Sam Bankman-Fried was a fascinating figure before anyone ever found out he was a fraud. The son of two Stanford law professors, he studied computer science at the Massachusetts Institute of Technology. He has a full head of floppy black curls, somewhat akin to Frodo. He is a vegan and does not spend much money. At just 30 years old, he was the founder of one of the world’s largest crypto companies, and he was the biggest donor to Joe Biden’s 2020 presidential campaign. He was worth $20 billion, and he was determined to become a trillionaire.
The collapse of Bankman-Fried’s company was all about leverage: In short, he had none. He owned a cryptocurrency exchange, FTX, and a trading firm, Alameda, that was a significant market maker on that exchange. This alone should have been enough to raise alarm bells. When the collapse of a massive cryptocurrency called Terra early in the year left Alameda in a deep financial hole, Fried had a choice: He could either allow Alameda to go bankrupt or save Alameda by giving the firm FTX’s customer deposits.
He chose the latter, and suddenly Alameda had enough money to survive and thrive. These FTX exchange’s reserves were in a token that had been dominated by the exchange. In other words, FTX was credit all the way down, and they covered up a $10 billion hole.
What Bankman-Fried did was to pull off a new version of an old scam—much like the stereotypical televangelist. His much-vaunted commitment to using money to help others allowed him to continue on longer than he should have—because people wanted to believe he was doing good, doing things for the right reasons.
A Gamble That Didn’t Pay Off
In the face of the failures we now know about, the important questions, it seems to me, are the following: Why was this man convinced that he ought to gamble with so much of other people’s money, and why was he worshipped by the people with whose money he was gambling?
Bankman-Fried wanted to become insanely wealthy so that he could give all that money away. He wanted to donate most of his wealth to charity based on a moral philosophy called effective altruism. Depending on whom you talk to, effective altruism is either good or evil: It is either doing good in an efficient way, or a way of distorting the idea of doing good.
Effective altruists believe in evidence-based charity: They label everyone with a “utility function,” which is a marker of how much good they are doing for the world. If one wishes to increase their utility function, they ought to give up the local volunteering and donate to efficient nonprofits instead. It is common for effective altruists to pledge to donate a percentage of their salary to charity, and Bankman-Fried’s pledge was to give away many billions and billions of dollars.
Effective altruism is an absurdly flexible doctrine, and it can be used to justify almost anything. If you want to do the most good, you probably have to spend the most money—and that means you have to possess the most money. If you steal a dollar from a homeless guy, who was probably going to spend it on alcohol, and use it to build malaria nets, you’ve basically increased your utility function.
This was essentially Bankman-Fried’s playbook: Optimize for a trillion dollars and look good while doing it. He succeeded in the latter because he convinced people he had good intentions: In his words, he played the “dumb game we woke Westerners play, where we say all the right shibboleths and so everyone likes us.” People wanted to believe he was doing good, doing things for the right reasons. But really, it was a new age version of the old televangelist scam.
The crazy thing is that he almost succeeded: He really did look like he had a decent shot at becoming the world’s first trillionaire. A Ponzi scheme is only a Ponzi scheme if it fails—if enough young, Frodo-looking effective altruists keep taking 50% bets, one of them will probably become a trillionaire. But then perhaps by the time they’re that rich, they would’ve decided they don’t care about utility functions.
A Look Into FTX’s Effective Altruism—and Its Downfall
You might not expect crypto’s youngest billionaire to be a Democratic-voting effective altruism enthusiast, but perhaps it’s not that great of a surprise. What’s been common to almost all of the internet’s most successful founder-CEOs is that they have not wholly been driven by money, but by an extreme conviction to a political ideology. For Meta’s Mark Zuckerberg, it was a deep universalism—a belief that most people were fundamentally similar, and that connecting more of the world would be fundamentally good for the world. For Apple’s Steve Jobs, it was an obsession with creative genius (which is why Jobs greatly admired people like the Beatles and Polaroid founder Edwin Land)—anything could be justified if it would aid the artist in their production of civilization’s great works.
These entrepreneurs had a responsibility to make shareholders money, of course, but they also had a level of fanaticism that allowed them to bypass the interests of those shareholders when they thought it necessary. For Bankman-Fried, it seemed to be a different sort of vision—not the money-obsessed libertarianism typically associated with crypto, but a belief that the key to saving the world is to find better ways of putting money in the right places (and that the effective altruism crowd is well-placed to decide which places are right and wrong).
If you went to the FTX Future Fund website, you’d have seen a long list of project ideas. Some examples included “AI-based cognitive aids” and a “cost-benefit analysis for everything.” The fund promised grants of millions of dollars to any talented group of people who wanted to spend the next few years of their lives tackling one of them. The fund was inspired by a project called Fast Grants, which Mercatus Center director Tyler Cowen helped spearhead during the early stages of the COVID-19 pandemic.
The point of Fast Grants was to quicken the speed at which money could be directed toward academics working on COVID vaccines and engineers working on mechanisms to prevent spread. Approximately $50 million was deployed over a matter of months through the project. It was seen as a massive success.
Until its recent shutdown, a substantial amount of the money behind the FTX Future Fund was being donated by Bankman-Fried personally. The ideas on the list were all projects that Bankman-Fried and his colleagues didn’t think were being addressed by the free market. They simply wanted to funnel money to solve the market failures independently, rather than relying on the state to do so.
The fund succeeded in attracting an incredible number of talented people who want to pursue hard problems without needing to confront the bureaucracy of academia. I personally saw several friends apply and receive funding in incredibly short amounts of time. But now, those who were given their grants recently are being asked to return them. The Future Fund recommended a $1.2 million grant to the Global Priorities Institute, an interdisciplinary research center at Oxford. And Global Change Data Lab, an Oxford University group that operates the web publication Our World in Data, was promised a $7.5 million cash infusion in July, spread over three years. Neither organization received any money from the FTX Foundation, according to a spokesperson for Oxford University.
A Whirlwind Story
I have not yet met Bankman-Fried, and I probably never will: There is a fair likelihood that he will be spending a long time in prison. We live in a society that creates heroes out of insecurity—a man who came into crypto for market arbitrage somehow became a symbol of the successful markets. He is a socially awkward, overly rational, drugged-up technocrat, but he managed to convince many—including the Democratic Party—that he was a child prodigy, a fantastic entrepreneur, a miraculous altruist. And that ability to convince so many to overlook his foibles and embrace an idealized version of himself enabled him to run his scam for much longer than he should have been able to.
The lesson here, it seems to me, is not a lesson about crypto. It is a lesson about power and about wealth. History is full of Bankman-Frieds—full of people who set one rule for themselves and one rule for those they pretend to serve. They do so because they believe that they are special in some way. The truth is, nobody is that special—intelligence often just makes you more convinced in the face of your mistakes.
People have spent a lot of time arguing whether Bankman-Fried was malevolent or stupid: He might be both, but he was clearly self-important, delusional and deeply naïve. This was fraud, pure and simple: FTX used customer deposits to speculate on assets, and it did so because it thought it could get away with it. This is exactly the kind of fraud against which crypto’s purists want to protect. If they are to succeed, they’ll have to be better at spotting scams.