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A cartoon drawing of a large figure sitting proudly on top of several people, who are struggling to hold the weight. The scene looks like a king on a throne with two bitcoins in place of arm rests. Cristina Spanò for Vox

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Crypto: New. Fraud: Old.

When you democratize finance, you get the good and the bad.

Emily Stewart covers business and economics for Vox and writes the newsletter The Big Squeeze, examining the ways ordinary people are being squeezed under capitalism. Before joining Vox, she worked for TheStreet.

Part of the issue Everything old is new again from The Highlight, Vox’s home for ambitious stories that explain our world.

FTX was too big to fail, or at least that’s what Dario believed. So he didn’t think about it too hard when he parked $28,000 — about 85 percent of his savings — on the ill-fated crypto platform. Apart from a couple thousand dollars in cryptocurrencies, most of his money was in US dollars, on which he earned a solid interest rate without having to do anything at all. Plus, athletes like Tom Brady and Steph Curry were endorsing FTX, and the company had even slapped its name onto the Miami Heat’s arena. “I’m a follower of the NBA, so I don’t know, it seemed like it was a safe and well-functioning company,” Dario, who lives in Berlin, says. “It didn’t cross my mind that they could go bankrupt.” But, of course, they did.

Dario first got into crypto sometime in early 2018, when he went to a crypto conference and was “intrigued” by the relatively new technology’s potential. He played around with investing for a bit, joining a small group of investors, but fell off until Covid hit in 2020. “My interest came back, basically,” he says, in part at the urging of a colleague who was an FTX ambassador — a colleague who’s now very sorry. “He was quite stressed about the entire thing.”

Now, Dario, who asked for his last name to be withheld in order to protect his privacy, is out of luck. His money went up in smoke last fall after the exchange imploded. “I was in disbelief, I was shocked, I was frustrated, I was angry,” he says of his reaction at the time. Very few people in his life are aware of what happened. He’s filed a claim with a firm handling FTX’s restructuring, but other than that, he says, “I just try to keep busy with other things and not think about it too much, because I can’t change it at this time.” He’s not really sure if he’ll ever see much of his money again.

Dario isn’t alone: Hundreds of thousands of FTX customers are in the same boat. And it’s not just FTX. Countless other investors, for a variety of reasons, have also found themselves holding the short end of the stick in this latest crypto boom-and-bust cycle that’s seen values plummet (though there’s since been some rebound) and multiple companies implode. To those observing from afar, what’s happened seems new and surprising.

FTX, which was once valued at $32 billion, has been the biggest catastrophe. It declared bankruptcy last November after a series of red flags about the company led its customers to try to pull their money out en masse, only to reveal that much of that money was no longer there. FTX had seriously mishandled people’s funds and, in short, gambled a lot of that money away through an associated hedge fund, Alameda. Now its founder, 31-year-old Sam Bankman-Fried, once crypto’s golden boy, faces a series of criminal charges, including securities fraud, wire fraud, money laundering, and campaign finance violations, and is under house arrest. Multiple former FTX and Alameda leaders have pleaded guilty to criminal charges related to the collapse. New leadership at FTX is trying to figure out where all the money went and get as much of it back as possible, but what that will mean for its creditors, of which there are believed to be over a million, is unclear.

FTX and Bankman-Fried, known as SBF, were supposed to be different, new. FTX positioned itself as the responsible player in the Wild West that is crypto, and SBF cast himself as a do-gooder wunderkind in both finance and philanthropy. But at the end of the day, very little about FTX or SBF appears to have been novel at all. What happened seems like a relatively basic — albeit large-scale — case of fraud.

“They allegedly took money out of FTX, investors’ money, and sent it to Alameda without making disclosures as to what was happening with their investment. That is not uncommon, that happens in a lot of cases where investors invest their money and are not given information as to what happened to the money,” said Ike Sorkin, a white-collar criminal defense attorney and lead lawyer for Bernie Madoff. “It doesn’t matter what the scheme is.”

The same could be said of a lot of the crypto space. Not that it’s fraud, per se — though let’s be honest here, some of it is — but that it’s not especially, well, special.

Crypto’s utopic vision can be an attractive one: a completely decentralized, egalitarian, anonymous ecosystem. It’s intended to be trustless, meaning that it runs without relying on the government or banks or any third party. It’s also, at least for now, not entirely a reality.

