Why Did America’s Elite Keep Falling for Crypto Frauds?

It only took a jury four hours to decide that former FTX CEO Sam Bankman-Fried had committed large-scale fraud—and that included their lunch break. Leading politicians, investors, and observers, not to mention a number of high-profile journalists, in contrast, managed to stay oblivious to it for years. Two recent books illustrate how and why he got away with it, at least for a while.

The first one, Going Infinite: The Rise and Fall of a New Tycoon by Michael Lewis, illustrates it by example. Early reviews alerted me that the book took a charitable view of SBF and his enterprise, and yet I still struggled to believe what I was reading as I started making my way through it. The preface is a flashback to 2021. Interesting, I thought—Lewis is taking us back to the day when he fell for SBF’s narrative of crypto-fueled do-goodery. That assessment was overly optimistic.

The first real chapter of the book is a litany of examples of Bankman-Fried behaving like an unbearable, childish jackass who lies a lot … written in the manner of a hagiography. “The funny thing about these situations was that Sam never really meant to cause them.” Lewis writes. “He didn’t mean to be rude. He didn’t mean to cause chaos in other people’s lives. … With him it was never personal. If he stood you up, it was never on a whim, or the result of thoughtlessness. It was because he’d some math in his head that proved that you weren’t worth the time.”

It does not improve much from there. Somehow, the villain of his book is John Ray, the current FTX CEO, who was appointed after the crypto exchange’s bankruptcy, and whose filings suggest that he has made significant progress in recovering missing customer funds.

The second book, Easy Money: Cryptocurrency, Casino Capitalism, and the Golden Age of Fraud by Ben McKenzie with Jacob Silverman, illustrates Bankman-Fried’s rise and fall by painting a picture of the whole crypto industry as a hive of scams and villainy. Its basic argument runs as follows. Loose monetary policy after the global financial crisis of 2007-09 and bailouts of chunks of the financial industry produced a context of distrust that facilitated the creation of cryptocurrencies as an alternative to sovereign money.

A new wave of easing was set loose when the COVID-19 pandemic triggered an economic crisis and led to a situation where asset bubbles were more likely. The main bubble that flourished was crypto, and with bubbles come fraudulent schemes—or so the story goes.

The juxtaposition of the two stories highlights an interesting aspect of SBF’s rise and fall: the class markers that convinced those around him that he was a genius, not a spoiled con artist. Sure, macroeconomic conditions mattered. In response to concerns about currency debasement and expansionary monetary policy as drivers of cryptomania, I would make note of the generous U.S. fiscal response to the pandemic that gave households plenty of cash to speculate with, as well as the boredom of especially the first months of the pandemic. I ended up watching all of the films Jeanne Dielman and Sátántangó for the first time; far be it from me to blame people for turning to drinking or gambling.

But macroeconomic conditions alone do not account for Lewis’s sympathetic approach to SBF. Lewis wrote The Big Short! The heroes of that story are the likes of Steve Eisman and Meredith Whitney, not Joseph Cassano and Howie Hubler: the people who saw through the bubble, not the people who gambled and lost. A Going Infinite­-style account of the global financial crisis would find a man who behaved obnoxiously while assigning incorrect ratings to collateralized debt obligations and treat him sympathetically, if not admiringly. And that’s even before we get to the fraud that Bankman-Fried so clearly committed.

While the macroeconomic context may offer a partial explanation for the crypto bubble, it does not explain why Lewis and many others []  admired SBF the way they did. Nor do the regular features of every bubble—the fact that lots of money is involved, or that riding a bubble until (just before) it bursts can be very profitable, while shorting one is difficult.

A number of idiosyncratic characteristics of the crypto bubble, and of SBF and his firm, may better explain their appeal. First, there is the nature of the technology—can we say of the securities?—itself. While the underlying assets in the global financial crisis were tangible, cryptocurrencies, with their reliance on algorithms and distributed consensus and proof-of-work or proof-of-stake mechanisms, are very much unlike real estate. Who are we to doubt those who know magic?

There was a deep conviction among those who didn’t understand crypto that there must be something to making money out of thin air, even as skeptics pointed out that it was, in fact, just as stupid as it sounded.

All that was happening was large-scale gambling: Will the price of Dogecoin, featuring the face of a Shiba Inu dog, continue to go up? Will the official cryptocurrency of the Cameroonian separatist entity of Ambazonia appreciate further? What will this non-fungible token representing Twitter co-founder Jack Dorsey’s first tweet sell for tomorrow? Nothing but a continued inflow of speculative cash could keep these bets afloat; no value or income was being generated by the underlying technologies.

