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.
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Has the FTX Debacle Discredited Effective Altruism?
Some observers have linked the alleged financial malpractice by the cryptocurrency magnate Sam Bankman-Fried to ideas widely held within the “effective altruism” movement, which Bankman-Fried says inspired him. But effective altruists are right: sometimes the end really does justify the means.
PRINCETON – In the wake of the collapse of the cryptocurrency exchange FTX, and amid reports that FTX’s founder, Sam Bankman-Fried, diverted billions of dollars of clients’ funds, some observers have linked the alleged financial malpractice to ideas widely held within the “effective altruism” movement, which Bankman-Fried says inspired him. More specifically, they point to the ethical view that the end justifies the means.
Effective altruism holds that one of our aims should be to do as much good as we can. In pursuing this goal, effective altruists believe, we should use reason and evidence to guide us. We should draw on research to find which charities do the most good, per dollar received.
In keeping with these ideas, I founded The Life You Can Save, a charity that encourages giving and curates a list of the most effective charities aiding people in extreme poverty. Another effective altruism website, 80,000 Hours, provides guidance on choosing a career that will enable one to do good. Included among a range of options is “earning to give” – seeking to earn well, not in order to live lavishly, but to be able to donate more to effective charities.
Many people seek to earn to give, but, until last month, Bankman-Fried seemed to be by far the most successful. In October 2021 a Forbes cover story reported that he had amassed $22.5 billion before turning 30, adding, “He just wants his wealth to survive long enough to give it all away.” Tragically for FTX’s clients, investors, employees, and those who would have benefited from the charities to which he might have donated, it didn’t. The fund Bankman-Fried created to donate to effective altruist causes had, by June, distributed grants totaling $132 million, less than 1% of the wealth he was believed to have at the time. (The Life You Can Save has not received any money from Bankman-Fried.)
The Vox journalist Sigal Samuel has speculated about Bankman-Fried’s thinking: “Did he reason that the ends justify the means – and that the ends of his plan to give away his fortune would be so benevolent that the risk of wiping out customers’ savings was okay?” The New York Times columnist Ross Douthat sets out (though without endorsing) a possible “purely negative reading” of these events. Effective altruism “is corrupted at root by its connection to a utilitarianism that, whatever protestations it may make, will always end up justifying wicked means for the sake of noble-seeming ends.” Douthat connects this corrupting form of utilitarianism to my own work by linking to a hostile review, now more than 20 years old, of two of my books.
The problem with pointing to “the end justifies the means” as the flaw that brought down Bankman-Fried is that, even for non-utilitarians, it is implausible to deny that sometimes the end does justify the means. The non-utilitarian Immanuel Kant disagreed, writing that if a would-be murderer comes to your door pursuing someone who has taken refuge in your house, you must not lie to him. Today, we honor those who had the courage to hide Jews from the Nazis and lie when the Gestapo came to their door. If you must lie to save an innocent life, the end justifies the means.
Nor is it only when an innocent life is at stake that the end may justify the means. In a forthcoming study of the Southern Black leader and educator Booker T. Washington, Desmond Jagmohan of the University of California, Berkeley reveals that Washington, the founder and president of the Tuskegee Institute in Alabama, misrepresented what the Institute taught in order to gain financial support from wealthy white donors. Because the donors did not believe that Blacks could benefit from the kind of education provided by colleges for white students, Washington led them to believe that the Tuskegee curriculum was limited to training its students for trades, farming, and domestic service.
Washington’s secret was nearly blown when a grateful Black student wrote to thank one of the donors for the scholarship that enabled her to study philosophy, politics, and rhetoric. The letter’s angry recipient rightly felt that he had been misled, but Washington pretended that the young woman had greatly exaggerated what she had been taught. In the difficult position in which he found himself, Washington’s deception was justified by the goal of providing Southern Blacks with the education that would otherwise have been denied to them.
In contrast, the deception in which Bankman-Fried is alleged to have engaged was unnecessary and unjustified. The many examples of successful financiers who have been ruined by unethical and illegal business practices should have been sufficient warning. Kant was wrong to claim that telling the truth is an absolute requirement, but wise effective altruists and utilitarians know that honesty is the best policy, and dishonesty is inherently risky. In Bankman-Fried’s case, the risk was not only to his wealth, his reputation, and possibly his freedom. It was also to the causes that would have benefited from his support, and to the effective altruism movement itself.
