The trial of Sam Bankman-Fried, cryptocurrency, and the financial crisis

Sam Bankman-Fried, the founder of the collapsed crypto currency exchange FTX , appeared in a Manhattan court yesterday after voluntary extradition from the Bahamas. He has been indicted on a range of criminal charges arising from the implosion of his $32 billion operation.

Federal prosecutor Nicolas Roos told the court that Bankman-Fried had “perpetrated a fraud of epic proportions” and that the government had dozens of witnesses, encrypted text messages and “tens of thousands” of documents to enter as evidence.

The charges arise from the use of funds provided by FTX investors, large and small, to Bankman-Fried’s crypto trading firm Alameda Research, which he founded in 2017.

The very name of the firm provided an indication of what was to follow. In a 2021 interview, Bankman-Fried explained “Research” was added because if you described the company as “We do cryptocurrency bitcoin arbitrage multinational stuff” no one would give you a bank account but “everyone wants a Research Institute.”

According to a November article in the Wall Street Journal, more than half of the money provided to FTX was lent to Alameda.

But one of the central purposes of this display will be to obscure what is a central issue: How was Bankman-Fried’s operation able to be carried out in plain sight?

It is not that he sought to hide what he was doing. Last April, in an interview with Bloomberg, after he laid out his modus operandi, the interviewer responded by saying that what he had described was essentially a Ponzi scheme, a system in which money is made so long as new money keeps flowing in.

Bankman-Fried replied that this was a “pretty reasonable response” with a “depressing amount of validity.” But despite these admissions, he continued to be promoted by the highest levels of the financial, media and political establishment as he funnelled money into both the Republican and Democratic parties.

At no time did his operations raise the slightest concern in the supposed watchdogs of the financial system such as the Securities and Exchange Commission.

In an article published in the Financial Times last week, Hyun Song Shin, an economic adviser and head of research at the Bank for International Settlements, laid out the essential mechanisms of the crypto market, based on research it had conducted.

Shin noted that intermediaries such as FTX “play a pivotal role as the gateway into the crypto world from the conventional financial system. They channel the flow of new investors, which is the oxygen that keeps these speculative dynamics alive.” Recruiting new investors was “key to the survival of crypto,” and centralised intermediaries “are crucial to propping up the edifice.”

The author did not refer to it, but the hype surrounding crypto and Bankman-Fried emanating from the “top” levels of society was likewise crucial.

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