The fall of cryptocurrency celebrity Sam Bankman-Fried came hard and fast. Investigators are still figuring out what exactly happened in the collapse of his cryptocurrency exchange FTX, but one lesson already is clear: The Wild West days of crypto must end.
It’s OK if you don’t understand what cryptocurrencies are and how they work. Most people don’t, including a lot of people who invest in them anyway. What you should know is that cryptocurrencies and their cousins like NFTs (non-fungible tokens) became immensely popular investment vehicles in recent years. Billions of dollars poured into exchanges. The total capitalization grew so large that crypto began to influence the broader economy.
Bankman-Fried, who often was known simply by his initials SBF, was heralded as a cryptocurrency visionary, a messiah, even. He was the richest person in the world younger than 30 last year and received fawning coverage not just on internet forums but also in the mainstream press.
It all began to unravel this year. As the stock market fell, the value of crypto and NFTs plummeted. Musician Justin Bieber’s $1.3 million Bored Ape NFT is now worth only $70,000. Bitcoin, one of the most popular cryptocurrencies, today is worth only a quarter of its peak value, which it hit a year ago.
Bankman-Fried’s FTX fell, too, and it collapsed into bankruptcy this month. Whether that was bad luck, mismanagement, fraud or a combination remains to be seen. The details that have emerged suggest Bankman-Fried shifted investors funds around without their approval. Whatever the legal consequences, his investors are out billions in the bankruptcy. Among them are the likes of football player Tom Brady and the Ontario Teachers’ Pension Plan, Canada’s third-largest pension fund.
Part of what attracted investors and reporters to Bankman-Fried was his adherence to “effective altruism.” It’s an ethical system that encourages people to make as much money as possible so that they can spread the wealth to charities, maximizing the good in the world.
Bankman-Fried tended to select progressive-minded charities and political groups, endearing him to liberals. He was one of the biggest donors to Democrats this year, funding campaigns with millions of dollars. In light of the growing scandal, those candidates ought to return his contributions so that investors might get something back out of the bankruptcy.
Bankman-Fried was able to play fast and loose with other people’s money because the crypto industry lacks any serious oversight.
As often is the case with new technology, Congress and the Securities and Exchange Commission lag behind. Indeed, part of the appeal of crypto to its true believers has been that it is divorced from government oversight.
That cannot continue unfettered. A well-regulated marketplace in which cryptocurrency exchanges must provide transparency and public accounting would help protect investors. Bankman-Fried was very much a cult of personality, but if the shoddy bookkeeping that has come to light had been known before, people might not have trusted him.
The FTX bankruptcy and underlying financial misdeeds provide a case study in why Congress and the SEC must intervene in cryptocurrency. That shouldn’t become a takeover nor should it make private (anonymous) transactions impossible, but regulations should provide the same basic protections that exist when people invest in stocks and bonds. Otherwise it’s only a matter of time until the next crypto collapse ensnares unsuspecting investors.
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