Reflections on FTX:SBF
On what it all means.
Like many of you, I’ve spent approximately too much time this past ~week following the FTX:SBF story. The story’s capturing attention well beyond CT, of course, but for anyone even remotely close to the ground of this stuff, it’s been near impossible to look away. Indeed, the story’s got everything — fraud on a global scale, sex in the Bahamas, the collapse of an empire (and, apparently, a not-so-healthy dose of amphetamines to boot). As entertaining as it’s all been, though, it’s also provided a fairly sober reflection on the current state of crypto (a term, admittedly, I have quite a bit of sympathy for) as well as the human condition itself (another thing I happen to have a fair amount of sympathy for). So, while we’re all wondering what it all means… what’s it all mean?
Let’s start with crypto. FTX just lost — or sure appears to have lost — billions of dollars in user funds. The Reality: Real people have lost real magic internet money — and lot’s of it. The situation is tragic, certainly. But what does it actually mean for the apparent promise/s of crypto? Does it prove, definitively, that crypto is a failed experiment? That the “movement” is, after all, morally and technically bankrupt? Or, is there another lesson to be drawn here? One that leaves, God-willing, a future for an “industry” determined to be legitimately regarded as such.
Ironically, the implosion of FTX is a flagrant example of the problems that crypto was originally intended to solve — namely, the problems inherent to the centralisation of power. For those of us who’ve been around long enough to remember, crypto was supposed to free us from the tyranny of centralisation and push power back to the edges, where it belongs! Unfortunately, however, things haven’t quite worked out that way — not just yet. While crypto represents a — more or less — decentralized economic substrate, for a variety of reasons, it’s currently serving as but another venue for centralized power to accrue, and, as it does, abuse.
Because of crypto, self-custody is now an empowering possibility. The significance of this is hard to overstate — and its power can be felt viscerally by interacting with one of these systems. But in order to get to the promised land of self-custody, one must first go through the treacherous valley that is a centralised exchange. Alas, there is no other way. Ideologically inconvenient though this may be, it’s a fact of Reality all the same. And as we’re fast learning, it’s also a relatively fringe psychological type that’s interested or willing to custody their own money in the first place. Certainly, self-custody will become increasingly user-friendly as the technology develops, but we should expect that a considerable portion of folk (probably the majority of people) will continue to prefer someone else looking after their life-savings. Stashing cash under the mattress simply isn’t everyone’s vibe. Accordingly, “just buy a Ledger” isn’t the answer to the problem here — at least not the only. And as much as the idea of decentralized custody holds promise, it’s also — at this point — only an idea. Until such time as the idea is made real, centralised custody will remain an integral part of the ecosystem.
For a healthy crypto ecosystem, it’s not sufficient that we have decentralized and performant blockchains (which we’re still working on, mind you). It will also require the existence of reliable — indeed trustworthy — centralised parties (cryptobanks / exchanges). While continuing to spread the message of self-custody is important, as is improving its UI/UX, equally important is it that we figure out a solution to the centralised piece of all this. Regulation and new industry norms — i.e. proof of reserves / liabilities — would appear to be unavoidable here, however loathe one may be to admit it. For at the moment, we’re trusting centralised exchanges without any hard evidence that they deserve our trust (besides the fact that they haven’t already lost our money). While we can’t eliminate trust from the system, try though we might, we should at least demand our trust be earned. Or so it would sure seem prudent.
Here it must be noted that this is already a higher standard than we currently demand of our existing, legacy financial institutions. Obviously traditional banks aren’t required to provide the kind of transparency we’re now beginning to ask of their crypto counterparts. Proof of Reserves? LOL. Not a chance. Why is that, you ask? Because, well, banks are basically FTX’s — just less SBF’d versions thereof. How’s that possible? Because they have the sympathy and support of governments. If a “real” bank was to go down in similar fashion as FTX, losing billions of retail dollars, the State would almost certainly come to the rescue. Unfortunately, the State has no such compassion for crypto and its ‘cabal of crooks’ who partake in it. Indeed, good riddance, “let crypto burn” they say!
