johnmaconline

SBF was found guilty of seven counts of various frauds against FTX customers and Alameda lenders.

But it didn’t have to be this way. To change the outcome, he didn’t have to make any changes to the salacious tidbits that the public ridiculed him for — crypto, creative trading practices, lavish spending on high-end real estate, tawdry relationships and almost-communal living amongst the execs, playing video games during public interviews, massive celebrity endorsements, extravagant marketing campaigns, over-the-top spending, and justified bajillions in the name of effective altruism.

None of that really mattered, nor was it illegal.

All he had to do was one simple, if not easy, thing — bring in at least one financial adult and give them a voice. One person that says,

“No, Sam, it’s not OK to lose track of people’s money. You need a better accounting system.”
“No Sam, it’s not OK to back door client money from FTX to Alameda. Borrowing the FTX customer funds needs to be an above-board operation.”
“No Sam, it’s not OK to take the reigns off the risk management engine. If you’re losing money, find a legitimate way to handle it, which may include copping to your investors that you’re losing money. If Alameda loses money, that sucks for you and the investors, but it’s not illegal. If FTX customer funds disappear, that’s fraud.”

Yes, one naysayer adult. One guy or girl that says, “Um, you can’t do that.”

It didn’t have to be this way.

What defines one as an adult?

Is it age? Is it experience? Is it worldview? Is it conduct?

It’s some combination of all these, yet hard to define objectively. The paradox of startups and organizations that make change in the world is that they are quite often (but not always) driven by young, inexperienced, naive, and maybe not professional people. Non-adults. Because adults know better.

FTX and Alameda had this in spades. SBF purposely kept the employee base very young and put many “smart,” inexperienced, and unqualified (on paper) people in all positions. Some of these people rose to the occasion. Maybe they all did. But there is no doubt, in hindsight, that having zero adults in the room was the third head of Cerberus that led to the downfall.

Nobody ever said to SBF, “No, you can’t do that.” Nor did anybody ever say, “You’re super smart, but you’re not infallible.”

Or if they did, they never said it in a way that he believed or took seriously. They basically operated as a fleet of yes-men to SBF.

Interestingly, a group of adults did actually say “WTF?” to SBF in the very early days of Alameda and prior to the launch of FTX. These were the hard-core effective altruists with whom he first got started. They, like the adults they were, looked at SBF’s operations and said, “Uh, no way. Thanks, but we’re out.” Prophetic.

Combine the lack of adult supervision with SBF’s arrogance, and it led to his inability to see the real-world problems that were coming. Once they did and buried FTX and Alameda up to the neck, they had no ability to stop the avalanche.

Sometimes, you need an adult in the room. Even if they’re the naysayer, the finger-pointer, or the “that’s how they get ya” guy over in the corner.

Crypto as a concept isn’t the reason that FTX failed and SBF went to jail, but crypto as a volatile asset class is definitely one head of Cerberus.

The first head was that FTX and Alameda operated as a run-of-the-mill Ponzi scheme. That was illegal, and ultimately why SBF is in jail, but it would have all worked out if not for the volatility of the crypto market.

Starting in about January of 2022, the crypto market took a steep dive. By the fall of 2022, Bitcoin was worth less than half what it was at the beginning of the year. The entire crypto market followed roughly the same line: ~$2.75T => ~$1T.

Alameda was a hedge fund that traded in crypto. FTX was an exchange that allowed consumers to buy and sell crypto. Both very exposed to the Crypto Winter. The traders inside Alameda feverishly tried to minimize losses and find gains on the short side, eventually needing more funds than existed without “borrowing” the FTX customer money. Yes, they just took the money out of the FTX customer accounts to use for trading in the hedge fund. Consumers with accounts in FTX overreacted to negative news and swings and exacerbated the already tenuous situation, eventually trying to cash out their accounts. That created a gap in what FTX should have had in its customer funds versus what it actually had.

Crypto as a concept, although I’ve stated not the reason for the collapse, did play a minor role. One difficult, confusing, and sometimes shady aspect of the crypto world is the abundance of bullshit coins and tokens. Coins and tokens are not exactly the same thing, but for our purposes here, we’ll just use tokens to refer to both. We all know Bitcoin, you might have heard of Ethereum, and if you’re crypto-curious, you probably know Solana. However, thousands of (mostly bullshit) tokens exist to be traded, much like penny stocks. Anybody with a computer and a dream can create their own blockchain or create an application on an existing blockchain to make any new token for any purpose. It’s basically that simple. 

FTX used this approach and created its own tokens, named FTT. Think of an FTT token just like a share of stock in FTX. The token’s value was tied directly to the value of the company. Therefore, a large portion of FTX’s valuation was tied to the value of its own FTT tokens. 

Cue the asset class drop, the FTX – Alameda Ponzi with frazzled traders, the frightened consumers trying to pull their money out of the exchange, and the drop in value of the FTT token. Roll that all together, and you get an exponentially dropping valuation for the company. Eventually, in November, the balance sheet flips over. FTX is insolvent. They file for bankruptcy.

