocol, as we’ve seen with Tezos.
Crypto has been hard to regulate so far. One lesson for the crypto sector is to stop looking for saviors. Bankman-Fried’s meteoric rise was not simply attributable to his own efforts – he was buoyed by many others. He raised plenty of funds from high-profile investors, received a lot of media attention, and with few exceptions, he just wasn’t questioned all that much. The bottom line is that so much hope and responsibility should not rest in one individual alone. Crypto’s principles should go against everything that represents it and shouldn’t be about putting too much faith in any single person.