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The Unbearable Uselessness of Crypto
Thanks to FTX's collapse, the world may have woken up to the grim reality that the crypto "industry" is nothing but a get-rich-quick lie, wrapped in hype, bobbing on an ocean of libertarian technobabble. Will anyone do something about it?
LONDON – Forgive the appalling cash management (or was it fraud?) that caught FTX with less than $1 billion on hand at a time when short-term liabilities were $9 billion. That sort of thing has also been known to happen to banks.
Forgive the opaque accounting, the incestuous loans with fictitious collateral, and the $8 billion that someone “accidentally” misplaced. Such mishaps occur as well in Russia’s Bratva, Italy’s Camorra, and Japan’s Yakuza.
Forgive the hyped-up database technology, for many purposes slower, more expensive, and more cumbersome than established, 30-year-old ways of doing things. Someone will someday find a use for all those blockchains.
Forgive the hyperbolic rhetoric about crypto as the miracle tonic not only for economic growth, but also for “reducing war and corruption and bringing about greater happiness.” Crypto nerds are not the only ones talking rubbish.
What is truly unforgivable is that in the 14 years since Bitcoin appeared, the crypto industry has failed to produce anything of value. What factories have been built with crypto? Which new goods and services are available? What government has raised money through crypto? Certainly not El Salvador, which adopted Bitcoin as legal tender and is now on the verge of debt default.
Even worse, the central promise of crypto – better money – has proved to be entirely bogus.
Brian Armstrong, co-founder and CEO of the cryptocurrency platform Coinbase, recently made the monetary case for crypto, telling the Financial Times that it allows you to trust “the laws of math, if you will, instead of the laws of men.” So “instead of ‘don’t be evil,’ it’s ‘can’t be evil.’ That’s the promise of crypto.”
The “men” in Armstrong’s statement work for governments, which are the issuers of old-fashioned fiat currencies. If those “men” print too much money – say, to finance a large budget deficit – then the value of that money falls, and government levies what amounts to a tax on citizens left holding a debased currency. Libertarian distrust of politicians and government is the cryptosphere’s animating force.
In contrast to supposedly fishy fiat money, only the “laws of math” govern crypto. An algorithm fixes how much cryptocurrency can be “mined” and at what cost. The more units you produce, the more expensive it is to mine the next unit. No politically motivated men (or women) can debase crypto. Mathematical rigor saves us from evil government.
Sounds good, right? If only it were true.
There are two reasons why people around the world (not just citizens of the United States and the European Union) are happy to hold currencies such as the dollar and the euro. The first was identified by John Maynard Keynes, who argued in his General Theory that “the fact that contracts are fixed, and wages are usually somewhat stable in terms of money, unquestionably plays a large part in attracting to money so high a liquidity-premium.” Columbia University’s Guillermo Calvo has called this the “price theory of money.”
If my monthly wage is set in dollars, and so are prices in the supermarket, I can be quite sure how many kilos of rice or bottles of beer I will be able to buy with my dollars. So, I am happy to hold dollars, primarily for transactions but also to store wealth. Here, crypto comes up short: no supermarket prices are set in Bitcoin or its equivalents, and no one (save a few Silicon Valley fanatics) gets paid in crypto.
The other reason why a US resident is happy to hold dollars (or a eurozone resident to hold euros) is that the government sets a minimum price for that currency by allowing taxes to be paid with it. That is, the value of a dollar in financial markets can never be less than the value at which Uncle Sam will redeem that dollar when you pay your taxes every April 15.
Here, again, crypto comes up short. Those evil “men” in government are not around to guarantee a minimum price for crypto. Its only value comes from the expectation that others will want to hold it. If they do, then I want to hold it, too. If not, I will dump it. That is what happened this past summer to the cryptocurrency Luna, which crashed and vanished in days. It could happen to any other cryptocurrency, too, on any other day.
The first economist to understand this conundrum was Frank Hahn. In 1965, Hahn explained that intrinsically worthless financial assets like crypto are unlike any other good. If the price of a baguette is zero, then demand for it will be huge, because everyone will want to eat that costless loaf of bread. By contrast, if the price of an asset like Bitcoin is zero, then demand for it is also zero, because one cannot eat it, make rings out of it, use it to repair teeth, or pay taxes with it.
