The cautionary tale of FTX
Fake it till you make it: an aphorism embraced perhaps too heartily by Sam Bankman-Fried, founder of the collapsed crypto exchange FTX. At the beginning of the year, SBF — as the board-short wearing, tousled-haired 30-year-old likes to be known — boasted an estimated paper fortune of $20bn. He ends 2022 languishing in a Bahamian jail, facing extradition to the US on charges of wire fraud, money laundering and violations of campaign-finance laws. In a written statement to a congressional committee, SBF admitted that he “fucked up”. That is one way of putting it. Prosecutors put it another way: that he is the perpetrator of one of the biggest financial frauds in history. It will ultimately be up to a jury to decide whose explanation is the most persuasive.
There will be consequences stemming from FTX’s collapse but it would be a great shame if one of them was a souring of America’s love affair with entrepreneurial geniuses. It is one of US capitalism’s best features that an individual with a big idea has a shot at making money from it. Iconoclasts, particularly in the realm of technology, have an illustrious history: there would be no Apple without Steve Jobs, no Amazon without Jeff Bezos, and no Microsoft without Bill Gates. Innovation requires boldness.
But it is time for rose-tinted glasses to be removed. Technology that not many understand can also allow for obfuscation, for style over substance, and for a fear of missing out to grip even seasoned investors. Combined with an era of low interest rates and easy money — now well and truly over — it is the ideal habitat for swindlers. Exhibit A: Elizabeth Holmes, the founder of Theranos, the once-hyped blood-testing company. She could ape the turtleneck sweaters and mannerisms of Apple’s Jobs but her claims about Theranos’s technology were rotten. She is now serving an 11-year sentence for defrauding investors.
That those investors included masters of the universe like Rupert Murdoch and Oracle’s Larry Ellison is shocking but not surprising: even Isaac Newton fell for the South Sea Company’s pitch. So too is FTX proving a cautionary tale for blue-chip investors, including Sequoia Capital and at least two pension funds. While losing money is a professional hazard for venture capitalists, pension funds have no business investing in a sector as volatile as crypto.
There seems to have been a complete failure of basic checks into a start-up that had no board, and which accounted for its purported $32bn business on QuickBooks software. Su Zhu, co-founder of Three Arrows Capital, a hedge fund that itself collapsed, said he used FTX after seeing the roster of investors behind it: “I assumed someone there did DD [due diligence].” Yet in an era when even Elon Musk waived due diligence before agreeing to buy Twitter for $44bn — from which he so far has little to show, beyond his demotion from the title of world’s richest man — it is not unusual.
Also not asking many questions were the Democratic politicians who received tens of millions of dollars in FTX donations. Bankman-Fried liked to portray himself as crypto’s friendly face who advocated, rather than eschewed, regulation — as a means of stifling competition, it turns out.
Behind FTX’s crypto babble and celebrity endorsements, prosecutors allege a tale as old as time. John Ray, the restructuring expert who is FTX’s new chief executive, calls it an “old-school” embezzlement. Bankman-Fried must be assumed innocent until proven guilty. But a less giddy approach to start-ups and their visionary founders ought in any case to emerge. One where basic questions are asked and where tried-and-tested aphorisms are kept in mind, not least: don’t believe the hype.