Cryptocurrencies are digital assets, such as bitcoin and ethereum, that run on decentralized networks that aren’t overseen by any one central authority. Transactions are recorded on the blockchain, an append-only ledger, where new information can only be added, never deleted or edited. There are thousands of cryptocurrencies now, the first being bitcoin, which has been around since 2009. Because crypto is so young, it’s not entirely clear yet what it’s for, or what it can or will really do. Its best application to date is probably instantaneous cross-border transactions or allowing people who live in places where they don’t trust the financial system to try to hold their money elsewhere.

In these senses, crypto is new. But in many of the ways that matter, it’s not — indeed, some of the newness of crypto merely papers over problems that are very old. It replicates many of the ugliest parts of our financial system, offering up unfettered capitalism without even the basic protections provided by that current flawed system. Crypto is sometimes just old-fashioned capitalism grafted onto technology.

There are countless examples of fraud and scams across the space, of Ponzi schemes and so-called “rug pulls,” where the founders of a project take investors’ money and disappear. Speculation runs rampant, and some coins and companies have seen spectacular collapses. Despite its promise to democratize finance and decentralize money, the sector tends toward concentration and inequality. The fresh financial paradigm crypto claims to offer remains very much grounded in the problems of reality. If a project doesn’t work or turns out to be a ripoff, values plummet, and in some cases, people’s money goes poof! and disappears.

“The thing about finance is that there are some parts of its nature that are unchanging, including its inherent fragility, its continuous search for new hunting grounds, new sources of returns, and innovation,” said Ramaa Vasudevan, an economist at Colorado State University who has critiqued the crypto space. “Finance doesn’t like to be bound; it finds ways of escaping. And crypto was a way of escaping — but as we can see, the real world has ultimate control.”

Whatever its form, capitalism hinges on winners and losers.

Dario has twice found himself on the losing end in crypto — prior to FTX, he fell victim to a more run-of-the-mill scam. Someone posing as ethereum founder Vitalik Buterin on Instagram was offering to help people affected by Covid-19 who had lost their jobs, and Dario, who had been laid off during the pandemic, reached out. “I sent 8 ethereum to their address thinking that they’d pay me back double or something, because he was a generous person,” he says. It amounted to about $2,000 at the time. “I kind of thought maybe he’s really genuinely doing it, but obviously it wasn’t him. It was silly.”

Whenever there’s a new scam, crime, or scheme uncovered in crypto, people in the space will say that it’s no different from what happens in the broader financial system. Which is ... true.

“Corruption, embezzlement, fraud, these are all characteristics which exist everywhere. It is regrettably the way human nature functions, whether we like it or not,” former Federal Reserve chair Alan Greenspan said in a 2007 radio appearance. “What successful economies do is keep it to a minimum.” In the burgeoning crypto economy — not yet so successful — schemes and scams are rampant.

Throughout history, the basic structure of financial tomfoolery fits into well-worn patterns, even if the details are often spruced up to look novel. “The psychological dynamics, the nature of the pitches, the reason that people respond, there’s a lot of continuity,” said Edward Balleisen, a history professor at Duke University and the author of Fraud: An American History From Barnum to Madoff. Innovations and new financial instruments and business ventures bring with them new opportunities for bad actors to try to take advantage, and people fall for them, especially if it seems as though others have already struck it rich.

In his book, Balleisen explores how behavioral psychology and people’s biases explain how they make non-rational economic decisions and ultimately fall prey to traps. They’re drawn in by “social proof,” meaning that once enough people hop into a scheme, it makes it more attractive for others to follow suit. They assess economic merits by placing extra weight on memorable events, like companies whose fast growth brought about riches for people who got in early. They’re also averse to loss and view loss as running the risk of missing out.

These were factors for Dario, who learned about FTX from a coworker, believed celebrity endorsers, and worried about the consequences if he didn’t get in. “I felt as though if I didn’t do it, I would miss out on an opportunity, so I didn’t want to be left out,” he said. “I didn’t want to be the silly one who was not able to keep up with today’s methods of making money.”

