You can forget crypto now

When I spoke to Sam Bankman-Fried three weeks ago, he was crypto’s golden boy. This quirky 30-year-old, worth around $15 billion, led one of the industry’s biggest empires. Over the past few years, he has been fooling around with Bill Clinton, graced the cover of Fortune magazine, and made himself a three-letter initialism: SBF. Toward the end of our busy 90-minute interview, Bankman-Fried dropped a casual hint about the state of his finances. “The truth is,” he said, “most of my fortune is not liquid right now.” As for why his once-generous political donations had dried up in the previous months, he offered a mystical koan: “There are limits to what I can give in the short term.”

That turned out to be an extreme understatement. This week, Bankman-Fried lost virtually all of his fortune in a single day, in what Bloomberg has called “one of history’s greatest destructions of wealth ever.” The largest companies he once oversaw, crypto exchange FTX and hedge fund Alameda Research, became insolvent almost overnight, and have since filed for bankruptcy, along with “approximately 130 additional affiliates” under the Bankman-Fried umbrella. On Friday — in an irony lost on absolutely no one — John J. Ray III, the lawyer who oversaw the liquidation of Enron, was the new CEO of FTX.

Crypto collapses have become par for the course. But even for an industry known for its volatility, SBF’s downfall came like a cascade of cold water. Bankman-Fried, after all, was supposed to be crypto’s good boy wunderkind, the pro-regulation prophet who would eventually lead crypto into the mainstream. In fact, SBF placed special emphasis on the idea that you could trust his exchange in an industry notorious for its gamblers and grifters; as if to make that message even clearer, FTX paid to sponsor MLB’s umpires—the supposed arbiters of truth and justice—as opposed to the players. In an article that has since been deleted from the internet, venture capital firm Sequoia hailed SBF as a surefire “future trillionaire,” thanks in part to the scope of his vision for a future where trading bitcoin is as easy and popular as shopping. on Amazon.

But now crypto feels less ready for the mainstream than it has in years. Although crypto slipped into a bear market in recent months, it was still dream of crypto as originally conceived in the wake of the 2008 financial crisis: Part of blockchain’s raison d’être lay in cutting out greedy bankers and creating greater trust between transaction partners. Now, in 2022, the crypto markets are controlled by an industry that has proven time and time again how similar the existing financial system really is. Before this year’s crash, it felt like a decent portion of the public was starting to trust this industry. SBF’s antics have turned back time, and what looked like a winter is starting to feel more like an ice age.

Imagine your debit card suddenly stopped working because the executives at your bank were out making high-risk trades with your money while you were trying to pay for groceries—that’s roughly analogous to what Bankman-Fried is accused of doing. (Bankman-Fried did not respond to a request for comment.)

Autumn began with a story from CoinDesk reporter Ian Allison suggested that SBF’s companies were far more interconnected than anyone knew. Instead of storing value in dollars and debt, Bankman-Fried’s empire held money in an internal cryptocurrency, which of course only works as long as the currency remains stable. It just so happened that FTX rival Binance – led by the richest man in crypto, Chinese billionaire Changpeng Zhao – had a couple billion dollars worth of this cryptocurrency on its own balance sheet. After CoinDesk report, Zhao said he planned to dump everything.

The dominoes fell from there. In the wake of Zhao’s move, FTX found itself struggling to pay out withdrawals to customers. Suddenly a company worth $32 billion was $8 billion in the hole. Zhao initially said that Binance would buy FTX for scrap, but backed off once he saw the books. FTX was never a bank; customers will be lucky to recover a fraction of their money in bankruptcy court over the next few years, and it appears that SBF will face serious legal consequences.

Several major crypto firms have collapsed in the past year, but Bankman-Fried and his team were supposed to be the adults in the room, trying to legitimize crypto by rehabilitating its reputation as a stubbornly immature sector. But it turns out that there are no adults, and no room. The collapse of SBF’s empire should be a wake-up call not only to the industry that made it possible, but to the millions of people who decided to take a chance on crypto for a few bucks over the past couple of years. Centralized exchanges like FTX – arguably the easiest way for retail investors to find their way into crypto – still come with a huge amount of risk. When these companies go under, as they now seem to do every other month, they take your money with them.

But the problem is more fundamental than losing some money. Crypto was built on the idea that you shouldn’t trust the banks with your money, that people should be able to keep it themselves, hopefully somewhere a little safer than a mattress. And while technically you can still do that, there’s no guarantee that the value of your tokens won’t one day drop to zero, thanks to the actions of a few rogue billionaires with huge effects on the market. This is, obviously, a terrible deal, and a seeming betrayal of the dream of crypto-utopianism – the vision of a future without shady middlemen.

Even the legions of crypto-skeptics, now basking in I-told-you-so’s, would acknowledge that even as recently as this spring the industry was bursting with some kind of potential energy. “We’re so early,” goes a popular crypto mantra, the idea being that despite the fragility of the entire system, despite the constant feeling that everything could fall apart at any moment, there will come a time when crypto really is coming. The fall of Sam Bankman-Fried, and the more than likely fall of many more firms in the immediate future, has dampened much of this hope. Now, it’s hard to imagine a near or even mid-term future where crypto has a fraction of the influence it did six months ago.

Crypto will always persist in one form or another, but the future of crypto as an institution – as something that could one day destabilize the big banks, or at least operate in parallel – has never been less certain.