The author of the Flash Boys won`t write about the FTX debacle
You don`t need me to point out that we are fascinated by businesses that have scaled exponentially and we worship white men that take risks (especially, when they are younger than 50ish).
I am referring to exponential scale by metrics like monthly active users or geographic expansion or revenue growth, or the time it took to become a unicorn. Binance has been a business admired because it became a profitable unicorn in just 6 months since it launched, beating all tech companies (across all sectors — CB Insights).
You don’t need me to remind you that Binance and FTX were centralized crypto exchanges that were unregulated at launch and chose to acquire regulatory approvals on the way and at their pace.
The FTX blowup, although extremely painful and unfortunately predictable, will not merit a book written by some Michael Lewis, like the blowup of Long Term Capital did. Why? Because it is déjà vu fraud and ironically banal, unlike the Luna/Terra blowup which involved an innovation (algorithmic stablecoin architecture). Micheal Lewis has written about market manipulation by Wall Street wolves and others have written about over-leverage (best read is `When Genius Failed: The Rise and Fall of Long-Term Capital Management, by Roger Lowenstein), so there is nothing novel about the FTX blowup for Wall Street Wolves.
Just a centralized traditional business for buying and selling cryptocurrencies (instead of stocks or money market funds). No different than a centralized business to buy and sell stocks but with none of the governance basic processes in place. Customer funds were not in segregated accounts. They were commingled with business accounts and as we found out after the fact, there are 134 FTX business entities globally; so, go figure out what was happening behind the scenes.
Is commingling illegal or bad? Not necessarily. When you invest in an ETF your money is commingled in that investment vehicle, but it is clear, the industry has been educating the world about the inherent risks, and there are established governance procedures in place.
Back in 2016, I wrote on Daily Fintech about the 4 different types of liquidity risks inherent in ETFs as they were/are the bread and butter of Robo-advisors (See `Are ETFs, trackers that Fintechs can turn into trucks without brakes`?)
An astute reader will note that cryptocurrencies (especially the large cap ones) are liquid, so this is not a relevant analogy. What is relevant is that centralized exchanges and brokers of most traditional assets are regulated (without that guaranteeing solvency) in terms of their behind-the-scenes processes.
Traditional exchanges run order books (unlike most Defi exchanges) which are subject to rules that prevent manipulation, layering, spoofing etc.
FTX was manipulating its order book and we will only find out in the upcoming web of litigations, the exact nature of the manipulations. The commingling of customer funds is despicable and a violation of the ethos of Bitcoin and Satoshi`s gift to the world.
This brings me to my last point: We are all humans and we worship people that tell stories well and are successful. Our affinity for storytelling is timeless as Yuval Harari reminds us. What success looks like however, has varied over time.
We are right now at an inflection point that is screaming for Social Innovation enabled by all these advanced technologies that have the potential to be used for collaborative social innovation. Of course, it is our choice and responsibility at the end of the day. Blockchain and the peer-to-peer exchange gift from Satoshi are collaborative in its nature.
SBF did not use ANY smart contracts in his business. SBF did not disintermediate any old processes. SBF did not TRUST in mathematics or any God`s protocol.
SBF has no idea that financial services are about RISK MANAGEMENT. SBF was young and naturally a risk taker but consciously chose to have no Governance mechanisms in place. Why that was not a red flag to any of the Big name VCs that invested in FTX and the jurisdiction in the Bahamas, remains unanswered.
He was smart enough to implement software that allowed him to move customer funds to the entities that he chose, secretly. I wonder how MIT, his professors, and his parents who are both compliance lawyers, feel about all this smartness.
I also wonder why nobody is pointing fingers to the Bahamas regulatory jurisdiction where FTX filed bankruptcy.
Time to reflect on this despicable incident which is nothing and nothing less than the immoral yuppie stereotype we hoped to get rid of. Stay with me for a very short story.
Depicting visually Bitcoins as Gold coins with B on them turns out to be a dangerous skeuomorphism, that we have all become accustomed to.
Have you heard of skeuomorphism?
I hadn’t, even though it is a magic Greek word until Patrick Connell mentioned it in one of the many conversations on Linkedin about SBF.
The etymology is Skeuos from Ancient Greek σκεῦος (skeûos, “implement, tool, vessel”) + μορφή (morphḗ, “form”), modeled after zoomorph (“resembling an animal”) and phyllomorph (“resembling a plant”). Source
Apparently, it is used in often in software design. A “Skeuomorphic design” is when the shadow of existing legacy design is overlayed onto brand-new technology unintentionally replicating the past.
Andreas Antonopoulos highlights  the danger of the Bitcoin skeuomorphism mentioned above. It can lead to people collecting coins as an investment, golden coins with a B engraved, and feeling that they are part of the disruption of Digital money and the future of Money.
A young MIT white man launches an exponentially successful Exchange business that is focused on trading the NEW Thingy (the pile of gold coins with B engraved).
Beware of this skeuomorphism.
Is it a familiar business — i.e. just another exchange?
Is it a new business — radically different in any way but yet with the familiar safeguards that we have become accustomed to when we hear EXCHANGE?
The irony of the FTX debacle is that it will educate more people about what DeFi is really all about, behind the scenes (forget user experience). It ironically, alerts the world that what goes on behind the scenes in finance matters more than the front end.
This debacle will shift the attention of a more mature Fintech sector (obsessed with UX and CX) to the importance of risk management, self-custody, and governance. G for governance gets some stage time, finally.
For anyone who doesn’t know who Michael Lewis:
Michael Lewis is a well-known journalist and the author of several New York Times bestselling books, with a couple of them focused on Wall Street debacles and culture. He worked at Salomon Brothers as a salesman and has shared his insights about the culture on Wall Street in the 80s and 90s in some of his books — e.g. Flash Boys, The Big Short, The Money Culture. I started my career at Salomon Brothers in 1993 (he had just left) but before joining I read about the culture in Liar`s Poker, which was considered the Bible for anyone in the trading business on Wall Street at the time.
Just before publishing my post, I found out that Michael Lewis has actually been following SBF for the past six months and has a book planned with the title The Ankler on SBF. Apparently, M. Lewis has not written a line yet and of course, now any planned fiction plot will have to be revised. Source
The Ankler — the product of a thread on the web game PonyIsland in which Anklers are (apparently) described as both a small and adorable, yet vicious domestic animal, and the reason for everything good in the world in the history of time.
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