The Crypto Emperor’s New Clothes

Scandal and intrigue surround the swift fall from financial grace of 30-year-old Sam Bankman-Fried, who may have lost as much as $8 billion of customers’ money when his cryptocurrency exchange FTX became insolvent. But the real story is the regulatory lapses that enabled Bankman-Fried’s malfeasance and, with more dominoes set to fall, the FTX debacle’s likely impact on crypto’s future.

One reason regulators failed to prevent the FTX crash, Princeton’s Harold James suggests, may be that they – together with financial institutions and investors – still struggle to spot Ponzi schemes. After all, valuable innovations also rely on the “snowball effect,” which clever fraudsters fuel with a combination of a compelling narrative and incentives for the political elite.

As Princeton’s Peter Singer points out, Bankman-Fried’s narrative included “effective altruism” – the “ethical view that the end” (giving more) “justifies the means” (earning more). But while “the deception in which Bankman-Fried is alleged to have engaged was unnecessary and unjustified,” it should not discredit the effective altruist approach. “Sometimes, the end does justify the means,” Singer insists.

But when it comes to crypto, argues former Chilean Finance Minister Andrés Velasco, neither the ends nor the means are much to boast about. In the 14 years since Bitcoin appeared, “the crypto industry has failed to produce anything of value,” he writes. “Even worse, the central promise of crypto – better money – has proved to be entirely bogus.”

Harvard’s Kenneth Rogoff thinks the FTX crash may well be a wake-up call for regulators, who until now followed a “wait-and-see approach to crypto regulation,” not least because of the incentives – in the form of large political donations – provided by crypto lobbyists. But far from destroying crypto, stronger regulations could bolster the industry, by boosting confidence in the remaining exchanges.

The University of Chicago’s Jonathan Levy believes the FTX crash reflects a broader problem with the tech industry, also exemplified by the turmoil engulfing Twitter and Meta: the blind worship of enterprise and wealth. The message should be as clear today as it was during nineteenth-century America’s railroad bubble: “The state cannot afford to leave matters of vital public importance, including citizens’ savings and the principal means of public communication, to the whims of paper billionaires’ puerile fantasies.”