Then there was the ideological edge of the movement. While the housing bubble was aligned with a political push to promote homeownership and a broader ownership society, those ideas never inspired the kind of commitment that crypto does among its biggest fans. That commitment is fueled by skepticism of government-issued currencies and an appreciation of some level of privacy (or an even more hard-line libertarian attraction to the ability to pay for illegal goods and services, or to evade taxes).

McKenzie highlights a related aspect of the crypto craze: its cultlike nature. The loss of trust in traditional financial institutions that he diagnoses created a desire for community that manifested itself in the creation of multilevel marketing (MLM) dynamics of enthused individuals spreading the gospel of the new currencies. The get-togethers and online communities that he describes in the fourth chapter of his book highlight how this works in practice—a world where “being scammed is a necessary educational experience in order to be reborn in the community of the free.”

For a more recent illustration of the bizarre groupings forming around blockchain technology, I refer you to a Bored Ape Yacht Club event that took place in Hong Kong earlier this month, where attendees who had paid thousands of dollars to say they owned digital art of an ape gathered to accidentally get blinded, reportedly by shoddy ultraviolet lights. Cryptocurrencies and related technologies are better suited for MLM schemes, because unlike mortgage derivatives, retail investors can easily access this gambling technology.

But to some extent, all of that was for the rubes, and SBF was playing at a very different level—one where he was able to con people as smart as Lewis. The cult-like scene most important to SBF’s appeal to intellectuals was a different one: the world of so-called effective altruism.

This is a movement focused, at least in theory, on doing good effectively and efficiently. It is associated with ideas ranging from the purely altruistic—such as kidney donations—and the relatively uncontroversial—cost-benefit analysis: dollar for dollar, do mosquito nets save more lives than water sanitation projects?—to more speculative ones, such as an emphasis on long-term catastrophic risk and “earning to give.”

Assessments of existential risk often come down to calculations involving small, hard-to-estimate probabilities, as well as difficult decisions around modeling uncertainty and the relative value of benefits enjoyed by future generations. This leaves a lot of room for rigging the numbers—especially when science-fiction fantasies about the impact on future generations come into play. Why eradicate malaria today when you could save billions of lives in the future from the threat of super-intelligent artificial intelligence—by investing in a buddy’s project?

That suspicion was not alleviated by the calculations a prominent effective altruist produced to show that donating $50 million to his buddy’s congressional campaign would serve humanity better than donating it to various charitable purposes. Earning to give, which SBF claimed to engage in, is the idea that instead of working directly toward one’s cause, one should maximize one’s earnings and use the proceeds for good.

This should, of course, trigger at least two concerns. One, how do you commit to using the proceeds that way as opposed to channeling them to your relatives? Two, once you place yourself at a remove from the good works, what constraints remain? Does consequentialism force you to violate rules, norms, and basic accounting standards?

Effective altruism is important to the story of FTX both directly—Bankman-Fried recruited a good number of self-described effective altruists to work for his firm, and he used the network to raise money for his crypto exchange—and for our purpose of figuring out why SBF was and remains so appealing to at least some outside observers.

A few examples: In May 2022, commentator Matthew Yglesias wrote a piece titled “Understanding Effective Altruism’s move into politics” with the subheading “SBF is for real,” a judgment based, among other things, on the academic work of Bankman-Fried’s mother: “SBF was raised by a leading consequentialist moral theorist.”

Writing for the New Yorker, Gideon Lewis-Kraus argued earlier this month that “one can’t help but feel like the existence of the trial, as necessary as it is, seems a little arbitrary” because Bankman-Fried might well have gotten away with his crimes. Perhaps long-termism, taken to an extreme, leads one to think that of life as a mere game of probabilities without real stakes, not unlike the video games that he so obnoxiously used to play (not very well) during video calls.

Either way, effective altruism gave SBF, and crypto with it, a veneer of respectability that it might not have had otherwise. The alternatives, like the argument that the purpose of our large-scale gambling is to give the unbanked access to financial services, were not an easy sell.

The effective altruism connection does not matter solely because of the ideas and human resources it brought SBF. The movement is one with close ties to elite academia, associated with academics such as Will MacAskill at the University of Oxford, who served on the board of a grantmaking operation funded by FTX and was a close SBF associate, or Peter Singer at Princeton University. Bankman-Fried’s father is a professor at Stanford Law School, though he also worked for FTX for 11 months. His mother is a professor emeritus at Stanford Law School, where she specialized in the field of legal ethics, such as it is.

These connections—and these are certainly not the only ones—may explain some of the sway that SBF had over America’s intellectuals. “None of what the Bankman-Frieds did was for show; they weren’t that kind of people,” writes Michael Lewis.

FTX’s post-bankruptcy lawyers allege that the couple enriched themselves by accepting $26.4 million from their son. Surely our kind of people wouldn’t do such a thing.

The post Why Did America’s Elite Keep Falling for Crypto Frauds? appeared first on Foreign Policy.

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