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The trial of Sam Bankman-Fried begins tomorrow.
As a person that has worked in crypto quant trading[1], I have the tiniest slice of sympathy for him. He still seems like an unsympathetic freak overall, and has done some stuff that seems pretty unethical, and some of his actions are definitely criminal. He has given EA a bad name as well.
There are certainly a lot of process crimes he's guilty of. The fact that the US has pulled his international operations into US jurisdiction means he's in for a universe of pain and if they can't fight that he's going to jail for infinity years. I consider this legal theory a bit dubious but the US has taken the position that it can prosecute crimes that happen in the rest of the world if they even marginally involve US citizens[2]. Is everyone in the world really supposed to follow US laws? That strikes me as a bad precedent; on the other hand, I also do appreciate it sometimes that the US is an international law enforcer of last resort.
That's not really where my sympathy lies though. He knows he was playing a dangerous game. Pretty much everyone who works in quant finance occupies enough legal gray area to worry that they could all be shut down at any time and end up in court. This is even worse in the crypto era, as the position taken by the SEC and friends is shameful, giving very little guidance on new forms of financial technology and telling firms years later by indictment that they were frowning on their behavior all this time.
Many tradfi firms prostrate themselves before the SEC in the hopes of maintaining a good relationship. Even still, reputable firms who were attempting to operate outside of US jurisdiction have been caught with their pants down in the crypto era e.g. Trading Firm A, B and C in the recent Binance indictment: https://www.bloomberg.com/opinion/articles/2023-03-27/the-cftc-comes-for-binance (paywall bypass: https://archive.ph/aMi5Q )
It's still not clear to me that SBF and FTX spent user funds as a matter of course, or if it effectively became spending user funds because so much of their other assets imploded. Though, again, that's not necessarily a crime if you operate outside of US jurisdiction, which is what their international arm believed it was doing. But, that's also sort of secondary.
The primary question I keep coming back to, and I come to this every time there's a large corporate fraud scandal, is: what is fraud, actually? Because it seems indistinguishable from "I thought our business was legit and every indication I had was that it was legit and then it failed and it failed really hard and lots of people lost money".
FTX was a successful business. It was a high quality crypto exchange among many exchanges where the standard at the time was "complete clown show". They were probably the last people I would have bet on imploding and disappearing user funds. The failure is shocking. It's so shocking it's hard to believe.
One thing that's common to these frauds is that people always seem to have a moment of reckoning where they know they're fucked and they can either pack up and go home and face the consequences, or they double down and hope it'll all work out. Indeed, there are some legendary stories from doubling down: FedEx for example where the CEO literally doubled down with their last remaining $5000 in Las Vegas to turn it into a much needed $27,000 to keep the business alive. In this timeline FedEx is legitimate, but if it hadn't worked out he could've possibly gone to jail.
As far as I can tell Uber was based on complete fraud. Its business plan from day one appeared to be: completely ignore taxi laws the world over and just push out a product that was so much better than calling taxis that before jurisdictions knew what was happening they would have tons of passionate users that would be furious if Uber was taken away. This seems to be a resounding success. But it was very much organized crime? If Uber had failed their founder would have definitely gone to jail. In fact he was involved in so much other generally shady stuff that he was forced out. Yet he definitely moved the needle.
Anyway, this isn't meant to be an impassioned defense of SBF, more like my continuing fascination and horror at this alien thing we call modern business. Poor fool tried to play the game of changing the world and got burned. And in this case the burning is fantastic public spectacle.
EDIT: Matt Levine's newsletter today is about SBF's trial, which hit my inbox right after I submitted this comment. Amazing, as usual. https://www.bloomberg.com/opinion/articles/2023-10-02/sbf-s-defense-will-be-tough
EDIT2: As replies have pointed out, I am probably technically wrong for calling what Uber did fraud. Sorry to distract. I should've made my case that Uber was more like a plan to openly disregard and defy taxi regulations across many jurisdictions with the excuse that this isn't a taxi it's a "carpooling app" tee hee. I think this is an insane business plan and it depended on them delivering an amazingly useful app. And if they hadn't succeeded (by delivering an amazingly useful app) they would've all been busted for something rising to the level of organized crime.
The model of 'success has many legal theories, failure has one' isn't wrong -- Levine has made it and he's pretty far from an SEC skeptic -- but I don't think it's really the big driving factor, here.
Uber, most clearly, was based on illegal conduct (with Uber/Lyft making a lot of kinda marginal arguments about whether they were 'really' unlicensed taxis/limousines), but it didn't lie about the illegal things it was doing (uh, much). FedEx's founder either had a really good winning streak at blackjack or just trafficked drugs, depending on how much you trust the official story, but it didn't tell consumers or investors something that FedEx knew was false.
((Unlike their tracking number system.))
