by Peter Franklin
Monday, 14
November 2022
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13:30

The moral lesson from Sam Bankman-Fried’s downfall

The crypto meltdown shows us that we must be wary of unbridled altruism
by Peter Franklin

The fall of the FTX cryptocurrency exchange isn’t the only crypto-collapse of the last 12 months, but it could be prove to be the most significant. 

There’s much more than crypto’s tattered reputation at stake here. Despite his counter-cultural vibes, FTX founder Sam Bankman-Fried is (or was) a pillar of the establishment. His parents are Stanford law professors. He is also a leading political donor, funnelling tens of millions of dollars to the U.S. Democrats. And, perhaps most significantly, he’s a leading philanthropist who championed and bankrolled the effective altruism movement.

Effective altruists believe in doing good rationally. Instead of being guided by sentiment or tradition, their argument is that givers should use objective methods to maximise the amount of good that their money can do.

Bankman-Fried is the ultimate effective altruist: the 30-year-old crypto-billionaire who’s also a generous donor. One might regard all things crypto with suspicion or believe that billionaires shouldn’t exist — but just look at what he used his money for. In other words, it’s the consequences that matter.

To the cynics, the philanthropy is a smokescreen: a means of distracting our attention from what some people believe to be a scam. Leading proponents of effective altruism — such as William MacAskill, a professor of moral philosophy at the University of Oxford — have already expressed their horror at this possibility.

It should be said that, at this stage, we don’t know exactly what went wrong at FTX or the associated crypto trading outfit, Alameda Research. However, the smokescreen theory strikes me as over-simplistic.

It’s possible that Bankman-Fried was entirely sincere in his philosophical convictions. Indeed, the philosophy may have inspired his business strategy as opposed to merely providing PR. Consider his recent interview with Tyler Cowen, in which SBF agrees that he is a “fairly pure Benthamite utilitarian”. Cowen then goes on to ask him, “Should a Benthamite be risk-neutral with regard to social welfare?”, to which SBF replies “Yes, that I feel very strongly about.”

Risk neutrality is the idea that a 50% chance of winning two million pounds is worth just as much as a 100% chance of winning a million pounds. And, in terms of pure mathematics, that appears to be correct — especially when you’re a philanthropically-minded investor making multiple bets in the market place. Consistent with utilitarian principles, you can maximise the amount of money you can make (and therefore do good with) by taking risks that a more cautious individual would shy away from. 

But there are limits. There comes a point at which financial risks become so complex and intertwined that they move beyond the capacities of human beings, however competent, to manage them rationally. Which is why we must submit to time-honoured principles that keep us from running such risks in the first place.

For instance, as we learned during the banking crisis of 2008, high-risk investment operations should be firewalled from financial service providers that look after the money of ordinary savers. Indeed, many people would see such as a rule as something that should be adhered to because it is good in and of itself. 

Philosophically, this is the deontological position: the idea that certain actions are intrinsically right or wrong. For rationalists who balk at notions of transcendent good and evil, and utilitarians who only care about outcomes, this is anathema. And yet the fall of FTX and the wider crypto meltdown is a lesson that we must live within limits and accord them the highest respect. 

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Andrew Raiment
Andrew Raiment
19 days ago

The ideology would be a success if only reality didn’t keep on getting in the way.

Billy Bob
Billy Bob
18 days ago
Reply to  Andrew Raiment

Any ideology would be a success if only reality didn’t keep on getting in the way.

Frank McCusker
Frank McCusker
18 days ago
Reply to  Andrew Raiment

Exactly – just like Brexit.

Rocky Martiano
Rocky Martiano
18 days ago
Reply to  Frank McCusker

Is there any topic remoaners won’t bring back to Brexit. The weather maybe? No, I think it’s got distinctly worse since Brexit.

Last edited 18 days ago by Rocky Martiano
Warren Trees
Warren Trees
18 days ago
Reply to  Rocky Martiano

It’s almost like mentioning Trump as the cause of all problems.

Ian Stewart
Ian Stewart
18 days ago
Reply to  Rocky Martiano

I enjoy seeing the misery of the Remoaners announced time and again. Every time I get reminded of our wee revolution against the establishment I smile at the sheer bravery of our electorate.

