What the Collapse of FTX Means
The implosion of the leading cryptocurrency exchange will not affect the wider economy, but it will affect tech elites and the Effective Altruism movement, which sought to reform philanthropy.
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Until its recent implosion, FTX was the world’s second or third-largest cryptocurrency exchange by volume, with around $2 billion in daily volume as of June 2022.Founded in 2019 by CEO Sam Bankman-Fried, FTX allowed customers to deposit money and trade cryptocurrencies, and was predominantly used for trading cryptocurrency derivatives, such as futures contracts. While U.S. residents could not access the main FTX exchange, it serviced millions of clients around the world and generated over $1 billion in revenue and $388 million in net income in 2021. In January 2022 it was valued at $32 billion in a private market funding round. Earlier in 2017, Bankman-Fried had founded Alameda Research, one of the most prominent cryptocurrency-oriented hedge funds. Even after formally departing Alameda to focus solely on FTX, Bankman-Fried retained a substantial ownership interest in both companies.
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The widely acknowledged yet opaque relationship between FTX and Alameda led to the collapse of both on November 8, 2022, when rumors of Alameda’s potential insolvency led to a massive bank run on FTX. Outflows totaling around $5 billion occurred in a single day before withdrawals were frozen. Binance, the world’s largest cryptocurrency exchange, announced a “non-binding” agreement to acquire FTX in an emergency sale. Binance’s founder and CEO Changpeng “CZ” Zhao had played a major role in starting the run on FTX by publicly endorsing rumors of Alameda’s troubled financial status. Bankman-Fried’s personal net worth reportedly dropped from $16 billion to under $1 billion in a day, a decrease of 94%.
The following day, Binance announced it was backing out of the deal, leading most observers to conclude that FTX’s remaining customers will recover at most a small percentage of their billions of dollars’ worth of assets held by FTX. On November 11, 2022, Sam Bankman-Fried announced on Twitter that FTX and Alameda Research were both filing for voluntary Chapter 11 bankruptcy proceedings in the United States.Bankman-Fried then resigned as CEO of FTX.
While details of FTX and Alameda’s finances have not been released, the circumstantial evidence suggests that FTX is insolvent because it lent assets including customer deposits to Alameda, which then lost money in a series of cryptocurrency deals earlier in the year. FTX insiders have reportedly communicated the essential truth of this account to the news media.This would imply that FTX is responsible for one of the larger illicit losses of customer funds in financial history, with the size of the lost funds currently estimated at around $8-10 billion.
This shock, no matter how much it decreases the value of cryptocurrencies, will not be felt in the economy proper. Cryptocurrencies are digital currencies that rely on a peer-to-peer computer network and cryptographic software to make and validate transactions, rather than relying on a single authority like a central bank or government to issue a currency that is then used for transactions. As of June 2022, there were reportedly over 19,000 cryptocurrencies on the marketplace, including the first and most famous cryptocurrency, Bitcoin, which makes up about half the total cryptocurrency market capitalization.
Cryptocurrencies nevertheless exist in relative isolation from the real economy. While many individual fortunes have been made through cryptocurrency, in practice these have mostly been used for further cryptocurrency speculation. Collapsing prices of stocks or fiat currencies issued by states can lead to massive layoffs and reductions in the supply of crucial goods like gasoline or computer chips, but collapsing cryptocurrency prices have no equivalent structural consequences for the physical economy. There will very likely be no financial effects felt by those who have never touched a cryptocurrency.
But the collapse of FTX will have a major impact on the cryptocurrency sector and, as a result, on the strategies and futures of the Silicon Valley elites who have increasingly tied their fortunes to it. Venture capital firm Andreessen Horowitz, for example, aggressively incubates cryptocurrency startups, with investments totaling over $7.6 billion.Mark Zuckerberg’s Meta (formerly Facebook) has twice attempted to enter the cryptocurrency market directly, first with the native cryptocurrency Diem (originally called Libra), then Novi, a cryptocurrency wallet. It is still aiming for “deep compatibility” with blockchain technology. Any cryptocurrency-based strategies will become harder not just because of the loss of a major institution and a drop in cryptocurrency prices, but because the incident will invite the further intervention of regulators in the U.S. government.
