FTX fees leave the industry’s image in tatters

Hello and welcome to the FT's Cryptofinance newsletter. This week we take a look at the aftermath of Sam Bankman-Fried's arrest in the Bahamas.

For Christians, it is supposed to be a time of goodwill and charity, but these attributes are in short supply in the crypto industry.

Most of the anger and acid was understandably directed at Sam Bankman-Fried following the collapse of crypto exchange FTX last month, and the media apology tour only deepened the mistrust.

Things came to a head this week with his arrest in the Bahamas and the release of the full US indictment against him.

The long list included criminal charges such as wire fraud, money laundering and violating political campaign finance laws. If he is found guilty, he will spend a long time in prison. Conspiracy allegations suggest that others may also be involved.

There was also perhaps the most damning accusation of all; that these alleged crimes have occurred since FTX was founded. In fact, authorities said, this was the plan all along. You were Will Ferrell's character in the Christmas movieElevenShe discovers a deceitful Santa Claus and whispers: “You are sitting on a throne of lies.” It is damning because it opens the door to accusations that the entire market bubble of the last few years is a fraud, a fake.

No wonder there were few well-wishers. “His arrest is the right thing to do, there needs to be accountability for what has left many consumers in financial difficulty, with the prospect of funds being repaid unlikely,” CryptoUK’s Ian Taylor told me.

The sight of a handcuffed Bankman-Fried being led out of a Bahamas courthouse into the night as police lights flash could become the defining image of a terrible year for digital assets. Token prices have plummeted and many major crypto companies went bankrupt over the summer. But he is just the most prominent figure in an extraordinarily crowded field of scandals and villains. Many may still face civil or even criminal charges of their own.

Crypto is now embarking on a path to redemption, although many skeptics will consider this mission futile.

“FTX’s collapse is not an indictment of cryptocurrency, but important aspects of the collapse are emblematic of an – almost proud – amateurism common in parts of the industry,” said Peter Fox, partner at law firm Scoolidge, Peters, Russotti & Fox.

I will forgive less. Such amateurism appears dangerously naive to the real world of law enforcement, court filings and hearings in Washington. When a grizzled veteran like John Ray III, FTX's new chief executive, reveals that the company uses QuickBooks for accounting, the punk, do-it-yourself ethos loses its charm.

For example, FTX’s alleged misuse of customer funds is symptomatic of this disconnect. It is important to recognize that crypto exchanges are not like exchanges in the real world. Platforms not only facilitate meetings between buyers and sellers, they act as escrow agents and market makers that also borrow from and lend to customers.

“The alleged misuse of customer funds at FTX could not have happened on a traditional exchange because traditional exchanges do not hold customer funds,” Fox added.

So what's left? The few remaining big players have big question marks hanging over them - Tether over its reserves and Coinbase over its financial performance. Binance is the largest black box in the industry.

Decentralized finance has its fans. They say it represents the future and has survived the fate that has befallen larger and more centralized entities.

True, but it's easier to forget the litany of mistakes that have roiled the world of DeFi. Scaling operations has always been one of the weak points of cryptocurrencies. And projects have suffered countless hacks because developers didn't adequately test the systems before releasing them onto the open market. Another sign of amateurism.

Then there are other chronic problems like Bitcoin's unwarranted carbon footprint and its use by rogue states like North Korea to evade economic sanctions.

In his Senate testimony this week, actor and crypto critic Ben McKenzie suggested that one reason so many customers couldn't get their money back was simply because "a lot of it was never there."

“The prices of these speculative so-called ‘digital assets’ were bid/manipulated far beyond actual real money,” he wrote, citing conversations with SBF and Alex Mashinsky of the failed Celsius Network to back it up.

This all begs the question. . . what remains to be redeemed? This is the challenge that the industry will have to face next year.

CryptoFinance is now taking a break until the New Year and returns on January 6th. Merry Christmas to readers and thank you for your subscription. Any thoughts until then? Email me at scott.chipolina@ft.com

Weekly highlights

• FTX collapsed in the Caribbean, but its shockwaves continue to spread across the world. France – one of those “crypto hubs” we keep hearing about – is starting to question whether it should have opened its doors so readily to digital assets. The country is currently allowing crypto companies to operate without a license, but is coming under fire. My colleague Akila Quinio and I looked into it here.

• Binance faced $1 billion in outflows in a single day. Binance has been battling a crisis of confidence of its own as fears grew that it would also be drawn into US investigations. Joshua Oliver and I have the story here.

• Elizabeth Warren (D-MA) introduced the Digital Asset Anti-Money Laundering Act alongside her colleague Roger Marshall (R-KS). The bill was called “unconstitutional” by Coin Center, the crypto-focused nonprofit that failed to explain to me in October how the statements “We don’t deal with criminals” and “We don’t know where the donations sent through Tornado Cash come from” can coexist.

• It's a terrible time for crypto miner Argo Blockchain. It's in danger of going under next month because it doesn't have enough money. What it didn't need to do was accidentally post material on its website that implied the company was filing for U.S. bankruptcy protection. Stocks on the London Stock Exchange and Nasdaq were duly suspended and permission had to be sought to reverse everything. Oops.

Soundtrack of the week:

Damian Williams, a U.S. attorney for the Southern District of New York, is having a big week. On Tuesday, he held a press conference to discuss the Justice Department's charges against SBF. He also found time to bring fraud and money laundering charges against founders and promoters oftwoalleged crypto Ponzi schemes. But he also sent a message to all crypto scammers.

"We're coming for you. Stealing is stealing, even if it's disguised in cryptocurrency jargon."

Data mining: Binance consolidates power

During a Twitter Spaces session this week, Binance CEO Changpeng Zhao was asked whether his company's size represents a dangerous single point of failure for the already delicate crypto industry.

His response was, "Is this a problem for the industry? It's not a problem because if you want innovation, you have to let people win, you have to let people vote."

I suppose the sacred principle of decentralization isn't so sacred when you're the only man in the room.