Listening to a podcast with Kraken CEO, Jesse Powell, this morning, the current state of affairs — the utter untrustworthiness of current custodians — was cast in rather terrifying terms. When asked how we might “move forward” as an industry, Powell suggested, among other things, that people diversify their counterparty risk by… you won’t believe it… using multiple counterparties. Instead of having all your crypto with one custodian — say, Kraken — spread it around a few, he advised. He went on to explicitly state that he would never suggest someone keep all their funds on Kraken because he "couldn’t guarantee that they wouldn’t be hacked or that the government wouldn't steal all their funds at any moment”1. On one hand, I applaud his candour — it’s a deep and startling truth that very few CEOs in his position would care to admit. Bravo to him. But in the same spirit of candour, WTF!? Just imagine for a moment Jamie Dimon saying the same thing: “Hey, look, I can’t guarantee I won’t lose all your money,” right before saying, “but please, do go ahead an open an account with us! We’ll do our best, promise!” Presumably, you’d be less than excited. Indeed, you probably wouldn't open an account. And yet, that’s where we are today. Welcome to crypto!
Whatever the cause of this terrifying lack of self-confidence, it needs to be addressed. Until the CEOs of our exchanges can honestly — and on good evidence — say our money is safe, without also having to add that we should probably ‘hedge our bets’, then there’s work still to be done. ‘Proof of’s seem like a good start, but presumably there’s more we could do, too (but I’ll leave that to folk better qualified than I to figure out).
Now if this means we’re held to a higher standard than TradFi, then perhaps that’s the price we should be willing to pay (we are trying to build a better financial system, after all). Yet, there are also legitimate concerns that regulation will only hinder this project of ours (that is, the construction of a more just financial system). In order to cast considerable doubt here, cynics of regulation only need to point to the existing system. For if regulation were the fix, then there’d probably be no need for crypto in the first place. Indeed, if that’s all it took, we’d already be dancing barefoot in the splendour of the quadratic lands! But alas.
The trouble with financial regulation, in the end, is that it’s not clear who ought to have the authority to regulate such a thing. And I don’t just mean legislatively. Rather, it’s a more basic question: who do we know that has the wisdom to impose regulations that would actually serve our interests? Who do we know, for instance, that’s built a digitally-native, global and equitable financial system? Preferably, one that doesn’t implode with considerable regularity? For me, no-one comes to mind (but then again, I’m an anon who plays a ronin on the Internet). Maybe you know someone?
The silver-lining to this whole situation, and a detail that’s conveniently overlooked by mainstream media, is that at no point throughout this whole debacle did the underlying infrastructure — the actual “crypto” piece — break. In fact, the protocols hummed along just fine. Even Solana. At least in this respect, the past week was a vote of confidence for crypto — it really works!!
On the human side, it’s been interesting to see Twitter’s response to SBF, the fraud behind the fiasco. The man many were heaping praise on as recently as last week is now the face of evil. How fortunes can change. Personally, I’ve tried to abstain from personal judgments of SBF and am a fan of Vitalik’s framing of the human vs public figure dichotomy:
For one, I don’t know the guy. Does he seem like a sociopath? Sure. Does he seem remorseful? Not particularly, no. Is Effective Altruism (EA) to blame? Unlikely — sounds like it was just a part of the act. In the end, though, such ruminations hardly seem fruitful, and schadenfreude is just as unbecoming as sociopathy. And so, until the book comes out, I’ve elected to spend my thought cycles on other things.
What the situation does highlight, however, is that technology is — for all practical purposes — value-neutral. And so it is with crypto. Evidently, this technology we have so much hope for can be leveraged for great good, just as it can be readily exploited for all manner of pathological ends. Thus what the “revolution” would appear to require, now more than ever, is that simple yet seemingly all-too scarce ingredient: decent people. This is where crypto’s PR problem is precisely that — a problem. The image of crypto as an especially debauched casino filled with degenerates is, it would seem, something of a self-fulfilling prophecy. Those decent people we so desperately need hear the news and decide they’d rather avoid the mess that is crypto. Can’t blame ‘em. Fortunately, though, we do have our fair share of decent folk — those starry-eyed idealists who endure the never-ending dramas that crypto has such a remarkable capacity to produce. But if we’re to realise the potential of crypto, we’ll need at least a hundred(?) more.
Now, the question many are wondering: is crypto dead? Hardly. But it does need to take a good hard look in the mirror. Although the non-believers are already dancing on its grave, crypto should — if it learns its lessons — emerge from this nightmare all the more resilient. And if it doesn’t, then it’s not the anti-fragile system we thought it was.
In the end, the underlying (if banal) moral of this whole story is that crypto is a powerful, emerging, alternative financial system that’s still working itself out, filled with good and bad actors alike (though not as much of the former as we might wish, and already too much of the latter). And though we’re building a parallel internet economy here, comprised of autonomous, self-executing code run on virtual computers that live “in the sky”, there are still humans and trust mediating this system, and thereby, scope for exploitation.
I’m paraphrasing but that was the gist.