The FTX Saga: Red Flags We Knew But Ignored

One of the once-largest and most reputable centralized cryptocurrency exchanges, FTX, had a $10 billion hole in its balance sheet, according to information released this week. This was the work of Sam Bankman-Frie, SBF, as he is known in the industry. The entire FTX saga scope of the devastation won’t be apparent until months have passed after the dust has cleared.

The Sam Bankman-Fried story

After starting FTX in 2019, Sam Bankman-Fried became well-known in the cryptocurrency world. Without providing any evidence of prior competency, he quickly rose to prominence in his field and became a darling of the media, becoming the richest person in the world under 30 as FTX reached $32 billion in 2022. Bankman-Fried gained notoriety for his geeky persona and plans to use effective altruism to donate his incredible wealth, which he amassed through rent-seeking and selling hopium in bulk to venture capitalists, who then sold it to crypto tourists looking to make a quick buck flipping the newest trendy coins on the market.

This year, Bankman-Fried lobbied for the Digital Commodities Consumer Protection Act (DCCPA), a bill that, if passed, would virtually end decentralized finance. He also spent time meeting with legislators and regulators. In other words, he weaseled his way to the top and then attempted to sabotage everyone else by pulling the ladder under him.

Bankman-Fried oversaw FTX, while Caroline Ellison, a 28-year-old with just 19 months of prior experience as a junior trader at Jane Street, was in charge of Alameda Research. She caused a stir in 2021 when she admitted to using amphetamines on Twitter. One year later, it was revealed that Bankman-Fried shifted almost $10 billion of FTX customers’ money to help the company deal with a bankruptcy problem, placing Ellison at the core of the FTX scandal.

Never Do We Learn

The cryptocurrency events of the past week are nothing new. Trust, money, and power abuse are pervasive throughout history. In order to build a sound money system that does away with the need for trust and cannot be exploited, Satoshi designed Bitcoin. But it appears that we are unable to stop.

The similarities are obvious if you replace the years of the financial crises with the crypto blowups, such as Mt. Gox, QuadrigaCX, Voyager Digital, Celsius, FTX, and BlockFi. It’s all simply one continuous circle that keeps happening. We seem to never learn.

Regrettably, the business still has a lot of warning signs.

The Security Gaps of Trusted Third Parties

The Bitcoin whitepaper, which explained the design for “a completely peer-to-peer version of electronic cash would allow internet payments to be transmitted directly from one party to another without passing through a financial institution,” was published by Satoshi Nakamoto about 14 years ago. Satoshi made it clear why they wanted to create Bitcoin, saying they wanted to reduce the reliance on intermediaries in the financial system.

Many people ignored this guidance, nevertheless. This year, hundreds of cryptocurrency enthusiasts, including some seasoned professionals, have lost everything because they exploited centralized crypto exchanges or lending platforms, despite multiple warnings, including the Mt.Gox and QuadrigaCX collapses in 2014 and 2019.

The worst aspect of the FTX crisis is that there were warning signs from the beginning.

Bottomline

This did not occur as a result of “crypto being a fraud” or “crypto being uncontrolled.” Your politicians use the same offshore countries where FTX was regulated to hide their own money under the full laws and regulations of those nations. In other words, a business that was subject to regulation committed an unlawful act without being discovered by the authorities. What a surprise?

This time, we completely messed up, not because our aims were dishonorable, but rather because we disregarded the teachings we already knew to be true: never ignore red flags, never trust without verifying, and always keep your assets in your own self-custody.