Sam Bankman-Fried, the founder of the cryptocurrency exchange FTX, once masqueraded as the regulation-friendly face of the crypto markets. SBF was known for his openness to regulation and willingness to work with lawmakers; he not only wanted to graciously assist our elected officials in Washington with guiding policy but was also “socially conscious”. Sam was a vocal proponent of effective altruism and possessed a Benthamite concern for maximizing social benefits to help the most people. This wunderkind 30-year-old was too good to be true
Whether it was Bankman-Fried donating large sums of money to the Democratic party (the purported political advocate for the economically disadvantaged) or his views on veganism and charity, it was all a façade, a thin veneer masking his actual conduct. Per Reuters:
“… The turmoil at FTX has seen at least $1 billion of customer funds vanish from the platform, sources told Reuters on Friday. Bankman-Fried had transferred $10 billion of customer funds to his trading company, Alameda Research, the sources said.
New problems emerged on Saturday when FTX’s U.S. general counsel Ryne Miller said in a Twitter post that the firm’s digital assets were being moved into so-called cold storage “to mitigate damage upon observing unauthorized transactions.”
Cold storage refers to crypto wallets that are not connected to the internet to guard against hackers…”
As investors fled the platform and Binance pulled the plug on bailing out FTX, it is clear that SBF misrepresented the financial health of the exchange and its business practices. All of these developments are reminiscent of the Enron scandal. A corporation rubbing elbows with congress to engage in regulatory capture and foster a positive public image. While concurrently; creating a smoke screen obscuring the company’s off-color conduct.
The economist Bruce Yandle’s theory of Bootleggers and Baptist (1983) coalitions perfectly describes the Machiavellian tactics utilized by Mr. Bankman-Fried. After all, perception is what matters. If investors were not distracted by his social advocacy and success, they might have spotted the red flags. As observed by Yandle, there is often a demand for regulation. Often from parties that prima facie would oppose such measures (p.13). Why? This gives industry elites the to help shape rules that will benefit their bottom line and yield good publicity. Frequently, these scenarios are win-win for the firms involved. SBF proposed a licensing system for Defi (decentralized financial technology); per Erik Vorhees:
“..self-enforced rules and blacklists would only serve established exchanges that could afford to pay for compliance…”
SBF simultaneously worked to craft regulation that FTX would benefit from while appearing to share some of the concerns of crypto-phobic politicians like Elizabeth Warren. Progressive politicians are the Baptists in this scenario. SBF’s arrogance ended up being his own Achilles Heel, ultimately revealing his true colors, those of a covert Bootlegger (p.190).