In the end, claims that the value of crypto is insulated from the whims of “men” are bunk. In fact, cryptocurrencies are completely dependent on whim, and in the worst possible way: self-fulfilling expectations (what is politely known as “market sentiment”) are the only driver. What the great MIT economist Charles Kindleberger called “manias, panics, and crashes” are the norm for crypto, not the exception.
The technocrats in dark suits who run institutions like the US Federal Reserve, the Bank of England, or the European Central Bank deliver, in a very bad year like 2022, a loss in the purchasing power of their currencies of a bit over 10%. That is the depreciation rate that cryptocurrencies often experience in a day or – in the event of the kind of crash we have seen recently – a matter of minutes.
This is not a match between “men” and “math,” but between “men” in dark suits and “men” in baggy t-shirts and cargo shorts. In that contest, the suits win every time.
Thanks to FTX, the world may have woken up to the grim reality that crypto is a get-rich-quick lie, wrapped in hype, bobbing on an ocean of libertarian technobabble. Will anyone do something about it?
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Will Crypto Survive?
With a storyline full of celebrities, politicians, sex, and drugs, the future looks bright for producers of feature films and documentaries about the astonishing collapse of FTX. But, to paraphrase Mark Twain, rumors of the death of crypto itself have been much exaggerated.
SAN FRANCISCO – The epic collapse of wunderkind Sam Bankman-Fried’s $32 billion crypto empire, FTX, looks set to go down as one of the great financial debacles of all time. With a storyline full of celebrities, politicians, sex, and drugs, the future looks bright for producers of feature films and documentaries. But, to paraphrase Mark Twain, rumors of the death of crypto itself have been much exaggerated.
True, the loss of confidence in “exchanges” such as FTX – essentially crypto financial intermediaries – almost surely means a sustained steep drop in prices for the underlying assets. The vast majority of Bitcoin transactions are done “off-chain” in exchanges, not in the Bitcoin blockchain itself. These financial intermediaries are vastly more convenient, require much less sophistication to use, and do not waste nearly so much energy.
The emergence of exchanges was a major factor fueling cryptocurrencies’ price growth, and if regulators come down hard on them, the price of the underlying tokens will fall. Accordingly, Bitcoin and Ethereum prices have plummeted.
But a price adjustment alone is not the end of the world. The pertinent question is whether crypto lobbyists will be able to contain the damage. Until now, their money has been speaking volumes; Bankman-Fried reportedly gave $40 million to support the Democrats in the United States, and his FTX colleague Ryan Salame reportedly gave $23 million to Republicans. Such largesse surely helped persuade regulators around the world to follow a wait-and-see approach to crypto regulation, rather than be perceived to be stifling innovation. Well, they waited, and with the FTX crash, we must hope that they saw.
But what will they conclude? The most likely path is to improve regulation of the centralized exchanges – the firms that help individuals store and trade cryptocurrencies “off chain.” The fact that a multi-billion-dollar financial intermediary was not subject to normal record-keeping requirements is stupefying, no matter what one thinks about the future of crypto.
Of course, firms would face compliance costs, but effective regulation could restore confidence, benefiting firms aiming to operate honestly, which are surely the majority, at least if one weights these exchanges by size. Greater confidence in the remaining exchanges could even lead to higher crypto prices, though much would depend on the extent to which regulatory demands, particularly on individual identities, ultimately undermined demand. After all, the major transactions currently conducted with crypto may be remittances from rich countries to developing economies and emerging markets, and capital flight in the other direction. In both cases, the parties’ desire to avoid exchange controls and taxes implies a premium on anonymity.
On the other hand, Vitalik Buterin, the co-founder of the Ethereum blockchain and one of the crypto industry’s most influential thinkers, has argued that the real lesson of FTX’s collapse is that crypto needs to return to its decentralized roots. Centralized exchanges such as FTX make holding and trading cryptocurrencies much more convenient, but at the expense of opening the door to managerial corruption, just as in any conventional financial firm. Decentralization can mean greater vulnerability to attack, but so far the largest cryptocurrencies, such as Bitcoin and Ethereum, have proven resilient.
