I have been writing this crypto column for about six months. It used to be fun. I bounced around from this shiny thing to that sparkly thing — NFTs, cryptocurrencies, Metaverse, DAOs, Gamefi, Defi, DIDs and other crypto toddlers, reporting gaily on their clumsy totterings as they tried to walk on to the world stage.

Then FTX and Sam Bankman-Fried happened. And now that is the only story in crypto, consuming this column for four weeks running.

It is endless in its manifold miseries. Not so much fun. I hope never to write a column about FTX again.

A recap. Smart young guy starts an exchange to allow people to buy cryptocurrencies with their real-world currencies. He takes custody of the money, buys the cryptocurrencies on the blockchain, and holds the keys to access the money on the blockchain (the first big no-no — never allow someone to take custody of your keys). Unbeknown to most, the guy has racked up debt in another company he owns and so he steals his exchange customers’ cryptocurrencies to keep the other company afloat.

The FTX story isn’t that hard to understand, but I’ll say it differently to make a point.

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You, a six-year-old schoolgirl, give a dollar to your sweet seven-year-old cousin Sam to buy some chocolate for you at the tuckshop when you are hungry, because Sam knows the guy behind the counter and says he might also get him to add a lollipop for free. You trust your cousin — everyone does — because he is so lovable. But your cousin is secretly a dodgy gonif (thief) who has been losing heavily in the playground marbles game.

Sam buys some marbles with your money and keeps playing, hoping to win back his losses. But he is a terrible marbles player, especially because it has rained recently, and the ground is rutted and stony. Your dollar is gone forever. It sits with this guy who sells the marbles, and he is not giving it back.

Casino built on a Ponzi

FTX went something like that, give or take. Although much more labyrinthine in its details. As macroeconomist Lyn Alden so aptly described it — a casino built on top of a Ponzi.

You’ll notice something about this story, though. It has nothing to do with crypto. It has to do with trusting someone to take custody of your money and not knowing that he is gambling with it. Even if that person is your lovable cousin. You should never have trusted him.

Contrary to popular belief, the FTX imbroglio also had little to do with blockchains, notwithstanding the stuff you read in the media. It has everything to do with a guy who took your money and didn’t give it back. The blockchains in the FTX story did not fall over or get hacked. They just kept working perfectly, exactly the way they were designed. The blockchain wasn’t even an important actor in this kerfuffle. It was just where Sam Bankman-Fried stored the money until he stole it.

People stole, not the code

But because blockchains played a bit part in this fraud, and because crypto is a furiously emotive subject, the narrative that has been written is that the blame should be laid at crypto’s door.

Nah. Some humans stole the money. Not computer code.

Here are some of the startling contributing factors that led to this — the largest commercial fraud in history by some accounts (damage at $51bn and counting).

• FTX had no accountant.
• FTX had no board of directors.
• FTX had no idea how many people worked for it (there was no HR department).
• FTX lent its CEO hundreds of millions of dollars without any oversight.
• FTX lent millions to sister companies, without any oversight.
• Risk management, a core function of any financial institution, was considered unnecessary.

But, hey, hadn’t FTX been put under the microscope of the biggest investors in the world before they decided to invest?

Like Canada’s giant Ontario Teachers’ Pension Plan or Singapore’s sovereign fund Temasek — conservative players not exactly known for risk-taking. Or some of the smartest and storied of venture capitalists who handed over billions — Sequoia, Paradigm, Thoma Bravo, Multicoin Capital, Softbank, Lux, Insight, Tiger Global. Isn’t it these companies’ job to make sure their investments are both squeaky clean and financially attractive?

Who to blame?

So who is to blame here? Sam Bankman-Fried, certainly. And his co-execs who knew what was happening: Caroline Ellison, Nishad Singh and Gary Wang (at a minimum).

But what about these big investors who saw nothing amiss when they undertook what is euphemistically called “due diligence” before investing their customers’ and clients’ funds? How much blame should be apportioned there?

I would argue that they have plenty of culpability. They were enablers. Protectors, even.

If Sequoia had done its job properly, it would have declined and made some quiet calls, and then perhaps others would have declined, and then perhaps more than a million people would not have empty accounts.

Economic historian Dror Poleg, commenting on this wholly sorry affair, had this sharp observation: “Given the opportunity, most of FTX’s investors would do exactly the same thing tomorrow. Their job is not to avoid failure; it is to avoid missing out on the biggest success.”

There are no sanctions on investors who invest in crooks. Other than the money they lose, obviously. This seems terribly wrong to me, and now enraged and possibly shortsighted regulators are coming for everyone. DM

Steven Boykey Sidley is a Professor at JBS, University of Johannesburg.