Random Musings On FTX: Take Lessons From The Past
When we were little, my mother always used to say history repeats itself. I feel like there was some sort of lesson I was supposed to learn about that, but instead, I always keep that in the back of my mind when thinking about tech, finance, and especially crypto.
I was a fan of FTX, from a corporate development strategy perspective. I never used the product tbh and didn’t understand their massive valuation, but wasn’t too familiar with their business. But, if you’re highly valued and have a ton of capital (personal and on your company balance sheet) doing things like launching an aggressive VC arm and facilitating buyouts makes sense.
However, the assumption I was making (along with most of the crypto ecosystem) was that SBF wasn’t straight up committing fraud—using customer deposits to pursue aggressive trading strategies. If they worked, they were going to FTX’s pockets (or more likely, Alameda Researchs’.) If they didn’t work, then the losses would all be on the consumers. Kinda fucked. Pretty fraudulent.
I have no idea whether or not VC’s did diligence—Slow Ventures’ Sam Lesson wrote for The Information that there needs to be a new way to assess late stage deals beyond the standard “bro we’re doing this deal, our other boy is doing this deal, you should also do this deal.” Late stage investing is where VC truly becomes a boys club—you either get picked by kingmakers and have an easy raise, or you don’t. But the fact of the matter is smart late stage investors are so diversified that these losses don’t account for much (for Sequoia, less than 3% of one fund, and less than 1% of another.)
The thing that’s always puzzled me about crypto was blatantly doing away with financial norms that are not just considered best practices. In what world does it sound like co-mingling a trading firm and a bank, whose main purpose is to hold and store deposits safely, was a good idea? One of the most important pieces of financial regulation in US History—the Glass-Stegel Act—was designed to avoid this.
In 1929 we were deep in the throws of the Great Depression and many felt it was time for banking reform. According to federalreservehistory.org, “ …Congress was concerned that commercial banking operations and the payments system were incurring losses from volatile equity markets.”
We’re supposed to have learned this lesson that mixing trading and banking operations. We’re supposed to have learned a lot of lessons from centuries worth of banking history. Yet time and time again, people think they’re above these natural rules of finance, and get burned and their customers get burned even more.
In hindsight it seems obvious that something sketch was going on. My initial assumption was that Alameda was using trading to make money, and the money was being funneled into FTX to prop up their revenue to help secure more VC dollars and higher valuation. I don’t think that FTX was always using customer deposits—my assumption is after 3AC went under, a lot of Alameda’s trading strategies started to unwind and get margin called, and they needed to come up with cash quick, and the quickest cash was in the depository accounts of FTX users. Then I think Alameda pursued even more aggressive trading strategies to try and quickly recoup the lost deposits. But when Binance went full send on Twitter and decided to dump their FTT tokens, all hell broke loose.
Anyway, those are my random 2 cents. Over the last few years in our zero-interest rate environment, the influx of capital into the tech ecosystem overall has allowed for a lot of sketchy behavior—massive secondaries too early, loaning money to employees to pay for equity grants, etc. This stuff isn’t limited to crypto. But in building a new financial ecosystem, we should take into account history from previous iterations much more than we do—hopefully, this is a lesson that crypto learns in the future.