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Faking It, Making It, Losing It

The spectacular rise and fall of FTX and its founder Sam Bankman-Fried were driven by effective marketing, trickery, and financial speculation. In that, they bear a striking resemblance to the disastrous eighteenth-century experiment that fueled the Mississippi Company bubble and created the template for all future Ponzi schemes.

PRINCETON – The collapse of cryptocurrency exchange FTX and the mesmerizing rise and fall of its founder, Sam Bankman-Fried, is only the most recent episode encapsulating the perils of financial innovation. At this point, it should be easy for regulators, financial institutions, and investors to spot an obvious Ponzi scheme. Why, then, must we relearn a difficult lesson over and over?

Contrary to popular belief, the persistent allure of Ponzi schemes reflects not just greed and gullibility but also a simple fact: like such schemes, valuable innovations also rely on a snowball effect. FOMO, or fear of missing out, can be exploited by scammers who manipulate it for personal gain. But it also drives many beneficial advances that can work only if enough people sign on. That is why many entrepreneurs like Bankman-Fried embrace a “fake it till you make it” philosophy. The problems often start when this approach curdles into the more insidious “fake it till you have it.”

The oldest documented originator of the Ponzi scheme, who lived 200 years before the con artist who gave the fraud its name, is widely regarded as the pioneer of monetary theory. In the early eighteenth century, the Scottish adventurer and economist John Law transformed the French financial system with a unique and ultimately catastrophic currency experiment that collapsed in an inflationary crisis in the summer of 1720. At the time, France was deeply in debt, and Law sought to stimulate the economy by replacing all metal coins with paper money. The scarcity of gold and silver, he argued, had been the cause of France’s economic woes, and he successfully lobbied the government to demonetize them.