Sam Bankman-Fried’s shadow still looms over the crypto industry

During Sam Bankman-Fried’s month-long fraud trial, prosecutors presented irrefutable evidence that the fallen cryptocurrency founder knew full well what he was doing from the beginning. He knew that Alameda Research borrowed billions in client funds from FTX. He knew that his fellow executives fabricated balance sheets to send to lenders. He knew FTX was not doing well when he told clients that he was.

In the cryptocurrency world, the response to these revelations was largely to condemn Bankman-Fried and FTX as an aberration. When the truth about FTX came out, Binance CEO Changpeng “CZ” Zhao criticized Bankman-Fried, saying she “lied to everyone.” Similarly, Coinbase CEO Brian Armstrong wrote on X (formerly Twitter) that “not even the most gullible person should believe Sam’s claim” that the missing funds were due to an accounting error.

But as Bankman-Fried awaits sentencing after being found guilty of seven criminal charges, including wire fraud, the rest of the industry has had to take stock of its future. FTX may have been one of the most brazen fraud operations in recent years, but it is far from the only embarrassing crypto collapse. While some of the decisions Bankman-Fried made might have been unique to FTX, it is one of many cases where no one outside noticed until it was too late, and in the wake of the Bankman-Fried trial, it may be necessary to work. to convince the public that he was an outlier.

Before its downfall, Bankman-Fried was an example of an upstart industry. The powerful 31-year-old maintained the scruffy, somewhat quirky appearance of the kid in his computer class who he would most likely ask for help. (This particular look, according to his ex-girlfriend and former Alameda CEO Caroline Ellison, was carefully crafted.) He became the golden boy of cryptocurrencies, appearing on the cover of Fortune magazine and being profiled in Forbes. He testified about the safety of his operation before Congress. While other companies collapsed last year, FTX looked strong, and Bankman-Fried invited comparisons to JP Morgan as it rescued other struggling companies.

Some media outlets continued to polish their representation even after FTX crashed and burned. Washington Post He highlighted Bankman-Fried’s contributions to pandemic research (some of which apparently came from client funds). So, The Wall Street Journal focused on how Bankman-Fried’s “plans to save the world” went up in flames and said the collapse of FTX “wiped out her wealth and ambitious philanthropic efforts.” (The ambitions of FTX’s clients were presumably not headline material.) The information we know now allows us to see beyond that person, but it also gives the crypto-curious a lot to analyze.

Other crypto companies seem to think that picking the bad apple will be good for the rest of the industry. In a sentence provided to CoinDeskPaul Brody, head of blockchain at financial consultancy EY, calls the outcome of the Bankman-Fried trial a “wonderful moment for cryptocurrencies” and Yat Siupresident of blockchain gaming company Animoca Brands, says this marks a “new beginning” for the industry.

“Over the past year, our industry has suffered a reputational blow in Washington, but Sam Bankman-Fried’s crimes had nothing to do with the technology that underpins digital assets,” says Kristin Smith, executive director of the Blockchain Association. . The edge. “The trial was about a criminal, not about cryptocurrencies. And while the test has not been clearly positive for the industry, it has refocused attention on the fundamental promise of decentralization.”

In fact, many of Bankman-Fried’s misconducts are not inherently related to cryptocurrencies, such as falsifying the financials of his company Alameda Research and spending other people’s money without permission.

But much of this appears to have been possible because there was very little meaningful oversight of the crypto industry and much acceptance of companies playing fast and loose. It’s hard to say whether the crypto companies left standing are free of all of FTX’s flaws or how closely they have scrutinized their partners. And then there’s the simple and inconvenient fact that many of them are under legal scrutiny.

Earlier this year, the Securities and Exchange Commission sued Terraform Labs, the crypto company behind the stablecoin that vaporized billions in customer funds when it collapsed last year, for allegedly perpetuating “a fraudulent scheme.” After that, the Federal Trade Commission arrested the CEO of now-bankrupt cryptocurrency lending company Celsius for claiming that he made millions from lies he spread about the company’s token.

There’s also crypto influencer Richard Heart, who the SEC accused of spending at least $12 million in client funds to buy sports cars, luxury watches and a 555-carat black diamond. Other major companies including Coinbase, Binance, Genesis and GeminiThey also face lawsuits from the SEC.

That you can so easily fill two paragraphs with an (incomplete) list of legal issues facing the crypto industry doesn’t exactly inspire confidence. This uncertainty is already affecting the regulations that “good” crypto companies want to see passed. The industry favors a bill that would limit the SEC’s oversight of the industry, for example, while giving more power to the Commodity Futures Trading Commission. However, the outcome of the Bankman-Fried trial could ultimately hurt its success. Senator Elizabeth Warren (D-MA) has said political that the industry “has serious problems with fraud and the public no longer has confidence that it is on the rise.”

Witness testimonies and a wealth of evidence have revealed a wide range of things that may have gone wrong. What would have happened if CoinDesk Did you never publish the article that revealed the gaping hole in FTX’s balance sheet? Will Bankman-Fried continue to go about his business: doling out billions in stolen funds to save failing crypto companies, donating to politicians and sponsor sports teams? Would he have continued spending FTX client funds until everything collapsed for some other reason, or until one of his bets, such as an investment in the artificial intelligence company Anthropic, was big enough to clean the books? Alameda’s unlimited amount of credit makes it seem like a possibility.

Sam Bankman-Fried wanted to prove that the world could trust the cryptocurrency industry. Now, the industry hopes to leave it behind. But he could be far from the last bad actor to profit from cryptocurrencies, and the crypto world has yet to prove it can detect them before catastrophe strikes.