S3E6: Is Crypto Cleaning Up Its Act?
What does the recent history of crypto teach us about it today? FT Journalist Joshua Oliver won awards for his reporting of the collapse of FTX, the crypto exchange founded by Sam Bankman-Fried, known as SBF, who was sentenced to 25 years in prison for fraud and related crimes in March 2024. Joshua has written a book ‘Hype Machine: How Greed, Fraud and Free Money Crashed Crypto’. It covers the biggest names in cryptocurrency; how SBF became one of the most famous CEOs in the world; and why the collapse of his company rippled through the industry and led to the crypto crash of 2022.
What you should remember from this episode
We spoke with Joshua Oliver from the FT - this is his book, Hype Machine: How Greed, Fraud and Free Money Crashed Crypto.
He was in New York for the whole Sam Bankman Fried (SBF) trial for the collapse of his crypto exchange FTX.
Joshua’s suggestion is to ask what crypto does for you - what’s it for? He says these are some of the core use-cases that people at least say it’s for:
Payments, but there’s been slow uptake of it as a payments tool.
Speculation or investing, depending on your view.
As a store of wealth.
He says there’s a distinction between how crypto is labelled/marketed, e.g. as a hedge against inflation - and how punters actually use it which is basically for gambling.
His book is all about the gap between what crypto says it is and what it is.
Joshua argues that people have reinvented what they think crypto is for over time, e.g. it’s not being used generally as a real currency.
Crypto can be very unforgiving, e.g. if all your crypto is on a hardware wallet at home and your house burns down. Now, you can recover it if you remember your seed phrase but the point is there are real risks.
If you’re using an exchange like Coinbase (or FTX), your crypto is not decentralised - it’s centralised in an institution which is run by a small number of people, in an unregulated space.
Quick summary of what happened with FTX: People deposited into FTX thinking it was like a bank but instead of keeping the money, FTX were just spending it.
Longer summary: People were putting real assets into the company (dollars, pounds, BTC, ETH etc.) and the people in charge were spending the money. The company was propped up to look solvent largely by a crypto currency they’d invented called FTT, otherwise known as Sam coins. It wasn’t collateral in anything but name because collateral needs to be worth something if the company needs to sell a large volume of it quickly, otherwise it’s useless - which is what happened. It was possible to look at a balance sheet in the company (and at the trial) which looked solvent at a glance but there were very few real assets.
What happened at FTX isn’t new - people have committed fraud like this for decades, centuries - but this was the latest and largest crypto twist on it.
One of the problems of crypto, he argues, is the technology makes it possible to easily create new assets and move assets quickly. You can make a new coin in a matter of hours. This makes it easier to do dodgy stuff than traditional finance, or TradFi.
FTX wasn’t a grown up company - they didn’t have the systems, people or experience to manage their growth - a classic startup problem but with huge stakes.
There are big safeguards in the banking system to stop this sort of thing happening.
He thinks that people and organisations invested in FTX because some leading VCs had already invested so they thought they didn’t need to do their own due diligence. Somebody must’ve checked, was the thinking.
FTX also had a lot of power because a lot of VCs wanted to invest in them so if any VC wanted to poke around too much in their numbers, or have board seats or anything like that FTX just wouldn’t engage because they had other VCs willing to write cheques, no questions asked. The level of rigour was missing.
The UK has rules in place about financial products like investments, which is one reason it’s problematic when big crypto companies base themselves offshore (like FTX or Binance) so they don’t need to be overseen by authorities in this country (and other countries like the US).