But most importantly, the collapse of FTX will reduce the moral authority and intellectual legitimacy of the “Effective Altruism” (EA) movement, which has become a rising cultural force in Silicon Valley and a rising financial force in global philanthropy. Sam Bankman-Fried was a highly visible example of an “Effective Altruist.” He was a major donor both to the movement and to causes favored by the movement, for example committing $160 million in grants through the FTX Future Fund.Bankman-Fried also frequently boosted its ideology in press interviews and reportedly only earned money so that he could donate more of it to the cause, an ethos known as “earn to give” that was invented by the EA movement.
Bankman-Fried has also shown a serious interest in engaging with mainstream U.S. politics. He has funded political candidates aligned with his own views in congressional primary races and ballot initiatives in California. In 2020, he became President Joseph Biden’s second-largest campaign donor and, in 2022, the Democratic Party’s second-largest individual donor behind only George Soros, having donated a total of $39.8 million.While other tech and crypto companies tend to do too little political lobbying for their own good, Bankman-Fried pursued the opposite strategy, with the result that he was both the highest-profile Effective Altruist and the highest-profile cryptocurrency entrepreneur in Washington.
With the collapse of FTX, the regulatory outlook for the cryptocurrency sector in the U.S. has become worse, and it seems unlikely that the venture capital industry will soon see a return on the tens of billions invested into cryptocurrency startups since 2020. This will reduce the financial resources and strategic autonomy available to tech elites in the near future. But it will also reduce the appeal of the fastest-rising philanthropic vehicle in Silicon Valley, which has increasingly become a cultural and even political force in its own right. As its name suggests, Effective Altruism’s claims to authority and legitimacy rest on the idea that the EA movement is better than others at allocating time and resources towards saving and improving human lives. In Sam Bankman-Fried, perhaps its most visible proponent has demonstrated the opposite.
The FTX Empire
After beginning his career in traditional finance at leading quantitative trading firm Jane Street Capital, Bankman-Fried’s initial forays into cryptocurrency began in October 2017 with the founding of the cryptocurrency hedge fund Alameda Research. According to Bankman-Fried, it was founded initially to take advantage of a persistent but hard-to-exploit 20% disparity between the Bitcoin price denominated in Japanese yen and the same price denominated in U.S. dollars, one that lasted until January 2018. From there the firm expanded to quantitative trading more broadly across the entire cryptocurrency domain, moving its headquarters from California to Hong Kong, and later to the Bahamas, due to the difficulty of establishing and maintaining relationships with banks in the U.S. as a cryptocurrency trading firm.
It remains unclear why exactly Bankman-Fried and Alameda decided to start their own exchange. There are two sources of natural fit between an exchange and a quantitative trading firm: one legal, the other less so. The trading firm, acting as market maker, can supply the liquidity the new exchange needs to attract and retain new users. Alameda’s constant presence trading on FTX, initially providing almost 50% of liquidity, was almost certainly largely responsible for the site’s massive growth, as it grew trading volume from $50 million a day to $300 million a day in just four weeks between June and July 2019.The nascent exchange also benefited from a timely outflow of customers from the cryptocurrency exchange BitMex, at the time under investigation by the Commodity Futures Trading Commission (CTFC) for illegally providing services to U.S. residents.
Alternatively, however, the exchange’s customer funds can also be used as capital for the trading firm to use on its own account—an illicit practice, as unlike banks, an exchange ostensibly keeps all customer deposits available for redemption and rather makes its money from transaction fees. That FTX’s spreads were notoriously tight, even in its early days, might suggest that Alameda was making money in a different way to the typical methods of market makers.
FTX soared in popularity thanks to the high leverage it offered,provision of cross-margining, attractive user interface, and high-quality liquidity and risk engines. Daily active users grew from two thousand in 2019 to almost 15,000 in 2020 to over 60,000 in 2021. Daily volume hit a high of around $11 billion in mid-2021, at a time of soaring cryptocurrency prices and high market volatility—ideal conditions for both a hedge fund and an exchange.