The problem with having only decentralized exchanges is their inefficiency compared to, say, Visa and Mastercard, or normal bank transactions in advanced economies. Centralized exchanges like FTX democratized the crypto domain, allowing ordinary people without technical skill to invest and conduct transactions. It is certainly possible that ways to duplicate the speed and cost advantages of centralized exchanges eventually will be found. But this seems unlikely in the foreseeable future, making it hard to see why anyone not engaged in tax and regulatory evasion (not to mention crime) would use crypto, a point I have long emphasized.
Perhaps regulators should push toward decentralized equilibrium by requiring that exchanges know the identity of anyone with whom they transact, including on the blockchain. Although this may sound innocent, it would make it rather difficult to trade on the anonymous blockchain on behalf of an exchange’s customers.
True, there are alternatives involving “chain analysis,” whereby transactions in and out of a Bitcoin wallet (account) can be algorithmically examined, allowing the underlying identity to be revealed in some cases. But if this approach was always enough, and all semblance of anonymity could always be obliterated, it is hard to see how crypto could compete with more efficient financial intermediation options.
Finally, rather than simply banning crypto intermediaries, many countries may ultimately try to ban all crypto transactions, as China and a handful of developing economies have already done. Making it illegal to transact in Bitcoin, Ethereum, and most other crypto would not stop everyone, but it would certainly constrain the system. Just because China was among the first does not make the strategy wrong, especially if one suspects that the main transactions relate to tax evasion and crime, akin to large denomination paper currency notes like the $100 bill.
Eventually, many other countries are likely to follow China’s lead. But it is unlikely that the most important player, the US, with its weak and fragmented crypto regulation, will undertake a bold strategy anytime soon. FTX may be the biggest scandal in crypto so far; sadly, it is unlikely to be the last.
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Big Tech Gets Derailed
Much of what Big Tech values is praiseworthy, from fun (a good thing) to wondrous creativity. But, like similar episodes in the nineteenth century, the meltdown of FTX, and the turmoil engulfing Twitter and Meta, have exposed the costs of blindly worshiping enterprise and wealth.
CHICAGO – The failure of the cryptocurrency exchange FTX, the latest in a long history of American financial shenanigans, was a doozy. “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” said the corporate restructuring specialist John Ray III, who is now overseeing FTX’s bankruptcy.
The FTX collapse is only the latest in a sector that has been pummeled since April 2021, when the value of crypto first dropped. But it’s not just crypto. After markets sliced $89 billion off Meta’s market capitalization, CEO Mark Zuckerberg announced he was shedding 13% of the company’s workforce (11,000 people). Then, within days of Elon Musk’s takeover of Twitter, which he purchased – apparently on a lark – for $44 billion, many began to fear for the platform’s future.
Idiosyncratic individuals wielding billions of dollars, intent on building corporate empires (including philanthropic ones), are far from unknown in the United States. Reading about Sam Bankman-Fried, FTX’s disgraced founder and former CEO, I recalled the “Erie Wars” of the late 1860s, when charismatic financiers, with easy access to gargantuan amounts of capital and credit, sought to build the first great US business corporations: the transcontinental railroads. The railways got built, but not without considerable financial waste and corporate intrigue.
Glittering Gould
At the center of it all was Jay Gould, the greatest financial operator in US history. In 1868, Gould, a young man recently arrived on Wall Street, took on the aging Commodore Cornelius Vanderbilt, who had made his fortune in steamboats. After the Civil War, Vanderbilt began to buy up shares of the New York Central Railroad, hoping to take control of it.
To conceal his intentions, Vanderbilt bought the stock by proxy. But Wall Street speculator Daniel Drew caught wind of it. Drew, a director of the competing Erie Railroad, loaned himself Erie stock, which he used as collateral to buy New York Central shares. Vanderbilt, angered that he now had to pay more to buy New York Central, cut a deal with Drew and worked in unison to bid up the stocks of both railways.
Drew, a former cattle-driver who fed salt to his herds so that they would drink more water and take on more weight, soon double-crossed Vanderbilt, joining with Gould and his partner, James Fisk, Jr. During the Erie Wars, Drew, Gould, and Fisk “watered” Erie stock by issuing stock certificates in excess of the plausible value of the railroad’s existing assets. A New York judge in Vanderbilt’s pocket ruled against them.
