The FTX crypto victim card can be hard to play

Sam Bankman-Fried has tried to present himself as a naive 30-year-old who got out over his skis, but each day brings new reports of elaborate internal tools used to support the profits of trading firm Alameda. — Bloomberg

THE crypto industry has suffered many booms and busts in its brief lifespan, but nothing like this.

Sam Bankman-Fried, currently sitting in a Bahamian jail, has been accused by the United States securities regulator of orchestrating a years-long fraud that diverted billions in customer funds from opaque and offshore exchange FTX to a now-bankrupt empire.The outrage among FTX’s roughly one million creditors is understandable, as is the skittishness of investors yanking money from other crypto platforms like Binance.

Bankman-Fried has tried to present himself as a naive 30-year-old who got out over his skis, but each day brings new reports of elaborate internal tools used to support the profits of trading firm Alameda.

Less understandable, however, is the narrative of victimhood emerging from crypto-friendly firms that did business with FTX as an apparently trusted counterparty.

That includes entities that themselves went under months ago, such as crypto hedge fund Three Arrows Capital – whose co-founder recently claimed FTX colluded to bring it down – and crypto lender Voyager Digital, which said it was “shocked, disgruntled and dismayed” by FTX’s collapse. (Voyager had in September agreed to be bought out of bankruptcy by FTX.)

Meanwhile, Silvergate Capital Corp, which provided banking services to FTX and Alameda, is now in the sights of three US senators who want information on fund transfers between the two entities. Silvergate says it was a “victim” and will cooperate fully.The causality of some of these claims is a little ironic, considering the likes of Three Arrows Capital and Voyager first went under as a result of a market-wide loss of confidence in crypto following the collapse of stablecoin Terra – and they explicitly said so at the time.

Huge swathes of the crypto market were imploding well before FTX’s ultimately empty promises of a bailout. The bigger issue is these are sophisticated financial institutions whose job it is to manage counter-party risk.

Even without knowing the gory details of Bankman-Fried’s alleged deception, it was clear that FTX was an offshore exchange in the Bahamas, whose revenue mostly came from trading instruments that are illegal in the United States, in an industry where exchanges take on conflicting roles such as broker and lender and issue tokens with minimal oversight.

There was too much greed and not enough fear. Three Arrows Capital co-founder Kyle Davies has argued that his fund was sceptical of FTX initially but ended up using it partly because of the implicit seal of approval that came from venture capital investors such as Sequoia.

Yet it’s more likely that these big crypto exchanges became impossible to ignore because of their booming size and success pulling in huge piles of customer cash with high-risk products. And for Silvergate, FTX helped grow digital-currency customer deposits to US$14bil (RM62bil) from US$1.2bil (RM5.3bil) in about a year. — Bloomberg

Lionel Laurent is a Bloomberg Opinion columnist. The views expressed here are the writer’s own.