FTX grew aggressively, both organically and through acquisitions, picking up the price tracking app Blockfolio and LedgerX, an equity derivatives exchange and clearinghouse. In mid-2020 FTX launched its U.S.-focused offering, FTX US, which restricted derivatives trading and, to comply with U.S. law, barred users from trading some cryptocurrencies that were available on the main international site. FTX advertised FTX US heavily throughout 2021 and 2022, with ads at the Super Bowl and sponsorships including the naming rights to Miami's main sports stadium.
Alameda expanded its operations alongside FTX, broadening its scope to include venture capital, as it led funding rounds in a wide variety of cryptocurrency projects.Many of them were based around the Solana blockchain, which Bankman-Fried extensively promoted through his Twitter account. The centrality of FTX and Alameda to the cryptocurrency ecosystem was further enhanced in the immediate aftermath of the collapse of the TerraUSD stablecoin and associated Luna token in May 2022, which caused widespread contagion across a number of critical cryptocurrency institutions. TerraUSD reached a peak market capitalization of $19 billion and Luna a peak of $40 billion before both tokens fell to near-zero valuations within a few days.
Due to its exposure to TerraUSD and Luna, Three Arrows Capital, another prominent cryptocurrency hedge fund, collapsed.It had borrowed extensively across the cryptocurrency ecosystem to fund its activities and in its wake the lending platforms Celsius, Voyager, and Blockfi all faced insolvency. Celsius collapsed, and Voyager filed for bankruptcy after initially accepting a credit facility from FTX. Blockfi survived only through another emergency loan from FTX, with Bankman-Fried also acquiring an option to buy the platform outright at a valuation that could—depending on Blockfi’s performance—have been as little as $15 million. Blockfi had previously been valued at $3 billion in earlier funding rounds.
Decline and Fall
Voyager ultimately opted for Chapter 11 bankruptcy, and as its financials became public during the court proceedings, the first signs of trouble in the FTX empire emerged. While Voyager’s main losses were due to its loans to Three Arrows Capital, it emerged that Alameda Research had also borrowed $200 million from Voyager and had not repaid its loan.While one of Bankman-Fried’s businesses was ostensibly trying to bail out Voyager, another of his companies was in debt to the platform. Meanwhile, scrutiny of the deals FTX had struck with Voyager and Blockfi made it clear that FTX was actually putting very little capital at risk, since the terms for the firms to access the credit facilities it had announced were so onerous.
The speculation around Alameda’s solvency was heightened by the departure in August 2022 of Sam Trabucco, the company’s co-CEO along with Caroline Ellison, an associate of Bankman-Fried’s since his earlier days at Jane Street. Trabucco had been largely responsible for Alameda’s trading strategies since Bankman-Fried shifted his focus to FTX, and while his departure was claimed to be for purely personal reasons, in hindsight this seems suspect.
In this atmosphere of heightened scrutiny, more attention was paid to the backgrounds of other FTX employees. The company’s chief regulatory officer was Daniel Friedberg, a lawyer who had previously worked as in-house counsel for an online poker site, Ultimate Bet, where company management stole millions of dollars from high-stakes professionals in rigged games. Friedberg was surreptitiously taped participating in a meeting with other Ultimate Bet executives, openly discussing the theft and how the company could avoid admitting full liability.
The collapse of Alameda and FTX, however, finally came when Alameda’s balance sheet was leaked to the cryptocurrency news site CoinDesk, and it emerged that of $14.5 billion assets, the company had just $134 million in cash on hand. It held a wide variety of volatile cryptocurrency assets, especially SOL, the token associated with the Solana blockchain that Bankman-Fried had extensively promoted. But most notably, it held $5.8 billion of FTT, FTX’s own token. Against these assets, it had $8 billion of outstanding liabilities, nearly all loans it had taken out from unidentified creditors.In other words, Alameda’s primary asset was a highly illiquid, thinly traded, volatile cryptocurrency issued by a related party, which had already fallen by 50% from its all-time high in September 2021. If Alameda needed to offload large quantities of FTT, this would crash the price, meaning it could not actually be sold for anything near the value listed on the balance sheet.
