At one point in 2022, cryptocurrency was an enormous, nearly trillion-dollar market. Crypto investments rocketed upward with the familiar euphoria of a typical capitalist market bubble, spawning a new genre of annoying commercials and cocky speculators. Soon enough, the crypto bubble burst, resulting in a giant crash that ruined millions of small investors.

Like other market booms, this one served to conceal a fair amount of outright fraud, the most prominent instance of which is the once enormous crypto exchange FTX and its former CEO, Samuel Bankman-Fried. Once worth $16 billion and a rising star on the Democratic Party donor circuit, “SBF” is now at the center of a major federal fraud indictment, facing seven charges alleging rampant fraud by the management of the exchange.

The ongoing trial has been morbidly fascinating. Despite Bankman-Fried’s personal eccentricities and the shamelessness of his fraudulent dealings, the episode exemplifies the particularly scammy brand of capitalism that we’ve come to associate with Silicon Valley.

Tales From the Crypto

Cryptocurrency, many economists will tell you, was misnamed from the beginning. “Currency” usually refers to money that can be used in purchases: to buy groceries, say, or pay the bills. A few of the most prominent cryptocurrencies do indeed function as a medium of exchange, as economists call it — Bitcoin, for example, is often used in extortion and money laundering.

But cryptocurrencies, especially those beyond the most common, Bitcoin and Ethereum, are not used for purchases. They are investment vehicles, purchased not for use but with the expectation of selling them later for more.

In other words, crypto is almost entirely a speculative asset, purchased purely in order to sell at a gain. To inflate the incredible bubble, crypto exchanges ran fairly large ad campaigns, often including figures who ought to know better, including Matt Damon and Spike Lee. (They were paid in dollars, of course — which you can actually use to buy things.)

Bankman-Fried developed the FTX crypto exchange, taking customer deposits and holding them while users invested in various crypto assets. He also created Alameda Research, essentially a hedge fund that made risky investments. (Both companies were majority-owned by Bankman-Fried.) At some point, the fund began using FTX customer deposits to invest in high-risk tech firms and make political donations, among other things.

Bankman-Fried is alleged to have discouraged putting anything too forthcoming in Slack or other recorded media, fearing future legal complications. Part of the success of the exchange was due to the celebrity of Bankman-Fried himself, who purposefully cultivated an eccentric image by leaving his hair uncombed, wearing a slovenly wardrobe, and affecting the detached, asocial genius image popular with business media today. Bankman-Fried’s former girlfriend, Caroline Ellison, testified that Bankman-Fried “said he thought his hair had been very valuable.”

Bad Breakup

Much of the trial coverage has focused on the testimony of Ellison, who was also the former head of Alameda Research. She testified that Bankman-Fried told her to use FTX customer money for investments and to pay back loans taken out by Alameda, saying Bankman-Fried “directed me to commit these crimes.” She claims she only realized the alarming condition of Alameda, struggling with heavy losses from bad investments, after she was put in charge of the hedge fund in 2018.

Spreadsheets created by Ellison were entered into the record, including her prediction that the company would be unable to repay its creditors if the overall crypto market, feverishly inflated at the time, were to collapse. Importantly, FTX also had its own cryptocurrency (as did many trading platforms at the time), FTT, which Bankman-Fried was eager to keep from falling below a certain value. Alameda used FTT as loan collateral, meaning it could trade the token it invented for other assets. Bankman-Fried would direct the hedge fund to quietly purchase FTT occasionally when needed.

Ellison claims she and Bankman-Fried sweated the state of Alameda, which she calculated to have a net asset value of negative $2.7 billion in 2021. In late 2022, a leaked Alameda balance sheet triggered a run on FTX. Unable to cover more than a fraction of the withdrawals, the exchange filed for bankruptcy.

Among the most incriminating pieces of evidence brought by the prosecution is an audio recording from the week of FTX’s implosion, in which Ellison appears to admit she and Bankman-Fried collaborated to embezzle customer deposits. This is especially damning, as he has claimed Alameda did not realize its large debt position to FTX until it was too late to prevent collapse.

This dubious contention was made plausible by the extant mythology of the scrappy start-up company, where proper risk controls are not usually a priority. In Bankman-Fried’s version of events, FTX deposited customer money with Alameda in an internal account labeled “fiat@.” Only in time did management realize this meant Alameda’s debt to FTX was enormous — in the billions — and when customers pulled their deposits, FTX was soon out of cash.

