Three books explore the failures of regulators—and sometimes journalists.
By David Gerard, the author of the book Attack of the 50 Foot Blockchain and the cryptocurrency and blockchain news blog of the same name.
Foreign Policy Illustration
- Economics
- United States
The cryptocurrency bubble of 2021 and 2022 made fortunes for a few and lost fortunes for many. Crypto exchanges advertised at the Super Bowl. Murky shadow banks backed all manner of dubious enterprises. The gospel of the blockchain was promoted around the world on the basis of a number going up. 2023 produced numerous books that follow such phenomena.
The cryptocurrency bubble of 2021 and 2022 made fortunes for a few and lost fortunes for many. Crypto exchanges advertised at the Super Bowl. Murky shadow banks backed all manner of dubious enterprises. The gospel of the blockchain was promoted around the world on the basis of a number going up. 2023 produced numerous books that follow such phenomena.
The most famous of the fraudsters—though far from the only one—was Sam Bankman-Fried of crypto exchange FTX.
There seemed an obvious candidate to provide the definitive story of the crypto bubble. Michael Lewis, renowned author of The Big Short, was in the right place at the right time. He embedded himself with Bankman-Fried and FTX in April 2022—just before the bubble popped, as all bubbles must. When FTX collapsed in November 2022, the financial world was delighted to hear that Lewis was on the case and eagerly awaited his dissection of crypto. But with Going Infinite: The Rise and Fall of a New Tycoon, Lewis has fallen in love with his subject.
Lewis seems to have decided early on that this would be the story of a radical financial genius—and he refused to pivot when events told a different tale. He meets Bankman-Fried for the first time and falls for him utterly. He tells a friend who was thinking of investing in FTX: “Go for it! Swap shares with Sam Bankman-Fried! Do whatever he wants to do! What could possibly go wrong?”
It shouldn’t have been at all hard to see that something was not quite right with Bankman-Fried and FTX. In one jaw-dropping example, on an April 2022 podcast with Bloomberg’s Matt Levine, Bankman-Fried inadvertently let slip the business plan for Web3 “yield farming”: create a box of crypto tokens that have no intrinsic value and sell shares in the box based on assigning it a spurious value in dollars. Levine was shocked: “You’re just like, well, I’m in the Ponzi business and it’s pretty good.”
The glaring failure of Lewis, of all people, to spot a fraudster is baffling. As he should know, con men are charming by default—and yet he comes to the conclusion that this guy couldn’t possibly have stolen everyone’s money; there must be some mistake. Lewis paints crypto as hilariously inept and corrupt nonsense that makes everything around it just as inept and corrupt—but somehow our boy Sam remains innocent.
The outline of the real story is visible beneath Lewis’s apologia. Bankman-Fried grew up as a math camp kid, studied physics at MIT, and was a trader at Jane Street Capital. There, he got into the “effective altruism” quantified charity subculture. Bankman-Fried and Tara Mac Aulay, whom he met through the Centre for Effective Altruism, started crypto hedge fund Alameda Research in 2017 and staffed it with their fellow effective altruists (EAs) with no trading experience.
The firm lost a fortune immediately. Bankman-Fried lost track of where Alameda’s assets got to. Almost all the staff left—except the core crew of Caroline Ellison, Gary Wang, and Nishad Singh, who would stay with Bankman-Fried through the founding of FTX in 2019 until its end in 2022.
FTX founder Sam Bankman-Fried arrives at a Manhattan federal court for an appearance in New York City on March 30, 2023. Santiago/Getty Images
Lewis describes Bankman-Fried’s crimes in euphemisms: “speculators who for various reasons wished to avoid revealing their hand on public exchanges … customers not wanting anyone to know who they were.” In other words, they were laundering money, as Bankman-Fried was later convicted of. Alameda subsidiary Genesis Block even offered over-the-counter crypto services in Hong Kong for bags of cash.
Lewis is appropriately cynical about effective altruism and the degree to which it’s an excuse for bad behavior because you have money. But he keeps describing the billions of dollars Bankman-Fried talks of donating as “Sam’s money.” Months before Going Infinite was published, we had the guilty pleas from the rest of the FTX executive team that it was the customers’ money, not Sam’s—and Bankman-Fried was duly convicted of stealing it.