This news was extensively publicized by Changpeng “CZ” Zhao, CEO of Binance, the world’s largest cryptocurrency exchange. Binance itself held around $500 million worth of FTT, since it had itself been an early investor in FTX, but had its stake bought out by Bankman-Fried in 2021 after an apparent falling out with Zhao. As part of this transaction, Binance had been paid in FTT, which Zhao announced that it would liquidate on the open market. Zhao’s intervention triggered a death spiral, despite Alameda CEO Caroline Ellison tweeting that Alameda would buy all of Binance’s FTT holding at a price of $22 per token.
Sam Bankman-Fried and Effective Altruism
Sam Bankman-Fried is a major donor to the Effective Altruism (EA) movement, which is “about using evidence and reason to figure out how to benefit others as much as possible, and taking action on that basis.”Effective Altruism emerged in the late 2000s and was popularized by academics like the Australian Toby Ord and the British Will MacAskill, who together founded the Centre for Effective Altruism (CEA) in 2012, based in Oxford in the United Kingdom. Generally speaking, the main concern of EA ideology is improving the cost-effectiveness of philanthropic and charitable giving in order to save and benefit more human lives. This can be expressed as anything from donation drives to deliver mosquito nets to people at risk of malaria, to research on preventing or controlling global pandemics, artificial general intelligence, or other “existential risks” to humanity.
Effective Altruism has become both a cultural force in Silicon Valley and among ambitious young people in the English-speaking world, as well as a growing financial force in both global philanthropy and U.S. electoral politics.Affiliating with the EA movement is attractive not just because it offers new adherents a potentially high-status career and professional network, but because it also offers power. The totalizing ideology of EA provides a justification to intervene in any area of human activity—whether electoral politics, technological development, or anything in between—so long as it can be justified on the basis of altruism. This power can be used insofar as the EA movement can build up its moral authority and intellectual legitimacy, on which the power ultimately rests. Effective Altruism has been well on its way to becoming not just a charitable movement, but a numerically small yet influential political faction.
Bankman-Fried served briefly as director of development at the Centre for Effective Altruism before founding Alameda Research and then FTX, and has been transparent that the appeal of cryptocurrency is its ability to accumulate money fast, which, until recently, he had certainly achieved.Alameda’s earliest trades were enabled by Bankman-Fried’s friendships in the Effective Altruism community, through which Bankman-Fried found connections in Japan willing and able to help exploit the Bitcoin price arbitrage, as well as the funding to increase the scale of the trades. According to FTX’s director of engineering Nishad Singh, Alameda “couldn’t have taken off without EA,” because “all the employees, all the funding—everything was EA to start with.”
In 2022, the FTX Future Fund committed over $160 million in grants, including tens of millions to EA organizations, and the rest strongly influenced by EA ideas of effective charity.On November 10, the FTX Future Fund team resigned and announced that “it looks likely that there are many committed grants that the Future Fund will be unable to honor.” FTX’s arrival on the scene funded a profusion of professional EA organizers and a growing patronage network of “regranting” funds given to respected community members to redistribute as they think best. All this is now threatened, but should these new positions evaporate entirely, the movement as a whole will be no worse off financially than it was in 2019.
Sam Bankman-Fried became probably the second-largest donor to EA organizations and causes of 2022, behind Facebook cofounder Dustin Moskovitz, whose support has long been instrumental to the movement. Moskovitz and his wife Cari Tuna founded and continue to fund prominent EA organizations like Open Philanthropy and Good Ventures, which in turn distribute funds to other EA organizations. For example, in 2020, “approximately two-thirds” of the budget for the Centre for Effective Altruism came from Open Philanthropy.In 2021, Good Ventures reportedly made $416 million in grants on the recommendations of Open Philanthropy. Moskovitz has pledged to donate most of his approximately $11 billion fortune, which is derived from his shares in Facebook and Asana. The loss of current grants and especially of expected future donations will be a blow to EA institutions, but they are in little danger of collapse.