Next, we’ll tackle how the people themselves became the third head of Cerberus. 

The first problem with FTX, and the big reason why SBF went to jail, is that it was a plain ole Ponzi scheme.

SBF owned two companies:

• Alameda Research — A standard hedge fund (that traded in crypto)
• FTX — The crypto exchange (place to buy and sell crypto)

Although two separate companies, they didn’t keep a robust enough financial separation between the two. In fact, they didn’t separate them, which ultimately led to the collapse. 

If you opened an account on FTX and dropped some money into it, your dollars were physically held inside of Alameda rather than FTX. The old shell game. They did this because when FTX first opened, no bank would supply it with a bank account. Therefore, they found a pragmatic solution in using Alameda’s bank account. That, in and of itself, is fishy, but maybe not illegal (depends on who you ask) because if you do the accounting correctly and keep those funds separate, it shouldn’t be a big deal.

But they didn’t do that. 

When Alameda needed extra funds, they just used the money (“borrowed”) in the FTX user accounts. That’s illegal. That’s a Ponzi scheme.

They could’ve gotten away with it without the other two problems: the volatile asset class and no adults in the room.  

So we’ll talk about why it went bad next…

Crypto’s a scam!
Crypto’s full of crooks!
Crypto’s not real!

You might think that Sam Bankman-Fried’s jailing and the FTX exchange’s collapse were inevitable because, you know, crypto. Crypto’s a scam. It’s full of crooks. It’s not real. Of course, it collapsed.

But that wouldn’t be exactly correct. Crypto was a minor role player — more like the drug pusher standing outside the backstage entrance greasing the party wheels. A problem-enabler, but not the problem. 

The collapse itself was due to plain ole, run-of-the-mill f’nancial reindeer games. Namely, FTX-Alameda Research was a Ponzi scheme wrapped around a highly volatile asset class run by a bunch of people (or at least one person) who overestimated their abilities and underestimated the need for adults in the room. 

First, let’s tackle why FTX and Alameda Research were a Ponzi scheme.

A strange thing happened today. The FedEx truck stopped in my driveway.

Of course, that’s not strange. This time of year, between the endless string of UPS, FedEx, and Amazon trucks, my driveway presents an expert-level test in trucksmanship. True entertainment from behind the window of my home office. 

What was strange, however, was the other car that followed it into my driveway and parked behind it. That piqued my attention. The driver got out, waited for the FedEx person to step out, and then approached her. For the next minute or so, he calmly but earnestly waved his hands and flapped his jaws about something that irked him. At least, that’s what it looked like through the silence provided by my window and a good 100 feet of distance.

Then he nodded, returned to his car, and took off down the road. 

I met the FedEx driver at my front door (a wine delivery).

“You OK?”

“Oh sure. He thought he was right and he just needed to be heard. Sign here, please.”

And she was off to finish yet another long day of Christmas present deliveries. 

“Just needed to be heard.”

Whether out of a feeling of rightness, superiority, or a sense of justice, some people just need to be heard.

Recognizing it is next-level. 

Which would you rather?

I heard this question posed a few days ago, and I can’t get it out of my head. My initial reaction was, “Of course, I’d want to live a good story. Everyone would.”

But now that it won’t leave me and I’ve ruminated on it for a bit, I’m not sure of my own answer, let alone the statement about “everyone.” I love to read a good story. I’m trying to write good stories. I’ve lived some good stories.

But which I would rather? I think it comes down to emotional risk.

Reading a good story exposes you to emotional risk in a safe and controlled environment. The story can move you emotionally and even bring about emotional changes in you. But you’re engaging with it from the safety of the stands. You’re behind the glass, cheering but not affecting the outcome.

Writing a good story ratchets up your emotional risk by moving you out of the stands and onto the bench. Now you’re the coach. It’s your strategy and tactics. You’re directing the characters. It may work, or it might not. You can’t put the puck in the net yourself, but your job is to ensure the players can. Now you have skin in the game. Now you’re exposed.

Living a good story, however, thrusts you down onto the ice. You’ve got the stick and helmet, and you’re trying to score while the other guys are trying to stop you. Every decision, action, and consequence is real. You may lose. You may get hurt. You may destroy what you’ve already built. For real. But what if you win?

The best stories require conflict, journey, and transformation. Are you up for it?

If you’re on one side, you want to be able to say or shout the things that mean something to you, identify you, think others need to hear, or cause the emotions you’re feeling.

When you do, the other side gets to be offended, yell back, tell you why you’re wrong, boycott, protest, and say the things that are causing the emotions that they feel.

That’s how it works. It’s how it has to work.

You may get scammed. You may be confused. You may get led down a dark path. You may get injured.

Because free speech isn’t about truth, right and wrong, the way it should be, safety, comfort, or what’s good for us individually or collectively.

Paradoxically, it might just be the best protection we have in this diverse world.