It’s only been 10 months since Sam Bankman-Fried appeared before the US Senate to promote his FTX. According to the fallen CEO, the technology behind FTX was able to dramatically improve the traditional financial system.
The end of banks
According to Bankman-Fried, the software of the FTX platform would be able to take over various processes from banks. As an example, the fraudster mentioned the automatic liquidation of customer trading positions as soon as they become negative. Another advantage is that the collateral for the positions must be placed “on the platform itself”, so that FTX always has access to the assets.
What he did not say at the time is that Alameda Research had special privileges on the platform and did not need collateral to perform certain actions. It is also now known that Alameda Research even used the collateral of the customers to perform actions itself. Ultimately, that caused the billion-dollar crisis for FTX and Alameda Research.
The hearing this week however had a totally different tone. “Clearly, FTX’s problems arose primarily because of crypto’s unique ability to create assets out of thin air,” said Hilary J. Allen, a professor of law at the University of Washington.
The criticism is great
Ultimately, the fall of FTX is of course the result of fraud and that has nothing to do with Bitcoin or any other crypto in principle. In particular, it makes it clear that tight rules are needed for stock exchanges to prevent this in the future. In principle, a traditional equity platform can also choose to gamble away the shares of its customers, but they do not do so because of the consequences.
Sam Bankman-Fried and his club of fraudsters thought it was wrong and thought they were very smart. Much smarter than the rest of the market, which usually isn’t and turned out not to be the case this time. “You cannot create trustless money, just as it is not possible to create government without government or religion without religion. The words that fit this are anarchy and cult,” said Ben McKenzie, an actor who is currently writing a book on crypto.
FTX temporary CEO John Ray is clear about what went wrong with the exchange platform. “The collapse of the FTX group seems to stem from the absolute concentration of power in the hands of a very small group of inexperienced and unsophisticated individuals,” said Ray.