The bigger blow to EA will be to its moral authority and intellectual legitimacy. EA has long benefited from a very strong position in ethical discourse and the presumption that its institutions are doing “the most good,” especially among top intellectuals and ambitious live players making a name for themselves. EA’s alliance with Bankman-Fried and his use of EA philosophy to justify his activities will make this presumption much harder to take for granted. The scandal will most likely fade from discourse over the next few months as news cycles move on and, like any scandalized movement, EAs will be especially motivated to downplay the events or simply ignore them. However, careful observers and live players will remember the relationship and will no longer take EA’s claims of moral supremacy at face value, and the opinion of these groups has influence far in excess of their low numbers.
Like most ideologies, Effective Altruism makes it easy for the ends to justify the means: if doing more good requires acquiring more money, then perhaps even questionable means of acquiring more money can be easily justified or excused as a smaller evil in the service of the greater good. The phenomenon of wealthy businessmen taking to charity to polish their image and justify questionable business practices is also not a new one. Before the liquidity crunch at FTX, this worked well for Bankman-Fried, earning him prestige, glowing media profiles, and useful allies such as EA luminary Will MacAskill.
Whether or not Sam Bankman-Fried genuinely believes in Effective Altruism is ultimately moot, since his career path has been perfectly compatible with a genuine commitment to the cause. In other words, earnest intentions should not be ruled out. A genuine belief in the risks of rapid development of artificial general intelligence might well have been in part responsible for his high-risk approach to building wealth. The possibility of near-term global disaster, whether from AI or pandemics, may have represented a real imperative to grow disposable funds as quickly as possible in order to combat these immediate dangers.
Effective Altruism is the rising moral and charitable vehicle in the tech culture of software engineers, venture capital-funded entrepreneurs, and the crypto-rich. With his artfully sloppy t-shirts, unkempt hair, and stunts like playing video games during meetings, Bankman-Fried doubled down on membership in this culture and defiance of traditional professional culture.It is this cultural package that has him donating to EA causes instead of, for example, building a dorm at his alma mater like a traditional philanthropist might. But the collapse of FTX also reveals that Effective Altruism is in fact more similar to its philanthropic predecessors than either would like to admit: it is just as willing to convert “dirty” money from cryptocurrency casinos into legitimacy, in the same way universities or foundations are willing to accept large donations from Goldman Sachs or Philip Morris.
The legitimization also went both ways. By implicitly crediting his career path to the pure altruistic motives of EA, Bankman-Fried lent it the aura of financial success, which is a potent source of prestige and a draw for ambitious young recruits. He is a savvy and energetic self-promoter, and EA benefited from his brand-building in the news media. Before the collapse of FTX, the movement was happy to go along with his mythology and hold him up as a respected role model.The collapse of FTX and Sam Bankman-Fried’s fortunes will only moderately impact the material situation of the EA movement. But for careful observers it deals a serious blow to the moral authority, intellectual legitimacy, and prestige that the movement has cultivated thus far, and on which its appeal and power ultimately rest.
The Near Future of Tech and Crypto
While FTX’s declaration of bankruptcy most likely ends the prospect of any other exchange purchasing the site, its insolvency still eliminates one of the top players from the ecosystem of cryptocurrency exchanges. Contractions in the exchange ecosystem are unlikely to be limited to just FTX. It is reasonably likely that others are similarly precarious and illiquid, and will collapse in the coming months or years. The centralized cryptocurrency lending platforms, already battered by the collapse of Three Arrows Capital, are almost certain to have large exposures to Alameda and its failure. Silvergate Capital, one of a handful of U.S. banks that deals extensively with cryptocurrency companies, is likely also to have considerable, if manageable, exposures.
Fewer options for cryptocurrency exchanges on the market will ultimately make them easier to regulate. Those left will be more likely to comply with regulatory action, partly because a smaller field means regulators can pay more attention to each one, and partly because those who endure will tend to be those that are more cautious and less prone to big risks, such as breaking the law. FTX’s collapse will also have a major impact on the bureaucratic infighting over which government agency becomes ultimately responsible for cryptocurrency regulation, given that Bankman-Fried and FTX had cultivated close ties with the CFTC, widely perceived as a more crypto-friendly and tolerant organization than the much larger SEC.
