On Thursday, a federal judge sentenced former FTX CEO Sam Bankman-Fried to 25 years in prison after pleading guilty to seven counts of wire fraud and money laundering.
The scam he ran was pretty simple: He and his partners set up an exchange, FTX, that took customer deposits to invest and trade cryptocurrencies. Some of these deposits were secretly channeled to his other company, the hedge fund Alameda Research, which he had originally set up to regulate the differences between the prices of cryptocurrencies in different countries. According to the government’s case, which it won, Alameda used that money various things he should not have, such as investing in other crypto startups, buying some really good real estate, supporting political campaigns, and – most importantly for the purposes of the scam – supporting FTX’s proprietary crypto code, FTT.
Some document leaks and some clever work by journalists at Coindesk, combined with a timely tweet by Changpeng “CZ” Zhao, who ran rival crypto exchange Binance, sparked a run on FTX. The scheme fell apart in a matter of days, wiping out billions of customer money (although, apparently, they might get a fair share of that money back). CZ himself no longer runs Binance, having pleaded guilty in money laundering violations related to inadequate controls.
The sentencing brings to an end the most recent era of crypto, which was characterized by more foolish get-rich-quick schemes on the street — investors lured in with promises of impossibly high returns on everything from digitally watermarked images to simple interest payments on the weekly mark — and fraud investigations and accusations on the way down.
Crypto optimists such as Chris Dixon of Andreessen-Horowitz suggest that we are now entering a more sober phase of crypto, where software developers will eventually build useful applications on one of the many blockchains that have emerged from the original blockchain – what lies beneath bitcoin – proposed for the first time by the pseudonym Satoshi Nakamoto and distributed on Halloween 2008.
The problem with this view is that developers have built a wide variety of applications on top of Ethereum and Solana and other Layer-1 blockchains for years, and the only economically viable purpose any of them have served is speculation. Yes, it is possible to create a digitally certified work of art, but the value of that art is not in the aesthetic pleasure it brings, but rather in the possibility that someone else will buy it for more money later.
Almost everything else that is built or enabled by blockchains replaces something that is already being done quite well. Self-executing smart contracts replace — you know, regular contracts. Which aren’t perfect, but aren’t so ridiculously inefficient that they grind the economy to a halt. Decentralized Autonomous Organizations, or DAOs, where decision-making is shared equally among all participants, replace other decentralized organizational schemes characterized by hours of deliberation and few specific decisions, such as totalitarianism the Meetings of the San Francisco Board of Supervisors. Jokes aside, where is the clear killer application for blockchains? Where is the runaway success story?
Forget runaway success: There hasn’t been a single blockchain-based startup with enough cash flow or profitability to go public. Yes, there are bitcoin mining companies like Agitation. Yes, there are companies that facilitate crypto transactions like Coinbase and block (former Square). But there is no real company that has developed economic value by doing something brand new or better on a blockchain.
I’m open to persuasion — put me, blockchain geniuses, with incredible value-creating startups! — but my view right now is that crypto will return to Bitcoin’s original function as an alternative to nation-based currencies for storing and exchanging value. Its volatility may not make sense to people living in relatively stable economies, but in countries with exploding inflation, corrupt governance, civil unrest or war, the method of converting the collapsing local currency into bitcoins into stablecoins into a stable national currency such as the US dollar will remain a reasonable and demanding way for people of some means to maintain those means. It’s also useful for sending remittances without having to pay exorbitant international exchange fees and — sometimes — as a digital replacement for suitcases of cash for all kinds of underground financial activity.
Why bitcoin instead of one of the newer currencies? Because these other currencies are almost universally based on loyalty, trust and pixie dust. the main value they have is the value attributed to them by the people who own and trade in them. You can make a college sophomore argument that all money is like that, man, but in reality the US dollar is backed by the enormous economic and military power of the United States: real control over real resources that people really want and need. people.
Bitcoin is similarly backed by something real and tangible: energy. Because of the proof-of-work model, the only way to create and validate new bitcoins is by consuming energy, either by burning natural gas or connecting to a nearby nuclear power plant. Energy drives the real world economy, and unless Sam Altman or someone successfully unlocks fusion and delivers energy that is truly “very cheap to measure,” is going to remain a real asset with real value for some time. If the demand for bitcoin stabilizes, the price should theoretically follow the price of electricity. In fact, it wouldn’t surprise me at all if Satoshi had some sort of connection to the energy industry.
