The SBF trial is a reminder that crypto is a rotten business

If you haven’t heard that financial storyteller extraordinaire Michael Lewis has a new book out, on the rise and fall of crypto exchange FTX founder and alleged fraudster extraordinaire Sam Bankman-Fried, then you probably don’t spend an awful lot of time on the internet. Well done you. 

Those of you who do will know that Lewis has been generating almost as much controversy as the alleged criminal himself over the past week. But it wasn’t so much the book — the publication of which was timed to coincide with the beginning of SBF’s trial — that provoked the outrage; it was a clip from an interview Lewis gave on CBS’s 60 Minutes that was really getting people riled up. I was one of those people.

“This isn’t a Ponzi scheme,” he tells host Jon Wertheim in the short video. “In this case, they actually had a great, real business. If no one had ever cast aspersions on the business, if there hadn’t been a run on customer deposits, they’d still be sitting there making tons of money.”

Lewis’s take is a terrible one. To call a crypto exchange that managed to lose $8bn in customers’ money — even if this failing was somehow completely innocent and accidental — a “great business” is a bizarre and unsound assessment. In case we’ve forgotten: FTX held just 10 per cent of its liabilities in liquid assets the day before the exchange collapsed into bankruptcy. It was not allowed to do this; FTX was not a bank. 

By most accounts — including one that complained that the reaction to the video online amounted to a “cancelling” of Lewis — the thrust of the interview reflected the argument made in the book; even if the book stops short of being an SBF hagiography, it is certainly sympathetic towards him. And indeed, its writer struck the same tone on his own podcast, Against the Rules with Michael Lewis:

“I . . . thought how curious it was, the speed [FTX] went from [being] this pretty widely admired and reputable operation to being viewed as this vast criminal enterprise, without there being a whole lot of new data — except for the fact the money was in the wrong place.”

That final clause is doing a lot of work there.

That the kinds of people who actually admired FTX suddenly lost faith in the exchange and its founder once they discovered that it had lost $8bn of other people’s money doesn’t strike me as curious. What does, however, is that Lewis could have so bought into not just SBF, but the whole crypto narrative. Bloomberg writer Zeke Faux, who also has a crypto book out, quotes Lewis as telling him: “You look at the existing financial system . . . and the crypto version is better.”

How did we get here? Crypto is not just a zero-sum game, in which one person only gains if another person loses; its many moral deficiencies make it a negative-sum game. The idea that a shop such as FTX — and crypto businesses in general — could be an improvement on the existing financial system only makes sense if we are to value that system simply on the basis of how much money is being creamed off at the top.

This is a deeply nihilistic view of the role that financial markets are meant to serve, that forgets about crucial functions such as price discovery, or facilitating the supply and demand of commodities needed to keep the economy functioning.

But it is also one whose roots can be traced back several decades, says Martin Walker, director of banking and finance at the Center of Evidence-Based Management. “Going back to the 1990s, the idea of ‘the free market is always right’ started to become the dogma, and then ‘the free market is always right’ turned into ‘the financial system is always right’,” he tells me.

In some ways, then, it is no wonder that Lewis — who has spent his career documenting financial shenanigans — seems to have become so cynical about the value of the system he reports on. After all, much of the financial world does seem to function like a casino, and so-called “financial innovation”, like crypto itself, is often just a game of regulatory arbitrage — finding gaps in existing rules and exploiting them for as long as it takes for the regulators to catch up.

Bankman-Fried — who was 15 when the global financial crisis hit, wiping trillions of dollars from the economy — strikes me as the apotheosis of a kind of financial nihilism in which nothing really matters. Indeed, crypto itself grew out of this perspective.

The crypto world is one of Monopoly money, where dog coins invented as a joke can reach a “market cap” of almost $90bn, and in which digital receipts for pixelated images can sell for tens of millions of dollars. In this fake Monopoly world, money is little more than a bunch of numbers on a screen. And in that context, why does it matter if there was no $8bn there? There was never any “there” in crypto anyway.

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