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5 Lessons From the Stunning Implosion of SBF and FTX

2M ago
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editor's node column

It turns out Sam Bankman-Fried wasn't "the next Warren Buffett."

Just six months ago I was in The Bahamas for an FTX/SALT conference where Sam was treated like Taylor Swift. He chatted onstage with Bill Clinton, Tony Blair, and Gisele Bundchen. Posed for selfies with admirers. Interviewed Tom Brady about the art of winning—and found time to make some TikTok videos with him.

Brady has since deleted those videos amid Sam's total public disgrace. But FTX's damage and impact on the entire crypto industry will not be so easy to wipe clean. By now, you surely know the Cliff's Notes on what the hell happened: FTX was a piggy bank for Sam's hedge fund Alameda, and the entire empire was leveraged to the gills using its own shitcoin FTT as collateral.

Is there anything we can learn from the whole disaster?

1. The fall of another false crypto idol

The crypto industry has a way of building founders into false idols, even though that flies directly in the face of Web3's utopian ideal of decentralization. Crypto Twitter did it with Terra founder Do Kwon, Three Arrows Capital figurehead Su Zhu, and Celsius founder Alex Mashinsky, to name just a few, and now yet another emperor has been revealed to have no clothes.

That's not to excuse Sam's conduct or his agency in this mess. He embraced and fueled his own celebrity by putting himself on billboards (how many other tech companies use their dweeby founder as the face of their marketing?), and his explanations so far for the collapse of his business have been either weak (he tweeted that his "sense" of users' margins and FTX's leverage was off—why didn't the CEO have the correct sense of his own company's leverage?) or willfully dishonest at worst (he claimed Alameda wasn't insolvent, just illiquid, because it had "more assets than liabilities" mark-to-market—an absurd claim).

But other parties also bear some blame for creating the cult of SBF.

The media (crypto and mainstream) made him famous (so many magazine covers!—and Decrypt is not blameless, we named him our 2021 "founder of the year"). Celebrities and athletes like Brady, Bundchen, Steph Curry, Naomi Osaka, and Shohei Ohtani hawked the exchange to the public. Should they have known FTX was a sham? Absolutely not. Are they legally liable for the collapse? Legal experts say probably not. Did their endorsements lead some people to put money into FTX? Almost surely. Politicians happily took his donations and brought him to DC repeatedly to testify as the regulator-friendly advocate for the crypto industry. And crypto enthusiasts made him a folk hero, with every quirk (he dressed like an eighth grader! he plays video games while doing television interviews!) only making him more interesting.

After SBF's companies bailed out BlockFi and Voyager, people were calling him "Atlas" and crypto's "savior." Be very skeptical of crypto saviors.

sbf billboard sf august
FTX billboard in San Francisco in August 2022. (Photo: Daniel Roberts/Decrypt)

2. A plot twist at the end of a business rivalry

It is remarkable that Changpeng "CZ" Zhao would emerge the victor in his public rivalry with SBF. For those not steeped in the history here: Binance, the largest crypto exchange in the world by volume, was actually an early investor in FTX in 2019. After the two exchanges became public competitors, FTX cashed out Binance's equity stake in July 2021 in the form of FTT tokens—leaving Binance with a big stash of FTT to liquidate, initiating the meltdown that led to FTX's demise.

Throughout 2020 and 2021, the public narratives around CZ and SBF only grew further cemented: CZ was the rebel, stoking the ire of regulators by insisting his company had no headquarters and thus didn't need to play by any one jurisdiction's rules; SBF was Mr. Washington, befriending Maxine Waters and wining and dining Congressional staffers, advocating for sensible regulations of the industry. The stage was set for Sam to be the torch-bearer who would take crypto mainstream, bridging the gap between the DeFi degens, Wall Street, and Washington.

Instead, he bent the knee to his rival by announcing he would sell FTX to Binance—only to have CZ stick the knife in by changing his mind the next day, declaring FTX was "beyond our ability to help."

It is a series of events practically scripted for the movies—and there will be multiple movies made. CZ walks away from this mess looking like a mad genius—for now. In a May 2021 interview with Decrypt, Brian Brooks, then-CEO of Binance US, attempted to frame it as racist to paint Binance as shady for its regulation dodging. At the time, that looked like a stretch, but perhaps there is some truth to the idea that the media, and other parties in crypto, "othered" CZ because his company was overseas, while it was eager to make Sam, the American, a hero—even though his exchange was also based outside the US (Hong Kong, then Bahamas) to benefit from looser rules.

3. Victory lap for DeFi advocates

DeFi advocates have used the FTX collapse, as they used the failures of crypto lenders Celsius and Voyager, to say some form of "that's what you get for putting your crypto on a centralized exchange" and to point out that DeFi tools have continued to work as they should. (After Terra collapsed, DeFi users were the first to get paid back, since code moves faster than the humans.)

And they're correct. As Decrypt's DeFi guy Liam Kelly recently wrote, decentralized crypto platforms like Aave, Compound, and Uniswap have kept working through recent meltdowns of centralized players. If you entrust your funds to human beings, you're trusting the decisions they make with your money. SBF and the other people running FTX were funneling those funds directly to other uses. Just like Bitcoin maximalists have been able to point to the Terra crisis and now the FTX crisis (specifically FTT's role in it) and point out that Bitcoin keeps working, DeFi advocates have been handed another chance to point and say "We told you."

4. Centralized crypto exchanges are not dead

There's just one problem for the DeFi flag-wavers: The user experience of DeFi is still so thorny and opaque as to be unusable for most non-tech-savvy folks. The easy on-ramps are just not there yet. Do not presume this is the end of centralized exchanges. The average "normie" who decides they're ready to buy a bit of crypto is not going to do it on Uniswap; they're going to choose an exchange they think looks reasonably trustworthy. If they're in the U.S., they're probably going to choose Coinbase.

Indeed, Coinbase has wisely used the FTX collapse as a situational marketing opportunity to point out that it doesn't even have an exchange token and never trades with customer funds. Lots of true degens hate Coinbase for being too Wall Street or too overly compliant, but Coinbase is the closest thing to a household brand name in crypto (even Edward Snowden agrees), and because it's publicly traded and has been around since 2012, people are going to continue using it.

Centralized crypto is not going to go away due to the FTX crisis; instead, DeFi and CeFi will continue to rise in tandem, with eventual winners (and far more losers) to come in both spheres.

5. More bad for the industry than good

Some optimists have called the FTX collapse a positive for crypto, because it's another event that washes out more bad actors and speculators. "Crypto will emerge stronger," et cetera, et cetera. While I truly respect that spirit, a little hard realism might be more productive: The FTX fiasco is really bad for crypto. It's given all the virulent crypto skeptics another chance to point and laugh and say all of crypto is a house of cards, and it's given politicians who already looked at crypto as a high-risk casino a chance to scream more loudly for stricter regulations. Sam and FTX have done none of their peers any favors.

The public should not equate the collapse of another bad company with the collapse of the industry, but I believe it's going to take a long time for the reputation of crypto to recover from this black eye.

2M ago
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