Though the collapse of FTX will likely embarrass all U.S. regulators, the SEC will likely emerge as a relative beneficiary. Consequently, the likelihood grows significantly that nearly all non-Bitcoin cryptocurrencies will be eventually declared securities, in accordance with the stated views of SEC chairman Gary Gensler. Both in the U.S. and across the world, therefore, cryptocurrency issuers will either find themselves forced to comply with securities laws or find themselves unable to list their products on the most popular exchanges.
In spite of all this, these events are very unlikely to be felt outside the cryptocurrency sector itself. The links between the cryptocurrency sector and the broader financial sector are relatively weak, and its links with the economy of goods and services are weaker still. The cryptocurrency lending platforms, whether centralized or decentralized, virtually never fund productive economic activity or investments in real-world assets through their loans. Nearly all cryptocurrency lending goes toward enabling more speculation on the prices of the leading cryptocurrencies.
But through its effects on the cryptocurrency sector, the collapse of FTX will have an indirect yet significant effect on the viable strategies and resources, both tangible and intangible, available to elites in Silicon Valley. Tangibly, many tech investors and entrepreneurs will either directly lose money or lose expected future earnings from new businesses based on cryptocurrencies and related concepts like “Web3.” This will markedly reduce the expected return on investment for both time and money in the cryptocurrency sector, as compared to other possible investments in other areas of business or technology. Intangibly, the credibility and legitimacy of the rising ideological faction in Silicon Valley, Effective Altruism, will take a quiet but very real blow in the eyes of careful observers, live players, and ambitious young people.
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According to A16Z Crypto. See here: https://a16zcrypto.com.
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Initially 101x, later reduced to 20x.
Counting all fiat and cryptocurrency assets collectively as collateral rather than calculating collateral on an asset-by-asset basis.
For a full list, see here: “Raises - Alameda Research,” DefiLlama, https://defillama.com/raises/alameda-research.
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According to the Centre for Effective Altruism. See here: https://www.centreforeffectivealtruism.org/ceas-guiding-principles
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Nick Beckstead, Leopold Aschenbrenner, Avital Balwit, Ketan Ramakrishnan, and Will MacAskill, “The FTX Future Fund team has resigned”, Effective Altruism Forum, November 10 2022, https://forum.effectivealtruism.org/posts/xafpj3on76uRDoBja/the-ftx-future-fund-team-has-resigned-1
According to the Centre for Effective Altruism. See here: https://www.centreforeffectivealtruism.org/blog/ceas-2019-annual-review#financials
According to Good Ventures. See here: https://www.goodventures.org/our-portfolio/grantmaking-approach
According to Bloomberg. See here: https://www.bloomberg.com/billionaires/profiles/dustin-a-moskovitz/
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Robert Wiblin and Keiran Harris, “SamBankman-Fried on taking a high-risk approach crypto and doing good,” 80,000 Hours, April 14, 2022, https://80000hours.org/podcast/episodes/sam-bankman-fried-high-risk-approach-to-crypto-and-doing-good/#taking-a-high-risk-approach-to-doing-good-000610.
Adam Fisher, “Sam Bankman-Fried Has a Savior Complex—And Maybe You Should Too”, Sequoia Capital, September 22, 2022, https://web.archive.org/web/20220922164619/https://www.sequoiacap.com/article/sam-bankman-fried-spotlight.
See Sven Rone, “The Effective Altruism movement is not above conflicts of interest”, Medium, August 31 2022, https://medium.com/@sven_rone/the-effective-altruism-movement-is-not-above-conflicts-of-interest-25f7125220a5. This essay was written for an EA-sponsored contest for criticism of the EA movement; it did not win one of the 31 prizes awarded, but one judge included it on a list of entries (https://forum.effectivealtruism.org/posts/YgbpxJmEdFhFGpqci/winners-of-the-ea-criticism-and-red-teaming-contest?commentId=JjvpwGKeaj4w5FTzP) which were “worth highlighting, or considered awarding but ultimately did not make the final cut”.