Over the past year, as crypto companies imploded and losses mounted, a white knight appeared. 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 with a reputation that has been marred by scammers, hackers and sheer greed, Bankman-Fried seemed like a relatively nice guy. He even claimed that he wanted to give almost all of his money away.
And then, just like that, it was over. The onetime billionaire lost 94% of his fortune in a single day. On Friday FTX filed for bankruptcy and Bankman-Fried resigned as CEO. The contagion has already begun. Crypto lender BlockFi, one of the companies Bankman-Fried tried to rescue, has now paused client withdrawals. So who will save crypto now?
The answer is no one, because crypto shouldn’t need a savior. The whole point of crypto is that it is supposed to be decentralized and transparent. Bankman-Fried’s rise and fall shows how far the industry has strayed from that ideal. Today’s crypto world is one of opaque entities run by larger-than-life personalities. There is perhaps no better example than FTX and its leader.
It wasn’t supposed to be this way. Bitcoin, the world’s first major cryptocurrency, came into the world on the heels of the 2008 financial crisis, which led to a deep disappointment in bankers and politicians. In light of the distrust in financial institutions, the basic idea was that this new system didn’t require you to trust anyone at all. Bitcoin transactions are recorded on a decentralized ledger known as a blockchain, which everyone can see and no bad actor should be able to fraudulently alter.
But Bankman-Fried’s empire, it turned out, was far from transparent. Everything seemed fine until my colleague Ian Allison, a journalist at CoinDesk, wrote an article last week revealing that the balance sheet of Bankman-Fried’s Alameda, which is the sister company of FTX, was largely made up of FTT, a token that FTX created. This raised questions about the stability of FTX’s sister company and drew attention to the strikingly close ties between FTX and Alameda.
It’s worth highlighting that Alameda’s financial weaknesses were revealed by a journalist, rather than a publicly available blockchain.
Soon after, another larger-than-life crypto personality entered the chat. Changpeng Zhao, CEO of the world’s biggest crypto exchange Binance, publicly announced that the exchange would liquidate its FTX holdings. Binance then signed a letter of intent to acquire FTX, a plan that Binance abandoned shortly after.
Then, more disturbing information came to light. The Wall Street Journal reported that FTX lent more than half of its customers’ money to Bankman-Fried’s other company, Alameda. In other words, he used customer deposits in one company to pay for risky bets by another.
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.”
This very statement is a perfect illustration of how a decentralized technology like cryptocurrency is not supposed to work. The whole idea of a decentralized ledger is to remove a single point of failure and decrease the risk of human error. And yet, FTX would be far from the first player in the crypto space, led by an outsized personality, to suddenly deflate. Other examples included Alex Mashinsky, the founder and CEO of the crypto lending platform Celsius, and Do Kwon, who co-founded the company that created TerraUSD, a so-called algorithmic stablecoin that was intended to trade at $1 USD. Both of those projects imploded this past year, leading to billions of dollars in losses. Both figures had large followings, many of whom learned the hard way that these supposedly powerful leaders did not have the power to return their money.
The cult of personality problem is not limited to crypto. We see it in social media as well, another supposedly leaderless and decentralized technology. Twitter is now subject to the whims of owner Elon Musk, the richest man in the world.
In the case of crypto, many have long pointed out the risk of powerful centralized exchanges like FTX, with some people preferring to hold their own coins instead of storing them in an exchange. Another option is to actually use blockchain technology to provide greater visibility, something that Bankman-Fried is now promising to do. In his long Twitter thread on Thursday, he said his priority would be “radical transparency,” or “giving as close to on-chain transparency as it can: so that people know *exactly* what is happening on it.” In the case of FTX, of course, it’s probably too late.
For the crypto industry, the lesson here is to stop looking for saviors. Bankman-Fried’s meteoric rise was not simply based on his own doing – he was buoyed by many others. He raised millions of dollars from high-profile investors, was showered with media attention, and with few exceptions just wasn’t questioned all that much. The bottom line is that so much hope and responsibility should not rest in one individual. It goes against everything that crypto is supposed to represent.