SBF: The New J.P. Morgan
FTX CEO Sam Bankman-Fried is like a modern day robber baron in at least one way. As the digital asset industry tumbles downward in fits and starts, the titan of industry who sometimes skips lacing his shoes is thinking about ways to prevent calamity – and perhaps profit.
This weekend, Bankman-Fried discussed the “responsibility” he feels to bail out crypto firms in crisis. He repeated the sentiment on Twitter, where he said the principal concern is mitigating retail losses, disclosing risks and preventing bad debts from spreading across the sector.
“I do feel like we have a responsibility to seriously consider stepping in, even if it is at a loss to ourselves, to stem contagion,” Bankman-Fried told NPR. "Even if we weren't the ones who caused it, or weren't involved in it. I think that's what's healthy for the ecosystem, and I want to do what can help it grow and thrive."
There’s a historical analogy here: J.P. Morgan, a leading banker in the time before the Federal Reserve, twice stepped in to prevent economic collapses.
During the panic of 1893, after a period of intense speculation and consolidation in the emerging railroad and banking industries, Morgan lent the Federal Treasury $65 million in gold to reup its dwindling reserves and firm up faith in the banking system.
Then, amid the financial crisis of 1907, Morgan pledged his own capital and led a coalition of wealthy financiers to backstop failing banks, stock exchanges and trust companies. Historians think Morgan’s actions prevented a much deeper recession at a time when the federal government had little ability to manage economic crises.
Bankman-Fried, though perhaps less stylish than his Gilded Age forebears, might see a similar historical role to play. Today, FTX supplied the struggling crypto lender BlockFi with $250 million in credit. Last week, Bankman-Fried’s trading outfit Alameda Research bailed out crypto broker Voyager Digital.
Over the years, he’s acquired firms, like Liquid, that would have gone under following hacks and has contributed to bailout funds for attacked protocols and projects. Of course, these lifelines aren’t simply altruistic, but also a way for FTX to expand.
Bankman-Fried is a self-proclaimed “effective altruist,” or capitalist who believes in earning as much as possible to give as much back. It’s unclear whether his actions now fall in the former or latter camps: Perhaps he’s intervening today to profit tomorrow.
Crypto is often compared to the wildcat banking era, a time when financial institutions were essentially able to print their own money and play by their own rules. Though there have been attempts to work with governments to achieve “regulatory clarity,” crypto sometimes seems to fall outside the norms and safety nets established in the traditional financial sector.
In recent days, some of the biggest players in the crypto industry including Coinbase, Crypto.com and Gemini have announced layoffs. Influential hedge funds like Three Arrows Capital appear to be insolvent, while major lenders Celsius and Babel Finance have paused customer withdrawals. It’s impossible to know the knock-on effects if any of these firms falter.
Bankman-Fried clarified on Twitter that his role is not to save individual firms, necessarily. His own firm is slowing hiring, and reportedly pulled out of talks to advertise on the MLB’s Los Angeles Angels jerseys.
Crypto is supposed to be guided by certain core principles including financial transparency and free markets. Perhaps the most important is the idea that autonomous code, not humans, should determine winners and losers in markets – ensuring that everyone plays by the same rules.
So is there a moral hazard in Bankman-Fried stepping in, even if he’s bypassing the guarantees of the Fed? Despite its lofty ambitions, crypto is racked with scams, insider trading and a culture of backroom deals.
Today, the firms that seem at the greatest risk of default are those that are primarily reproducing the worst aspects of the legacy financial system – all without consumer protections. Celsius and Three Arrows were taking risky bets with client funds. And centralized exchanges are black boxes.
While some on-chain, community-governed protocols seem to be faring better, that doesn’t make them a perfect solution. This weekend, developers of the lending protocol Solend “voted” to commandeer a highly leveraged user’s wallet to lessen the effects of an expected margin call. A DAO was formed and the transactions were on-chain, but it’s striking that this was ever a possible course of action.
If crypto learns anything from the ongoing market reckoning, let it be that its only real hope in breaking away from the convoluted, easily corrupted legacy financial system is in real decentralization. Open protocols cannot prevent bad actors, but can provide the necessary information for investors to make their own decisions.
In his interview with NPR, Bankman-Fried noted that the “core driver” of the market sell-off “had been the Fed.” The largest interest-rate hike since 1994 – an attempt to quell inflation it may have accelerated and failed to predict – is causing markets to puke capital.
Though he isn’t all doom and gloom, perhaps seeing himself in the American institution, he noted how the central bank is "caught between a rock and a hard place."
Progressive politicians of Morgan’s day were driven to create the Fed in part after witnessing Morgan and his peers’ influence in the economy. Despite his altruistic intentions, the Pujo Committee feared that Morgan could influence markets for his own gain.
For his part, Bankman-Fried is amenable to working with regulators. He’s said he’d spend upward of $1 billion in political contributions in part to earn officials’ ears. Changes need to be made, especially if crypto’s largest players are just going to create a worse banking system.
But the real change, challenges and opportunities of the crypto industry will happen at the protocol level – not directed by any one person.
– D.K.
