There is now jawdropping evidence that, closeted in an island compound with a small cabal of insiders, Sam Bankman-Fried wielded power in an erratic, unchecked and highly destructive manner. All this, while the erstwhile CEO of FTX cultivated, promoted and largely succeeded in embedding in popular consciousness the glossy image of a wise and benevolent leader.
This wasn’t supposed to be the crypto way. Most FTX customers likely believed their investments in decentralized protocols supported systems that could free people and their economic activity from the need to trust a corruptible centralized authority.
How could a community so obsessed with decentralized systems fall so frequently for the one thing it professes to resist? I’d say it’s a combination of interrelated, deeply human factors. Recognizing and understanding them is vital if the crypto community is to adopt a model of uber-governance that protects its members from being duped by such cons.
Crypto bros are human, after all
No one is immune from the deep-seated human instinct of hero worship, not even hyper-rational crypto advocates.
Look at the subculture of Bitcoin since its early days and at its all-defining origin story: that its code was created by a single, brilliant man who selflessly bequeathed it to the world and kept his own name and potential for fame out of it. There have been songs about Satoshi Nakamoto, and poems, and artwork and a hagiographic volume of his “collected writings” (IRC posts.)
There’s nothing wrong, per se, with any of this. As mentioned, it’s a natural state of mind. What’s a problem is the denial that it exists, the idea that I’m not vulnerable to this kind of misplaced admiration because I’m a believer in math, not humans.
The vulnerability of invulnerability
This denial gets doubly worse when the misguided overconfidence extends from the self to the system.
Security experts frequently observe that the systems most vulnerable to attack are those where actors have excessive faith in its invulnerability. A false sense of security creates an ideal environment for an intruder – or a corrupt executive.
In the crypto world, that can manifest as misplaced confidence in “decentralization” when the real risks a person unknowingly faces lie with a centralized vulnerability, such as in FTX’s balance sheet.
Unregulated
Regulation, or lack thereof, also feeds into this misplaced confidence.
Unlike federally insured banks, under-regulated crypto exchanges’ depositors are just unsecured creditors with no recourse if the entity uses its unsegregated assets to invest in outside projects whose value has evaporated. But too few people understand this caveat emptor situation, thinking that they have the same rights as they do with a bank or with a well-regulated custodial fiduciary.
Does this mean the solution lies in tougher, globally universal regulations that compel centralized exchanges to ring-fence and protect their customers’ funds and for their controlling entities to be subject to strict audits? Maybe. But my point is not that governments are necessarily the answer but that some form of ecosystem-wide uber-governance – be that a national regulator or an industry-wide self-regulatory system – is required to force the likes of FTX to protect their users.
