On 11 November 2022 FTX declared bankruptcy. The firm was once heralded as the Goldman Sachs of crypto, and its CEO, Sam Bankman-Fried, was deemed by some the next Warren Buffett. And now, just after proclaiming in an interview that he would not be arrested, he is in custody in the Bahamas awaiting extradition to the US. He is charged with a litany of fraud and campaign finance law violations, in what US prosecutors are calling “one of the biggest financial frauds in American history”.
Casual investors, along with funders ranging from the Ontario Teachers’ Pension Plan to BlackRock, who invested millions into FTX, are now uncertain where their money went and if they will ever get it back. Amid a long series of scandals and collapses, this seems to be the one that has undermined trust of and within the cryptocurrency sector. This is far from over and if you want to keep up on it, researcher Molly White has made an excellent chart where you can watch the contagion spread.
Blockchain-based technologies were supposed to make finance an automated, frictionless environment where fallible humans and their corruptible institutions could be replaced by the infallible logic of code. Cryptocurrencies would finally give the little guy a chance by forcing everyone to play by the same encoded rules. But instead, these technologies appear to have supercharged the same old problems, letting a Bahamas-based “polycule” commit international fraud to the order of billions of dollars and sink millions into political candidates in just three years.
The way this was intended to work was to replace interpersonal relationships and institutional reputation with new “trustless” systems. According to the Binance Academy glossary, traditional banks run by humans would be replaced by blockchain-based networks that, “by providing economic incentives for honest behaviour” would “maintain network security”. In this new world of decentralised finance, DeFi for short, those incentives would be directly coded into decentralised autonomous organisations (DAOs), where the purchase and trading of proprietary tokens – units of crypto – would automatically trigger contracts and other actions based on pre-written rules.
Take, for example, PleasrDAO, which was set up to buy and sell non-fungible tokens (NFTs). Members of the DAO pool their money by buying “The People’s Coin” and using the exchange of those coins to make decisions. So if there was a proposal on the network to buy an asset, say, Pussy Riot’s “Virgin Mary, Please Become a Feminist” NFT, members could trade coins based on pre-determined and hard-coded rules that indicated their preference to buy it and where to display it. No one user makes the final decision, and all decisions and votes are recorded on the DAO’s blockchain. According to proponents, traditional hierarchies of humanity would be flattened into an infinite horizon of objective, computer-mediated exchange.
Well, that didn’t happen. John Ray III, the new chief executive once FTX went into receivership, has not minced words: “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.” Ray, who performed the same job in the wake of the Enron scandal more than two decades ago, called the situation “unprecedented” and laid all the blame at the feet of Bankman-Fried and his “very small group of inexperienced, unsophisticated and potentially compromised individuals”.
Like any radical, a true believer in crypto could argue that FTX is what happens when the revolutionary DeFi program is not fully implemented. But here again crypto bros are hoisted by their own trustless petard. The reality is that the 21st-century crypto industry – automated or not – must follow the same capitalist market physics that were endemic to 20th-century energy markets, or 19th-century London banks: ruthless competition winnows an industry down to a few key players and then, as Marx wrote in 1847, there comes a phase “when everybody is seized with a sort of craze for making profit without producing”.
And so it should come as no surprise that, as the New York Times put it, the crypto industry quickly “started assuming some of the same characteristics as the Wall Street institutions that it was designed to replace”, with the majority of trading happening on just a few exchanges – including FTX and Binance. Sure, you could write a bit of code that says at some point the organisation must cleave into multiple competing ones, thus staving off centralisation, but it only takes one actor to decide not to play by those rules to dominate the market. The only thing preventing that from happening is, well, a central authority. Like a government. I have yet to see an argument for how DAOs, no matter how internally well-regulated they are (and so far they’re not), can automate away this bad-actor problem that every Econ 101 student learns.
It should concern everyone in the UK that Rishi Sunak claimed last June, when he was still chancellor, that he wanted to make the country “the jurisdiction of choice for crypto and blockchain technology”. Now that he’s prime minister and the collective price of all cryptocurrencies have shed the equivalent of more than £400bn of value since that statement, he’s been much quieter about his plans. Parliament is, in fact, considering empowering the Financial Conduct Authority to treat crypto like most other financial assets, which includes combatting false advertising, money laundering and mismanagement.
Indeed, the path to the stated goals of decentralised finance – accessible markets, protections from fraud, defences from theft – are very old goals that have been met through progressive taxation structures, unionised labour, antitrust law and other regulation. Unfortunately, for those who want to become billionaire celebrity crypto influencers, this set of tools will not make you rich. If the decentralised finance crowd was serious, this is the route they’d take. But they won’t, because the populism of crypto was never anything more than marketing.
David A Banks is the director of globalisation studies at the University at Albany, SUNY and is the author of The City Authentic: How the Attention Economy Builds Urban America