FTX/Alameda had its own made-up crypto token, FTT, which it issued in 2019 to fund FTX. Lewis takes Bankman-Fried’s word for it that holding large piles of FTT in Alameda’s reserves was clearly a reasonable idea—and not the precise decision that ended up killing FTX.
On Nov. 2, 2022, Ian Allison at CoinDesk published an article about the Alameda balance sheet showing that a substantial fraction of its reserves was more FTT than the market could ever absorb, marked to market as dollars. The market realized this was nonsense pseudo-accounting and took out funds as fast as possible while there were any left. Lewis repeats the FTX response to the Allison document as “of no more than prurient interest”—even as it was the bombshell that took down FTX. But even an access journalist can’t help but show how naked the crypto industry is.
There’s a pattern in Going Infinite: Bankman-Fried lies, betrays people, or causes a disaster; everyone around Bankman-Fried—including Lewis himself!—calls Sam a liar who can’t be trusted; Lewis laughs it off as boys being boys. Bankman-Fried is now in a cell; everyone but Lewis saw it coming.
Others were more appropriately cynical about FTX and cryptocurrency. Crypto coverage in the media had been generally positive until the Terra Luna crash in May 2022 marked the end of the bubble, then immediately flipped negative.
But many journalists were onto the correct story early. Bloomberg reporter Zeke Faux’s Number Go Up: Inside Crypto’s Wild Rise and Staggering Fall is written in the understated manner of finance reporting, but the anger shines through. Finance press headlines are about numbers going up—but Faux hammers home the human cost of failing to interrogate a fraud.
What is a bitcoin? It’s an entry on a shared ledger that no one person has legal responsibility for. Faux explains why a bitcoin is, as well as the sort of person who wants to move money out of the sight of governments: some sincere libertarians, but overwhelmingly crooks. The use case for cryptocurrency is to evade regulation.
The most benign use case for crypto in the 2021 bubble was for venture capitalists and hedge funds to pick the pockets of retail investors, preying on their hopes and desperation. The other use cases were much worse: “By the end, I’d find myself in Cambodia, investigating how crypto fueled a vast human-trafficking scheme run by Chinese gangsters.”
Number Go Up documents the crypto bubble—“the greatest financial mania the world has ever seen”—through the lens of Tether Limited Inc., issuers of the dubiously dollar-backed “stablecoin” of the same name.
In May 2021, Bloomberg asked Faux to look into Tether—an allegedly $55 billion fund with 13employees total and effectively no regulation. Tether is functionally the central shadow bank of crypto, its fingers in every pie. Faux gets out on the road and lets the perpetrators of crypto’s various con games damn themselves out of their own mouths.
The real draw of tethers was that they were the chips in the crypto casino. If you wanted to do big trades without all the tedious regulatory oversight involved in moving hundreds of millions of actual dollars between sketchy offshore gambling dens, you used tethers: “Once the currency was out in the world, it could be transferred anonymously, just by sending a code.” Drug dealers, human traffickers, and sanctioned countries found tethers enormously useful.
A woman makes a purchase in a store that accepts bitcoins in El Zonte, El Salvador, on Sept. 4, 2021. Marvin Recinos/AFP via Getty Images
El Salvador’s bitcoin fiasco was announced at Bitcoin Miami 2021 by President Nayib Bukele. Tether was deeply involved in this as well, and even wrote enabling laws for the government to invest public money into crypto. Faux visited the site of Bukele’s planned libertarian charter city, Bitcoin City. Legal tender or not, he could hardly find a store in El Salvador that accepted bitcoin.
Faux covers other parts of the 2021 bubble: the Axie Infinity “play-to-earn” scheme, where he tracked down Arthur Lapina, the man who first popularized Axie Infinity in the Philippines and is now broke; and the Bored Ape Yacht Club NFT collection, promoted by celebrities like Jimmy Fallon.