Last edited 18 days ago by Ian Stewart
Billy Bob
Billy Bob
16 days ago
Reply to  Frank McCusker

Brexit wasn’t an ideology, it was a democratic vote to leave a supranational political bloc. The reasons for doing so vary from person to person, but ultimately a slim majority decided they’d rather be outside the EU than in

Gordon Hughes
Gordon Hughes
19 days ago

This articles seems to entirely misunderstand the issues that arose during the 2008 financial crises and which have affected FTX + associated companies.
There were no great questions of political philosophy – including utilitarian risk neutrality – at stake in 2008. It was a simple question: did anyone – and especially those constructing or investing in complex financial products – understand the risk distributions involved? The equally simple answer was that they did not. As many have pointed out, the risk modelling was utterly fake and took no account of inter-dependencies and limits on market liquidity. This is an old error that is repeated frequently by naive bankers and investors who believe the mantra that “this time things are different”. If you get the risk distributions wrong all of the stuff about utilitarian ethics is just nonsense.
As for FTX, this was nothing more than an old-fashioned bank run. It should have been utterly obvious to anyone not blinded by crypto-nonsense that many, perhaps all, crypto institutions are extremely vulnerable to loss of confidence. Nothing new nor anything to do with ethics – simply practical lessons from experience.

Positive Trends
Positive Trends
19 days ago
Reply to  Gordon Hughes

oddly, if one listens to his testimony before congress bankman-fried new this better than many. in fact your primary question “did anyone one understand…risk distribution” – is a perfect paraphrase for his testimony of what lessons must be learnt from 2008. clearly he knew. this seems another illustration that the human mind can rationalize practically anything in pursuit of its own goals. even when that said pursuit crosses the line of ones own theoretical principals

Warren Trees
Warren Trees
18 days ago
Reply to  Gordon Hughes

It also helps the “risk takers” if they are backstopped by the taxpayers. “Too big to fail”.

chris Barton
chris Barton
19 days ago

One Biden/Zelensky money laundering front falls another will take its place.

Peter Johnson
Peter Johnson
19 days ago

I lean libertarian – but the lesson here appears to be that absent enforceable legal regulation someone is always going to steal your money – or at the very least use it in ways that puts your money at risk for their benefit. They do that when regulated too – but not quite so spectacularly as these crypto schemes.

Jake Dee
Jake Dee
18 days ago

Philanthropy is a machine designed to turn money into power. Donations to political parties can also reasonably be seen as a shake-down. The rich buy access to politicians, but politicians also demand money for access, all nicely laundered through philanthropic charities and NGOs

Warren Trees
Warren Trees
18 days ago
Reply to  Jake Dee

Precisely. It has become a major industry in and of itself.

Hardee Hodges
Hardee Hodges
18 days ago
Reply to  Jake Dee

The real new word is Philanthropath.

Rocky Martiano
Rocky Martiano
18 days ago

It appears he lent 70% of his clients’ money deposited with FTX to his sister outfit, Alameda. That is probably illegal without a banking license. Effective altruism……my a**e.

Warren Trees
Warren Trees
18 days ago

Any business entity that is worth $32 billion one day and zero the next was not a business entity in the first place, in my opinion.

Samuel Ross
Samuel Ross
18 days ago

A crooked thief of a billionaire who paid off the Dems to look the other way.

Hardee Hodges
Hardee Hodges
18 days ago

Sam Bankman-Fried per his Wiki page came into his money via Alameda bets that paid off in a huge gain over a very short period. He asserts being altruistic but that seems to align with huge donations to politics, not people. He seems a figurehead for some sort of money washing business. Clearly financial engineering has pays well compared to other forms of engineering. The run on the bank shows there was never a bank to begin with. Investors were simply funding a political party in a tax efficient way. .

Ethniciodo Rodenydo
Ethniciodo Rodenydo
18 days ago

He was just another grifter with a new line of spin

Alan B
Alan B
18 days ago

We seem (still) to live in a time when those who would have been holy fools in another era instead talk themselves into “pure Benthamite utilitarianism”. Also, I don’t think its quite right to defend a deontological position with what amounts to a consequentialist argument; rather, the word (and virtue) we’re looking for here is “prudence”.

John 0
John 0
17 days ago

It is the finance frat running a scam. Jeffrey Epstein also donated to politicians, and it protected him for a while.