FTX charges leave industry’s image in tatters

Hello and welcome to the FT’s Cryptofinance newsletter. This week, we’re taking a look at the fallout from Sam Bankman-Fried’s arrest in The Bahamas.

For Christians it’s supposed to be the season of goodwill and charity but these attributes are in short supply in the crypto industry.

Most of the anger and acidity has understandably been aimed at Sam Bankman-Fried following the collapse of crypto exchange FTX last month, and the media apology tour only deepened the distrust.

This week matters came to a head with his arrest in The Bahamas and publication of the full US charge sheet against him.

The long list included criminal charges such as wire fraud, money laundering and violation of political campaign finance laws. If found guilty of them all he will spend a long time in prison. Conspiracy charges suggest others may be implicated too.

There was also perhaps the most damning accusation of all; that these alleged crimes had been taking place ever since FTX was founded. In effect, the authorities said, this had been the plan all along. They were Will Ferrell’s character in the Christmas film Elf, discovering an imposter Santa and whispering: “You sit on a throne of lies.” It’s damning as it opens the door to the charge that all of the market bubble of the past few years is a scam, a fake.

Little wonder that there were few well-wishers. “His arrest is the right thing to happen, there needs to be accountability for what has left many consumers in financial difficulty with the prospect of seeing any funds returned unlikely,” CryptoUK’s Ian Taylor told me.

The sight of a handcuffed Bankman-Fried being led out of a Bahamas court into the night as police lights flashed may become the defining image of a dreadful year for digital assets. Prices of tokens have plummeted and many several major crypto companies went bankrupt in the summer. Yet he is only the most high-profile figure in an exceptionally crowded field of scandals and villains. Many may still face their own civil or even criminal charges.

Crypto now embarks on a path to redemption, though many sceptics will consider this mission futile.

“FTX’s collapse is not an indictment of cryptocurrency, but important aspects of the collapse are emblematic of an — almost proud — amateurism that is common in parts of the industry,” said Peter Fox, partner at law firm Scoolidge, Peters, Russotti & Fox.

I’ll be less forgiving. Such amateurism looks dangerously naive against the real world of law enforcement, court filings and hearings in Washington. When a grizzled veteran like John Ray III, FTX’s new chief executive, discloses the firm used QuickBooks for accounting, the punk, do-it-yourself ethos loses its charm.

For example, FTX’s alleged misuse of customer funds is symptomatic of that disconnect. It’s important to realise that crypto exchanges are not like exchanges in the real world. Platforms don’t just facilitate the meeting between buyers and sellers, they act as custodians and market makers that also borrow from and lend to customers.

“The misuse of customer funds alleged to have occurred at FTX could not have happened at a traditional stock exchange, because traditional stock exchanges do not hold customer funds,” Fox added.

So what’s left? The few big players remaining have huge question marks over them — Tether over its reserves and Coinbase on its financial performance. Binance is the industry’s biggest black box.

Decentralised finance has its fans. They say that it represents the future and has survived the fate that has befallen bigger and more centralised entities.

True, but it’s easier to forget the litany of failures that have run riot through the world of DeFi. Scaling up operations has always been one of the weak points of cryptocurrencies. And projects have suffered countless hacks because developers didn’t sufficiently test systems before throwing them to the open market. Another sign of amateurism.

Then there are other chronic issues such as bitcoin’s unwarranted carbon footprint and its use by rogue nations like North Korea to evade economic sanctions.

In his testimony to the Senate this week, actor and crypto critic Ben McKenzie suggested one reason why so many customers could not get their money back was simply because “much of it was never there to begin with”.

“The prices of these speculative so-called ‘digital assets’ were bid up/manipulated far beyond the actual real money backing them,” he wrote, citing conversations with SBF and Alex Mashinsky of failed Celsius Network to back him up.

It all begs the question . . . what’s left to redeem? That is the challenge the industry must answer next year.

CryptoFinance will now take a break until the New Year and will return on January 6th. A Merry Christmas to readers and thanks for subscribing. Any thoughts until then? Email me at scott.chipolina@ft.com

Weekly highlights

• FTX collapsed in the Caribbean, but its shockwaves continue to ripple around the world. France — one of those “crypto hubs” we keep hearing about — is starting to question whether it should have opened its doors so readily to digital assets. The country currently lets crypto firms operate without a licence but it is coming under fire. My colleague Akila Quinio and I dug into it here.

• Binance suffered $1bn in outflows in a single day as market anxieties inspired by the collapse of FTX swirled. Binance was fighting a crisis of confidence of its own, as fears mounted it will also be drawn into US investigations. Joshua Oliver and I have the story here.

• Elizabeth Warren (D-MA) co-introduced with her colleague Roger Marshall (R-KS) the Digital Asset Anti-Money Laundering Act. The bill was described as “unconstitutional” by Coin Center, the crypto-focused non profit that in October didn’t explain to me how the statements “we do not transact with criminals” and “we don’t know where donations sent through Tornado Cash come from” can co-exist.

• It’s an awful time for crypto miner Argo Blockchain. It’s at risk of going under in the next month because it has insufficient cash. What it didn’t need was to accidentally publish material on its website that implied the company was filing for US bankruptcy protection. Shares on the London Stock Exchange and Nasdaq were duly suspended and it had to ask permission to undo it all. Oops.

Soundbite of the week:

Damian Williams, a US attorney for the Southern District of New York, has had a big week. On Tuesday he held a press conference to talk about the charges the Department of Justice brought against SBF. He also found time to announce fraud and money laundering charges against founders and promoters of two alleged crypto Ponzi schemes. But he was also sending a message to all crypto scammers.

“We are coming for you. Stealing is stealing, even when dressed up in the jargon of cryptocurrency.”

Data mining: Binance tightens grip on power

During a Twitter Spaces session this week, Binance chief Changpeng Zhao was asked whether his company’s size represents a dangerous single point of failure for the already delicate crypto industry.

His response was: “Is that a problem for the industry? It’s not a problem because if you want innovation, you gotta let people win, you gotta let people choose.”

I suppose the sacred tenet of decentralisation isn’t so sacred when you’re the only man in the room.