Balleisen said he realized crypto was probably nearing its peak and would crash around the 2022 Super Bowl, during which crypto ads were everywhere. It had all the classic markings of that being the case. “As soon as I saw all of those ads with all of those celebrities making the case that you don’t actually really have to understand everything, you just have to recognize the world is going to be transformed. You can either get on the gravy train or lose out,” he said.

The pitches evoked a democratic promise that anyone can get involved — you don’t need ingenuity, just guts — and the potential was reinforced by famous spokespeople. It’s reminiscent of companies in the late 19th century that were pushing speculative life insurance vehicles or other kinds of newfangled investment schemes by enlisting former Civil War generals and ex-governors in hopes of gaining credibility, Balleisen noted. “Nothing new about that at all,” he said.

The same goes for the pitch that crypto is a way to buck Wall Street, banks, and other traditional institutions, an opportunity for the little guy to get a return, away from the clutches of the Powers That Be that hold them down. Entrepreneurs looking to cash in on the oil boom in the early 20th century used Standard Oil as their foil. “Whenever something goes wrong, it’s because the powers are crushing competition,” Balleisen said. Sometimes that’s true — there’s no denying big companies try to keep out potential rivals — but it’s also a useful tactic to wind people up.

Despite his double losses, Dario still buys into the argument that crypto is a viable avenue for investing outside of mainstream finance, even though plenty of powerful players in more traditional circles are indeed in the mix (and may very well be making money off of people like him). “Crypto to me is a bit of a rebellious thing, I guess,” he said.

He pointed out that runs can happen to banks, too; some high-profile ones just happened in the US. That’s true, I conceded, but if his money had been in a traditional bank in the US or Europe, it would have been protected by deposit insurance, and he would have it right now. “Could be,” he responded.

The idea of alternative currencies is not particularly novel, either. For example, banks in the US issued their own currencies before the Civil War, and if those banks went under, the currencies became worthless. In England, centuries prior, merchants issued tokens to try to make doing business easier. In times of crisis, alternative tokens have popped up throughout history. Dario still finds this alternative-to-the-system appeal of crypto compelling. “I still believe in the concept of cryptocurrencies and what they stand for,” he says, “At least what they claim they stand for, because you never really know, to be honest.”

Finance tends toward centralization and concentration, and crypto is no exception. Many consumers and investors like having a central place to go, and profit motive means there’s an incentive toward land grabs. Money is, in many ways, based on trust. People believe the dollar and euro are worth something, so they are. They’re confident the bank they’ve put their cash into will have it for them when they need it back. Crypto’s promise is that you can’t trust fiat currency or banks — and in many parts of the world, that is the case. But you can’t trust crypto either.

It’s not clear the alternative the industry offers is really significantly better or different. It’s also not clear whether this completely trustless, lawless system is one everyone wants, including consumers playing in the space, at least when it comes to their own money. The idea of existing completely out of the realm of traditional institutions sounds nice until your crypto wallet gets hacked or that coin you’ve been betting on goes to zero and you realize there’s nowhere to turn.

Pat Rabbitte, a content writer in the crypto space based in Panama, had about 8 percent of his portfolio funds in FTX when it collapsed. He’s well aware of the “not your keys, not your coins” line in crypto, which basically means in order for your money to be safe, you have to store it off an exchange and by yourself. He also knows that completely decentralized exchanges are generally the better way to trade. He just thinks in their current state, that’s not super practical for many investors. “People say, ‘You’re an idiot to use a centralized exchange because of the risk,’ but there’s a risk with self-custody and it doesn’t get reported. Nobody’s going to put their hand up and say, ‘I lost all my assets because I lost my private key,’ and you can be sure that’s happening.”

Rabbitte was aware of the potential pitfalls of placing his trust in a centralized exchange. He was skeptical of Binance, the FTX competitor that partly helped orchestrate its collapse. He has an account there, too, and has always been wary of storing any of his money on it. “The irony is whenever I traded on Binance, I would have done it in a matter of minutes and taken my funds out,” he said. FTX and SBF checked all the boxes for him and looked to be the “most compliant exchange” there is. “I would never have envisaged the shitshow as big as what has unfolded,” he said. Rabbitte is the lead plaintiff in a class action lawsuit against the venture capital firms that backed FTX.

