by Izabella Kaminska
Tuesday, 29
November 2022
Analysis
14:11

Central bankers are to blame for the crypto collapse

Cheap money is the key to understanding Sam Bankman-Fried's downfall
by Izabella Kaminska
Sam Bankman-Fried. Credit: Getty

The unravelling of Sam Bankman-Fried’s trading empire FTX this past month has exposed the shortfalls of crypto as the supposed solution to the excesses, conflicts and trust issues of core finance. With the impending collapse of crypto lender Blockfi it appears crypto may even be equally prone to the sort of contagion the financial sector experienced in 2008. 

What has prevented the crisis from spiralling into a fully systemic episode for the global economy — at least so far — is crypto’s still largely contained nature and much smaller size, relative to that of the traditional financial system.


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Yet those keen to assert that the debacle is evidence of core finance’s clear superiority to crypto underplay the role of central banks themselves in stoking and propagating the rise of the crypto market.

The point of quantitative easing, after all, was always to lubricate the market and create the conditions for excessive risk-taking. By design.

The best evidence of this is the inadvertent truth revealed by the “secret” text message brought to light by a new media outlet, Semafor, in its obsessive drive to debunk Elon Musk’s assertion that his “bullshit meter” was going off when SBF first approached him to invest in Twitter back in March 2022.

Bankman-Fried happens to have been a key investor in the media group, a conflict that Musk was quick to pick up on in his response to the article. Semafor’s piece had focused on Musk’s supposed hypocrisy and manipulation of the truth, since — in their estimation — by May of this year he was back tapping SBF for money for his “take Twitter private” deal. This allegedly resulted in SBF maintaining a small stake in Twitter, worth approximately $43m, a fact backed by publicly disclosed FTX bankruptcy filings.

Musk denied the assertion, claiming that SBF had been given the opportunity to roll his legacy Twitter share into the private structure, but had not carried through. With the truth now a function of one billionaire’s word against another’s, Ben Smith, Semafor’s co-founder, finally coughed up the evidence. This proved to be the counterpart text message to one of Musk’s — the latter having already been disclosed in the legal documents related to the Tesla billionaire’s attempt to renege on the Twitter deal.

The text, however, was hardly conclusive. All it revealed was that SBF had decided to withdraw from the investment round because of his own regulatory issues but remained interested in rolling his legacy investment if possible. Musk’s response was ambivalent at most, and certainly not indicative of someone desperate for SBF’s investment. 

The bigger factor missed by almost all covering the story was the relevance of the dates in the tit-for-tat squabble. SBF’s decision to walk away from the Twitter financing round came on 5th May, two days before the dramatic market collapse of the Terra Luna crypto stablecoin on 7th May. This is relevant because Terra Luna’s collapse is now largely seen as the most probable trigger for the fall of the SBF empire.

But there’s another date that needs to be factored into the FTX collapse puzzle: what happened on 4th May. This was the day the Federal Reserve finally — after much market anticipation — officially raised interest rates on US dollar funding by 50 basis points. These rates would become effective in the market from 5th May, the very same day SBF officially walked away from the Twitter deal.

That the Fed ultimately played a role in FTX’s collapse, by puncturing more than a decade’s worth of irrational market exuberance it had itself fuelled with cheap central bank money, is arguably the real key to this story. It implies more than anything that SBF’s entire empire, rather than being a crypto phenomenon, was mostly built on the excesses of cheap dollar funding and massively over-leveraged business models.

The culpability of the Fed in stoking these bubbles, however, is strangely not getting the attention it deserves.

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Emre S
Emre S
1 month ago

Don’t agree with the interpretation of the article re Musk vs SBF, Arguably the best way to call bullshit on someone’s claim that they’ve an excess of money is to see if they can cough it up where needed. Seems like that’s what Musk did, and SBF didn’t deliver.
As for the contagion, the leveraged derivatives trades linking institutions weren’t there for the crypto businesses which probably helped contain the problem. An important difference though is the crypto founders are now penniless facing criminal investigations, but finance captains who arguably caused the collapse in all likelihood ended up making money on the “collapse” following the bail outs.
As an additional note, the 2008 collapse was probably the genesis for today’s problems. It made the working class lose trust and respect for the expert-led leadership who have left them homeless and jobless without facing up to their faults. In turn, the expert class turned to Wokeism disowning all of working class as racists, and that’s how we arrived at today’s successor ideology with all its absurdities.

Last edited 1 month ago by Emre Emre
polidori redux
polidori redux
1 month ago

How, in the name of all that is holy, can economic and financial fundamentals be influenced by the babblings of half witted, semi-literate, Californian children on Twitter?

Emre S
Emre S
1 month ago
Reply to  polidori redux

I liken today’s events to the 2000 dotcom crash. Many companies there were the real deal (think Amazon & eBay), but priced too high too quickly. Internet recovered, and went on to dominate the way we live.
Crypto is the next evolution of that. The implications of distributed/trustless finance and programmable contracts are immense, and it’ll change the way we conduct business much like how internet changed personal lives.

Last edited 1 month ago by Emre Emre
J Bryant
J Bryant
1 month ago

The glimpse this article provides into the relationship between SBF (whatever else happens to him, at least he’s now known by an acronym on the world stage) and Musk is interesting. Otherwise this article shows yet another way in which loose monetary policy has shaped our financial system. The fact is loose monetary policy has shaped our entire society at this point. Breaking free of cheap money (assuming that’s what the financier class will permit) will be very painful.

Hugh Bryant
Hugh Bryant
1 month ago

Granted that central bankers – and money farmers in general – are mostly both venal and incompetent as well as parasitic, I’d venture to suggest that the Ftx collapse is more symptomatic of the wider educational and ethical decline of the United States, and particularly of the Democratic party.

Warren Trees
Warren Trees
1 month ago

“…now largely seen as the most probable trigger for the fall of the SBF empire.”
I would offer that the honest most likely reason for the collapse was that he was taking client’s money and gambling with it, which is illegal in the U.S. Anyone who “invests” in a company HQ’d in the Bahamas might be better off going to Las Vegas.

James Sullivan
James Sullivan
1 month ago

In other words: the Fed both created and then popped FTX and the crypto bubble. Sounds about right.

Ian Stewart
Ian Stewart
1 month ago

Gawd who cares – he said he said, and I’ve got written evidence, yah boo!

D Walsh
D Walsh
1 month ago

Bankman is an excellent name for a member of the Tribe

Hugh Bryant
Hugh Bryant
1 month ago
Reply to  D Walsh

Bankrun-Fraud?