Over the past week I have been trying to find a way of writing about the biggest implosion in the crypto world in its short and exuberant life. Much that goes on in this arcane world is outside of headline news, but this event has been painted luridly across every global outlet over the past week. The near instantaneous vaporising of a company valued at $32-billion and its subsequent and still unfolding collateral damage. Led by one of the most trusted and beloved entrepreneurs in the industry. And now the most hated.  

The company is FTX, which was the world’s third-largest crypto exchange about a week ago. The creator is (ex) billionaire Sam Bankman-Fried, admired for his unfashionable grubby T-shirts, his old Toyota, modest accommodation and gentle demeanour. 

But FTX is toast now, and lives and livelihoods beyond counting have been ruined. Bankman-Fried might be in jail soon, depending on to what extent he misused investor funds. At the very least, he will never be trusted by anyone again. He wears a scarlet letter.  

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I had previously taken a crack at writing exactly what had happened. How the actual thing unfolded, in all its technical horror. It is a labyrinthine story, a complex tale of lending, borrowing, collateral, risk management, funny money and pipe dreams. Many detailed technical explanations have already been written over the past week, spread liberally over social media and beyond. I am not sure I will add anything by doing it again.  

Suffice it to say that it seems Bankman-Fried stole from Peter (his FTX account holders and investors) to pay Paul (his other proprietary trading firm, Alameda Research, which had done some risky stuff and was in trouble). And ironically, what he stole from Peter turned out to be a cryptocurrency that was once worth a lot and then became worth nothing in the blink of an eye.   

The size of the damage is difficult to estimate, but besides the ruined lives — thousands, perhaps many more — there is also now a contagion effect. All those companies that had become entangled with FTX and Alameda will find themselves in trouble. Jobs will be lost and even more people will lose some or all of their money. And then jittery investors and depositors everywhere will rush for the exits, leaving the crypto industry to rebuild trust from scratch.  

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It will take years for crypto to recover, I suspect, but I have thought that before and been wrong.   

But there is a story behind this story that bears an airing. The traditional finance industry has been around for more than 1,000 years, at least since the first modern Medici banks in Italy. It has had a lot of time to make mistakes and amends, fine-tune, undergo regulation, understand risk, see the big picture, harden processes and staff up with expertise.  

Many of us who are crypto lovers are only too pleased to point out the outrages and contradictions in the old system. Banks too big to fail, asymmetrical power imbalances, helpless depositors, usurious fees, unmanaged conflicts, onerous regulations and outsize profits. We all love to hate our financial institutions.   

Yes, well, crypto missed the most important thing while building its edifices from behind the safety of its screens. What it missed is that banks and other financial institutions have long had practice in wrestling risk to the ground. It missed the fact that regulations generally protect more than they hurt; they are generally not arbitrary.  

Crypto thought it could quickly and entirely reinvent what had been learned through scars and tears for more than a millennium.  

Nope. 

So where does that leave me? 

I am still an enthusiast, a true believer, perhaps somewhat chastened. Crypto in its widest interpretation (far from the jarring sound of noisy marketplaces) is among the most transformative technologies to be born in the last 50 years. It will recover. There will be more shocks to its system. There will be steps backwards and more steps forward.  

And then one day it will be boring because it will simply be part of the tapestry of everyone’s life, its wonders barely noticed. DM  

Steven Boykey Sidley is a professor of practice at JBS, University of Johannesburg and co-author of Beyond Bitcoin: Decentralised Finance and The End of Banks