Cedric Kees van Putten, a software consultant from the Netherlands who has money locked up in FTX, has also appealed to the legal system for some sort of restitution. He is one of the plaintiffs in a class action lawsuit filed against FTX in December seeking to get priority for customers when FTX’s assets are divvied up. He lost thousands of dollars when the exchange went under, though he says all of his crypto investments were always money he could afford to lose. Still, he’s frustrated customers might not be the first in line to get their money back from the failed exchange. “I wanted to do something about that,” he says of his decision to get involved in the lawsuit. He doesn’t trust any exchanges anymore, except perhaps some smaller ones in Amsterdam: “They’re registered, they have a license, the money is backed up by our national bank.”

“The impulse to escape jurisdiction, the impulse to undercut the prevailing structures of financial power, that’s just a recurring theme,” Balleisen said. So is, apparently, the impulse to look to prevailing structures when things go haywire.

It’s easy to be dismissive of the entire crypto project right now. We’re in the midst of yet another crypto winter. Some of the buzziest recent elements of the space, such as the metaverse and NFTs, have faded quickly from the limelight. The industry is looking for its next iteration or going back to old ones. It would be a mistake to write the sector off altogether; there really might be something to crypto’s utility in cross-border transactions and to digital currency, for example. There might be some important uses still waiting to be unlocked. But it would also be a mistake not to acknowledge the limitations and downsides here, which are in many ways not new.

The “democratization of finance” means the good and the bad; you don’t get to choose which parts. The normal trappings of capitalism and markets — concentration, inequality, and fraud — remain. “It’s in the inert nature of finance here, which is this tendency toward instability and this tendency to promote concentration and inequality,” Vasudevan, the Colorado economist, said.

If the crypto purists get their way, without any institutional safety net, that may be a trade-off some people are willing to make. They want to be able to really control and own their money completely outside of the financial system, to self-custody their coins in hard wallets (hopefully) out of anyone else’s reach. But that’s not appealing to everyone — when you make a mistake in that scenario, there are no backsies.

It really is a roll of the dice. Reporting for this story, I spoke to one crypto investor who made a lucky early bet on a cryptocurrency called polygon and made enough money off of that to be able to buy a condo. He’s got some money locked up in Celsius, but he largely got out before that company went bankrupt. I spoke to another trader who left tens of thousands of dollars in FTX and was duped by a crypto influencer while trying to pull his cryptocurrency off of the exchange, meaning even if FTX returns funds, his will be in coins that are pretty much worthless.

The investor who made money says he’s sticking to more traditional markets from here on out. “My crypto cowboy days are over,” he told me. The one who lost is trying to start a service where he tries to help people recover lost crypto — for a cost. He still can’t believe FTX went under. “I definitely made a little mistake by only using FTX, but if you talked to anybody 10 days before FTX went bankrupt, nobody would have bet that FTX could go bankrupt,” he said.

Fraud and scams and failure are an inevitable part of any economy or market, including crypto. They will never be stamped out altogether, and a catastrophic collapse might not even be enough to keep people away. Many former FTX investors think the exchange should be back up and running. Besides the fraud, they think everything was probably fine, and they’d risk it again. Balleisen said that, historically, this is quite common. “A remarkably significant fraction of individuals who don’t want to admit they’ve been duped and who believe in the vision, they’ll dip right back into their pocket,” he said.

Rabbitte, in Panama, thinks FTX should be reopened as soon as possible and that doing so would make investors whole. “Why wouldn’t you?” he said. “Maybe you have a choice between Binance and FTX, FTX has all of the skeletons out of the closet now, Binance doesn’t.” To be sure, there’s no “better next time” that can keep someone — at FTX or Binance or wherever — from lying.

Initially, Dario told me he doesn’t think trading in any form is an honorable way to make a living, and that if he were to invest again, he would want to put it into a business or a craft or making something. “I think it’s disgusting, to be honest, because you’re not taking part in the physical creation of things. A craftsman brings much more value to society than a trader,” he said.

When I asked whether he would get back onto FTX if it started again tomorrow, he paused. “That’s a good question,” he said. Despite what we’d just spent the last hour or so discussing — him being scammed twice, his belief trading is dishonorable — it turns out he wasn’t sure. “Obviously, the emotional side of me would say no,” he said. “Maybe I might get back in on it.”


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