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The model of 'success has many legal theories, failure has one' isn't wrong -- Levine has made it and he's pretty far from an SEC skeptic -- but I don't think it's really the big driving factor, here.
Uber, most clearly, was based on illegal conduct (with Uber/Lyft making a lot of kinda marginal arguments about whether they were 'really' unlicensed taxis/limousines), but it didn't lie about the illegal things it was doing (uh, much). FedEx's founder either had a really good winning streak at blackjack or just trafficked drugs, depending on how much you trust the official story, but it didn't tell consumers or investors something that FedEx knew was false.
((Unlike their tracking number system.))
Bankman-Fried is alleged (indictment here) to have told customers that their banked assets would be segregated and protected and not be used as investment capital, and also claimed to banks to be doing different things with different organizations than he was. Many of those customers were U.S. citizens on U.S. soil, and at least one of those banks was an American bank specifically trying to separate whether FTX was transferring coins to dollars and vice versa in a way that triggered extra overhead, or if "North Dimension" was a solely-cryptocurrency business doing just cryptocurrency things that didn't require that extra overhead.
These are frauds for regulatory purposes in a different way than 'I'm not a taxi wink-wink'. This is 'I'm not a taxi, ignore the yellow spray paint, and also I'm going to submit a bunch of advertisements and legal documents where I have "TAXI" on a sign ontop of my car'. There are good philosophical issues the argue that this law isn't Correct -- not because FTX would have been a legitimate company if only lying to customers about the safety of their funds were legal, but because it is genuinely pretty vague and, even in cases like this, it's often used as a simple way to trigger criminal liability rather than describing the actual harm (ie, I care a lot more that FTX was passing customer funds to Alameda than that he didn't put a tiny legal disclaimer).
I'm not sure it was. (and not just in the janky 'is it an exchange or a futures' bulls). It spent like a successful business, and it had an unusually competent customer interface.
But the simply rates-and-flows problem was awful: even the rosiest numbers for FTX had reasonable incomes, ridiculously high outflows, and no particularly compelling argument that it was going to bump the first half of that equation with the second. Worse, FTX was publicly promoting increasing those outflows continuously, on fairly short time frames.
It wasn't an immediate issue so long as a) it had a ton of investors eager to give it cash, b) the paper value of various coins were growing, and c) no one called Alameda's bluffs. But even for those rosy numbers, a lot of FTX's balance sheet consisted of values it have never bought or bet on. Now, Alameda's bluffs got called (maybe to the tune of 8-10 billion USD?) and that exploded the whole mess first, and maybe Alameda's bluffs were a necessary part of the whole scheme to keep pumping coin values.
But all of those bluffs were moved into 'assets' with paper values, and even at those paper values FTX's debts were growing faster. Without Alameda, or if Alameda had only broken slightly-less-than-even rather than at tremendous loss, it might have outlasted other exchanges/futures in the current crypto downturn, but it'd still be a really bad bet.
That's kinda annoying! I think there is (admittedly small) business cases for coins as a way to handle (weakly) committed transfers without a lot of conventional financial system weaknesses or abuses. But you're not going to be a business doing that and spending hundreds of millions of dollars on sponsorships.
I mostly agree with you. Though, I contend during the peak of cryptomania, banking these bluffs as assets sounded "reasonable". Unless you mean something by bluffs that I'm not understanding. Bitcoin grew from $11,000 to $67,000 in a couple of months, there were 10000% APY DeFi yield farming plays, and SBF was on a podcast with Matt Levine describing
innovative new ponzi schemesmagic box technology and instead of derailing the train it blew people's minds even harder.The party is now well over, everyone is hungover and people are regretting their life choices.
SBF was obviously high on his supply. Or he's an extremely manipulative criminal mastermind. But this seems more easily explained by untethered (ha!) speculative mania to me?
I'm not very strong at economics, but my understanding of the problem as a naive outsider :
FTX (bizarrely) didn't have possession of much actual bitcoin, and did have liabilities in bitcoin, during the rush. A lot of what they did have were weird (often self-minted) project tokens, or tokens where a lot of the value was, charitably, FTX employees buying high or making offers to buy high.
Weird self-minted project tokens aren't illegal or necessarily even fraudy, but at best they're ultimately like stock in that they operate as a bet that their majority owner will do well: if FTX's business case didn't work well, the coins would not have transaction volume or value, and if FTX's business case worked fine but their financials failed at a large enough scale it would eventually liquidate enough of each token to plummet their value. Similarly, the more that other tokens were dependent on FTX purchases to weather drops in value, the less dollar value they'd have if FTX folded (or even if it had 'merely' tourniquet them).
On its own, those bluffs aren't necessarily clearly bad decisions. If you have a lot of paper value that's probably worthless and you do nothing with it, you're fine. But both FTX and Alameda were hemorrhaging money, and selling a lot of this probably-worthless paper to other people in exchange for more valuable paper, or using it to justify loans. It's not just that it was in the red, but that FTX was spending like it wasn't in the red. The more and more your business case depends on the chance that many or most of these tokens have, if not as meteoric a rise as bitcoin, at least have a stellar result, that's not (necessarily) illegal, but it's a really dumb idea. The more and more your reserve fund depends on selling things no one's buying, the more it goes from really dumb to hilariously bad.
And that's the best-case scenario -- not that Alameda's bad bets were intentional ways for FTX to pump its sales side, no one explicitly calls anything embezzlement in e-mails, so on. There's some fun philosophical questions about whether this is 'really' criminal intent or just so hopped up on adderall that they don't know the difference between right and wrong, or honestly believed that just the next day every coin he owned was going to take off in a way that would grow them massively. For the purposes of fraud, though, he said he was going to do one thing and did another. For the purposes of business decisions, it doesn't really matter what he thought, or what some random person hearing about Magic Boxes thought.
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