Drew, Gould, and Fisk fled New York with suitcases full of cash and Erie stock and bonds. I imagine the trio laughing and waving goodbye to Manhattan as they decamped to Jersey City, New Jersey – much like Bankman-Fried and his coterie of chums, who became millionaires and billionaires while working beyond the reach of regulators from a Bahamas resort.
The US monetary and financial system looked very different during the Erie Wars than it does today. The US was struggling to return to the gold standard, and the Federal Reserve did not exist. Still, during these years, given the recent centralization of US capital markets in New York City during the Civil War, Wall Street was overflowing with credit, which made possible the egregious manipulations and schemes of Gould, Drew, and their ilk.
In addition to financial manipulation, corporate access to easy credit fueled booming investment in the fledgling US railroad industry. But much of it was unproductive. Corporate officers like Gould grabbed the cash, bought up land, and built railroads across Native Americans’ sovereign territories before competitors could arrive. When workers struck for higher wages and eight-hour days, they crushed them.
The specter of corporate monopoly loomed. But so did the menace of corporate busts if confidence – and hence money – drained out of the financial system. In the railroad age, there were two particularly severe financial panics, in 1873 and 1893, followed by crippling economic depressions.
The Digital Land Grab
The parallels to today seem clear. Taking advantage of the low interest rates of the 1990s and 2000s, and then the ultra-low rates that prevailed for more than a decade after the 2008 global financial crisis, Big Tech grabbed cheap money in order to gobble up rival companies, engineering talent, and personal data, stifling competition whenever possible. And now, with interest rates rising fast, there is less credit bidding up stocks and cryptocurrencies, and it turns out that for many companies that had been gorging on debt, offering a service to consumers at below cost may not be a viable long-term business strategy.
Abundant credit, it seems, inevitably taints animal spirits with greed, leading to excess and corporate malfeasance. It would be far better to tighten financial conditions, as central banks are now finally doing, and subject companies to the whip of scarce capital and market competition, right?
Not necessarily. What matters is not so much the sheer volume of credit as where it goes and what it funds relative to society’s preferences and needs. So long as legitimate preferences and needs exist, there is no such thing as overinvestment. There are only bad investments.
Morally speaking, the right response is to recoil at reports of Bankman-Fried’s shenanigans, financial and otherwise. But ethics – throwing out “bad apples” before they spoil the entire barrel – is not the central issue. The problem is not excess and greed, or even the merits of “effective altruism,” but that something has gone awry at the nexus of political and economic power.
The Erie Wars are well known partly because they were the subject of the book Chapters of Erie (1871), co-authored by Henry Adams and Charles Francis Adams, Jr., grandsons of US president John Quincy Adams. The Adams brothers, too, warned their readers not to focus on private greed but rather on politics. Reading their description of Vanderbilt, I cannot help but think of Musk ensconced at Twitter:
“[He] has combined the natural power of the individual with the factitious power of the corporation. The famous “L’état, c’est moi” of Louis XIV represents Vanderbilt’s position in regards to his railroads. Unconsciously he has introduced Caesarism into corporate life…. Vanderbilt is but the precursor of a class of men who will wield within the state a power created by the State, but too great for its control.”
Corporations – the Erie Railroad and Twitter, the New York Central Railroad and Meta – are in the first instance legal creatures of the state, and Vanderbilt was indeed a precursor to the “class of men” who wield so much power today.
The Return of the Repressed
In a sense, FTX’s implosion is ironic, because Bankman-Fried’s mother, the Stanford Law professor and philosopher Barbara H. Fried, wrote one of the finest scholarly studies of a very different conception of corporate power: the public utility ideal.
News reports have focused on a supposedly revealing essay by Fried in which she wrote that a desire to locate “personal blame” had “ruined criminal justice and economic policy.” But she was right. Followers of the FTX saga would do better by turning to her indispensable book The Progressive Assault on Laissez Faire: Robert Hale and the First Law and Economics Movement, published in 1998, when her son was six.
Hale, a Columbia law professor and economist, tirelessly argued that, because the railroads and corporations like electric utilities provide essential public services, they should earn a “fair” rate of return on investment, given their production costs, but nothing more – and certainly not the ridiculous financial valuations in credit-bloated capital markets.
It is not clear that cryptocurrency offers any essential public service, although I agree with the judgment of Bocconi University’s Massimo Amato and Luca Fantacci that, in challenging the current global monetary system, crypto “poses the right question, but gives the wrong answer.” The public utility case is easier to make for social media companies.