Traditional financial markets have far stricter controls over separating customer money from the firm’s own capital. Ellison’s testimony was seen as critical because she was in a position to bring evidence undermining these implausible claims.

Bankman-Fried was under house arrest after his indictment and rendition to the United States from the Bahamas, living with his parents, both professors at Stanford Law School. But his bail was revoked and he was remanded to jail after the presiding judge ruled he had attempted to intimidate Ellison by leaking her personal journals to the New York Times. During the trial, prosecutors have complained about Bankman-Fried’s courtroom behavior, where he has audibly laughed, scoffed, and shaken his head during Ellison’s testimony.

Ellison acknowledged dating her boss “created some awkward situations,” and the relationship ended when she felt ignored. Bankman-Fried now claims he insisted that Ellison hedge Alameda’s risky trades, but she ignored his urging. Classic breakup!

Ellison is not the only one of Bankman-Fried’s inner circle to turn state’s witness, as former top executive Gary Wang testified Bankman-Fried had him set up a “backdoor” in the company’s operating software code allowing Alameda to borrow essentially unlimited amounts of FTX customer balances.

WTFTX

The trial outcome remains uncertain, although it’s thought that Bankman-Fried will likely be found guilty. Beyond the relatively plain fraudulent practices, Bankman-Fried’s legal team has also managed to irritate the presiding judge with excessively repeated questions. The judge has also ruled Bankman-Fried can’t build a defense on his claim that investors should have done more due diligence — an amusing claim for a major acolyte of the unregulated, Wild West markets of the crypto boom. In addition, the judge has cited the “buried facts doctrine,” a legal rule that firms can’t build legal cases around the disclosure of risks in obscure legalese or buried in lengthy terms-of-service documents.

During the boom, Bankman-Fried was seen as a rising Democratic Party power donor, overjoying the Nancy Pelosi wing of the party that prioritizes access to campaign capital above anything as tawdry as regulation. Bankman-Fried told a pathetically credulous press corps that he was passionate about the usual Silicon Valley lodestones, including the ludicrous fortune-polishing conceits around “effective altruism.” But he also pushed regulators to crack down on Binance, a rival crypto exchange, in order to cut into their market share.

Conspicuously absent from the trial are the legions of crypto-boosters, from paid celebrity spokespeople to libertarian op-ed writers, all of whom made nice paydays (in actual money) from boosting crypto to naive investors. Spike Lee and Larry David are rightly beloved for their work, but their roles in this black comedy are less celebrated by the critics.

Among the few media enablers of these frauds to have gotten in any trouble at all is prominent author and financial journalist Michael Lewis, whose new biography of Bankman-Fried, along with his promotional appearances for it, make a weak case for rehabilitating FTX and exonerating Bankman-Fried. He told CBS’s 60 Minutes that the company “had a great real business” and “if there hadn’t been a run on customer deposits, they’d still be making tons of money.” But of course every bank with inadequate capital reserves has a similar complaint, and after all, the run occurred when the company’s fraudulent use of depositor money and reliance on its own token became public. That didn’t stop Lewis from writing, “There is still a Sam-Bankman-Fried-shaped hole in the world that now needs filling.”

Lewis, whose record includes popular books that later became feature films (including Moneyball and The Big Short), was reported by the Wall Street Journal to have “spent more than 70 days in the Bahamas” while interviewing Bankman-Fried. The book has received punishing reviews, above all by Jacob Bacharach in the New Republic, who wrote: “Like his employees, his marks, his dupes, his cheated counterparties, SBF’s biographer cast this figure — shambolic, often dirty, rude, condescending, wildly unpleasant, and, I am afraid to say, not evidently nearly as smart as everyone gave him credit for — as a once-in-a-generation-intellect, not because he was one but because he had to be.”

The FTX saga is a typical embodiment of capitalism’s false promises: charismatic corporate leaders proclaim a new day, heralded by confusing new technologies freed from bureaucratic red tape, only to see their firms collapse for very familiar reasons — fraud due to a lack of oversight, followed by a bank run.

For all its cutting-edge trappings, crypto is just a tinseled repackaging of a classic shell game.