Bankman-Fried is alleged (indictment here) to have told customers that their banked assets would be segregated and protected and not be used as investment capital, and also claimed to banks to be doing different things with different organizations than he was. Many of those customers were U.S. citizens on U.S. soil, and at least one of those banks was an American bank specifically trying to separate whether FTX was transferring coins to dollars and vice versa in a way that triggered extra overhead, or if "North Dimension" was a solely-cryptocurrency business doing just cryptocurrency things that didn't require that extra overhead.
These are frauds for regulatory purposes in a different way than 'I'm not a taxi wink-wink'. This is 'I'm not a taxi, ignore the yellow spray paint, and also I'm going to submit a bunch of advertisements and legal documents where I have "TAXI" on a sign ontop of my car'. There are good philosophical issues the argue that this law isn't Correct -- not because FTX would have been a legitimate company if only lying to customers about the safety of their funds were legal, but because it is genuinely pretty vague and, even in cases like this, it's often used as a simple way to trigger criminal liability rather than describing the actual harm (ie, I care a lot more that FTX was passing customer funds to Alameda than that he didn't put a tiny legal disclaimer).
I'm not sure it was. (and not just in the janky 'is it an exchange or a futures' bulls). It spent like a successful business, and it had an unusually competent customer interface.
But the simply rates-and-flows problem was awful: even the rosiest numbers for FTX had reasonable incomes, ridiculously high outflows, and no particularly compelling argument that it was going to bump the first half of that equation with the second. Worse, FTX was publicly promoting increasing those outflows continuously, on fairly short time frames.
It wasn't an immediate issue so long as a) it had a ton of investors eager to give it cash, b) the paper value of various coins were growing, and c) no one called Alameda's bluffs. But even for those rosy numbers, a lot of FTX's balance sheet consisted of values it have never bought or bet on. Now, Alameda's bluffs got called (maybe to the tune of 8-10 billion USD?) and that exploded the whole mess first, and maybe Alameda's bluffs were a necessary part of the whole scheme to keep pumping coin values.
But all of those bluffs were moved into 'assets' with paper values, and even at those paper values FTX's debts were growing faster. Without Alameda, or if Alameda had only broken slightly-less-than-even rather than at tremendous loss, it might have outlasted other exchanges/futures in the current crypto downturn, but it'd still be a really bad bet.
That's kinda annoying! I think there is (admittedly small) business cases for coins as a way to handle (weakly) committed transfers without a lot of conventional financial system weaknesses or abuses. But you're not going to be a business doing that and spending hundreds of millions of dollars on sponsorships.
I mostly agree with you. Though, I contend during the peak of cryptomania, banking these bluffs as assets sounded "reasonable". Unless you mean something by bluffs that I'm not understanding. Bitcoin grew from $11,000 to $67,000 in a couple of months, there were 10000% APY DeFi yield farming plays, and SBF was on a podcast with Matt Levine describing
innovative new ponzi schemesmagic box technology and instead of derailing the train it blew people's minds even harder.The party is now well over, everyone is hungover and people are regretting their life choices.
SBF was obviously high on his supply. Or he's an extremely manipulative criminal mastermind. But this seems more easily explained by untethered (ha!) speculative mania to me?
I'm not very strong at economics, but my understanding of the problem as a naive outsider :
FTX (bizarrely) didn't have possession of much actual bitcoin, and did have liabilities in bitcoin, during the rush. A lot of what they did have were weird (often self-minted) project tokens, or tokens where a lot of the value was, charitably, FTX employees buying high or making offers to buy high.
Weird self-minted project tokens aren't illegal or necessarily even fraudy, but at best they're ultimately like stock in that they operate as a bet that their majority owner will do well: if FTX's business case didn't work well, the coins would not have transaction volume or value, and if FTX's business case worked fine but their financials failed at a large enough scale it would eventually liquidate enough of each token to plummet their value. Similarly, the more that other tokens were dependent on FTX purchases to weather drops in value, the less dollar value they'd have if FTX folded (or even if it had 'merely' tourniquet them).
On its own, those bluffs aren't necessarily clearly bad decisions. If you have a lot of paper value that's probably worthless and you do nothing with it, you're fine. But both FTX and Alameda were hemorrhaging money, and selling a lot of this probably-worthless paper to other people in exchange for more valuable paper, or using it to justify loans. It's not just that it was in the red, but that FTX was spending like it wasn't in the red. The more and more your business case depends on the chance that many or most of these tokens have, if not as meteoric a rise as bitcoin, at least have a stellar result, that's not (necessarily) illegal, but it's a really dumb idea. The more and more your reserve fund depends on selling things no one's buying, the more it goes from really dumb to hilariously bad.
And that's the best-case scenario -- not that Alameda's bad bets were intentional ways for FTX to pump its sales side, no one explicitly calls anything embezzlement in e-mails, so on. There's some fun philosophical questions about whether this is 'really' criminal intent or just so hopped up on adderall that they don't know the difference between right and wrong, or honestly believed that just the next day every coin he owned was going to take off in a way that would grow them massively. For the purposes of fraud, though, he said he was going to do one thing and did another. For the purposes of business decisions, it doesn't really matter what he thought, or what some random person hearing about Magic Boxes thought.
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