Regulatory principles like “public utility” deserve rediscovery. Others do not. Among them, I would count the over appreciation of stifling bureaucracy during much of the twentieth century, which sapped the dynamism of enterprise. The problem is that when dynamism came roaring back in the neoliberal 1990s, greater inequality amid newfound tech riches, as well as a lot of corporate fraud and malfeasance, came back with it.
Much of what Big Tech values is praiseworthy, from fun (a good thing) to wondrous creativity. But the meltdown of FTX, and the turmoil engulfing Twitter and Meta, have once again exposed the costs of blindly worshipping enterprise and wealth. The state cannot afford to leave matters of vital public importance, including citizens’ savings and the principal means of public communication, to the whims of paper billionaires’ puerile fantasies.
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.
Law’s theories found a receptive audience, partly because France’s existing financial and monetary system was inefficient, arbitrary, and unjust. He could also point to a precedent: the bold 1694 experiment whereby England transferred much of its national debt to a private company, the Bank of England, which in exchange received the right to issue bank notes. Law believed that the English reform was less efficient than it could have been, because metal coins were still in circulation, forcing King William III’s government to undertake an expensive recoinage operation. Law viewed this continued reliance on precious metals as inconvenient and inefficient.
Much like FTX, Law’s scheme was fueled by effective marketing, trickery, and financial speculation. His first trick was to create two corporations that worked together to inflate the value of their respective offerings. In 1716, he convinced the French government to allow him to open a bank issuing paper notes that the government would accept as tax payments. Meanwhile, the silver coinage still in circulation had been depreciated.
Law then created a company with a genuine commercial purpose – developing an apparent paradise of natural resources and productivity in the New World – called the Mississippi Company. The company, which was granted a monopoly on trade with the French colonies in North America, financed its operations by issuing stock that could be purchased with paper money from Law’s bank or with state bonds. The Mississippi Company’s shares eventually became so attractive to investors that the company assumed France’s entire national debt, turning its notes into the currency of the newly productive French economy.
Three centuries later, Bankman-Fried repeated Law’s trick. He founded two companies, FTX and Alameda Research, that propped each other up, with FTX generating its own tokens (FTT) that could be used as collateral against borrowing.
But to entice investors and state authorities, Law needed a compelling narrative. He boasted that his companies had rescued or bailed out the French financial system. As its capital increased, the Mississippi Company took over rival trading outfits such as the Company of the Indies, the Company of China, and the Company of Africa. Law was thus a private lender of last resort, another feature that Bankman-Fried imitated in the summer of 2022 when he rescued struggling crypto issuers and exchanges.
Law also drew on extensive contemporary literature to promote a fantastic vision of how France, a country exhausted by Louis XIV’s wars, could become rich through a series of miracles, transformations, and unlimited consumption. Similarly, in selling FTX and crypto, Bankman-Fried spoke to a crisis-obsessed world that was desperately looking for a path forward.
Nowadays, paper money is considered inconvenient and increasingly associated with criminality – drug dealing, arms smuggling, tax evasion, and sanctions busting – leading many countries to experiment with digital currencies. The United States has been slow to join this trend, in large part because banks – a powerful lobby group – fear that they will be sidelined. Bankman-Fried picked up on fears that the US economy, like France in the early eighteenth century, might fall behind, and he seemed to offer a solution.
But having a compelling narrative is not enough. The political elite also requires an incentive to sign up. Law – and his counterparts across the English Channel who pushed the South Sea Company bubble – rewarded his supporters with stock. Bankman-Fried made large contributions to Democratic politicians, while another FTX executive made similarly large donations to Republicans. Instead of taking an explicitly anti-regulation position, FTX vowed to work with regulators to create a framework that would protect its interests.
Both schemes ultimately fell apart because their initiators issued too much of their allegedly superior alternative money. In his letter apologizing to FTX employees, Bankman-Fried blamed excessive leverage and said that he underestimated “the magnitude of the risk posed by a hyper-correlated crash.” But like Law before him, Bankman-Fried needed massive leverage to shore up his credibility. In the end, both fell as quickly as they rose. Ponzi schemes and bubbles, after all, survive only as long as people believe in them, and nothing is more damaging to one’s credibility than a deluge of claims one cannot honor.