Faux hammers home that the blockchain is not magical; cryptocurrency is just a new platform for well-understood scams. Number Go Up starts and finishes in cynicism of crypto because it’s the obviously correct position, and the rest is the excuses of con men. Some things really are just as dumb as they look.
But what about the technology? That turns out not to be so great, either. Peter Howson teaches international development at Northumbria University. Howson first encountered blockchain in a carbon-offset scheme. He was caught up in enthusiasm for the potential the promoters’ promises offered for blockchain. He even designed a crypto called CoastCoin to reward scientists.
But the deeper he looked, the less there was to it: “[W]hen we are convinced something’s revolutionary, but we don’t understand it fully, we often opt for the safe repetition of soundbites and plausible narratives.”
Howson’s Let Them Eat Crypto: The Blockchain Scam That’s Ruining the World surveys the geopolitics of cryptocurrency and blockchain: “what cryptocurrencies and blockchain experiments do to people and places.” Howson strikes not just at cryptocurrency but at the frauds who promote blockchain technology as a solution to any social problem.
Crypto went down in 2022 from the “sheer weight of fraud.” But it had gone down the same way in 2018 and in 2014. Blockchain for the enterprise, supposedly divorced from bitcoin’s scams, was first promoted by bitcoin fans from J.P. Morgan’s internal blockchain interest group in late 2014.
Bitcoin originated in extreme right-wing libertarianism and anarcho-capitalism. Howson documents the bizarre offshoot of enterprise blockchain that promised that this libertarian project could further social causes.
Blockchain was never about the technology. In fact, the technologists were often the loudest voices calling it out as snake oil. The ones fascinated were those who didn’t understand the tech but were drawn in by promises that technology could bring you magic. Finance only cared about a number going up; social causes heard the promise of organizational efficiency for free. But anyone who sells you magic is out to pick your pocket while you’re watching the show.
Kyle Powers and Chris Yim of Liberty Teller install a bitcoin ATM at South Station in Boston on Feb. 20, 2014.Darren McCollester/Getty Images
One of the greatest promoters of blockchain for social good was the MIT Digital Currency Initiative (DCI)—which also just happened to fund bitcoin developers. The DCI and its fellow blockchain promoters attacked on various lines: predation on vulnerable communities around the world; greenwashing energy-wasting cryptocurrency mining; positing themselves as rescuing a populace from weak government so they could move in and colonize. El Salvador is the most famous example, but crypto promoters also hit Palau, Papua New Guinea, and the Central African Republic (CAR). Russia allegedly tried to launder money via crypto in the CAR.
Christian missionaries in South and Central America pivoted effortlessly from the Bible to promoting cryptocurrency in the manner of an affinity fraud. They would promise economic liberation via their altcoin, or that they would “bank the unbanked” without any coherent plan.
Crypto exchanges recruited the poor as “ambassadors,” paid on commission for signups. Schemes targeted the young and naive—“in my own classes,” Howson writes, “I hear stories almost weekly from students about their failed crypto investment strategies, sometimes involving their entire student loan instalments.”
Bitcoiners’ fellow libertarians were also targets, sold on schemes to establish a sovereign city for bitcoiners, whether or not the promoters had secured the legal rights: Blockchain City in Nevada, Satoshi Island in Vanuatu, Cryptoland in Fiji, the Crypto-Kingdom of Bitcointopia in Utah. The MS Satoshi promised to do the same as a “seastead,” a floating offshore jurisdiction—now back to running as a working cruise ship, the MS Ambience.
The word “decentralization” does not mean operational decentralization: It means a legal firewall to protect the operators. The plan is always to “consolidate power rather than redistribute it.”
When blockchain promoters offer your government an exciting and radical scheme, Howson reminds you to pay attention to the man behind the curtain. Faux paints a damning close-up picture of those men behind the curtain. Lewis tries and fails to paint them as the good guys, in the face of all evidence. Regulators failed the public in not reining in crypto after the 2017 bitcoin bubble; they must not miss their chance a second time.
David Gerard is the author of the book Attack of the 50 Foot Blockchain and the cryptocurrency and blockchain news blog of the same name. His new book is Libra Shrugged: How Facebook Tried to Take Over the Money.
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