Sam Bankman-Fried: Trust Is Everything

Economies are built on trust. 

Will the bank keep your money safe and accessible? Will the seller mail you those vintage action figures? Will eBay make you whole if the package never arrives? 

Trust is everything. And it depends on reputation.

Sam Bankman-Fried—a.k.a. SBF, the founder and CEO of the now-defunct crypto exchange FTX—earned trust by winning the approval of elite institutions. Then he allegedly siphoned about $10 billion of customer deposits into a hedge fund run by his purported ex-girlfriend who then squandered it on risky bets that didn't pay off. 

Sequoia Capital, Silicon Valley's premier venture capital fund, trusted SBF enough to invest over $200 million. Crypto lender BlockFi trusted him enough that it's now facing bankruptcy. And, of course, retail investors trusted him to keep their money safe. They're unlikely to see any of it ever again. 

Unlike blue-chip financial institutions that gain trust by being too big to fail—meaning taxpayers will provide a backstop—SBF did it in part by winning the affection of the progressive elite in a way that set him apart from the usual libertarian crypto bros.

The World Economic Forum hosted him as a speaker in Davos, Switzerland, listing FTX as a corporate partner. Journalists fawned over him, including Fortune magazine, which asked if he was "the next Warren Buffett" in a cover story that evoked another infamous profile.

Securities and Exchange Commission (SEC) Chief Gary Gensler is accused by one congressman of helping the company to create a "regulatory monopoly." As the second-largest donor to Democratic politicians in the lead-up to the 2022 midterms, SBF branded himself a new kind of capitalist, a different sort of billionaire.

SBF was an "effective altruist," or part of a movement that encourages its adherents to make as much money as they can so that they can give it all to charities that they deem maximally efficient at alleviating suffering. 

"So the ethics stuff - mostly a front?" Vox reporter Kelsey Piper asked SBF via Twitter direct message after FTX filed for Chapter 11.

"Yeah," replied SBF. "it's what reputations are made of, to some extent. I feel bad for those who get fucked by it. By this dumb game we woke westerners play where we say all the right shiboleths and so everyone likes us."

Real effective altruism might be a legitimate method for deciding which charities to support with money that was earned honestly. But SBF is an alleged fraudster who represented the antithesis of Milton Friedman's claim that "the social responsibility of business is to increase its profits," which the Nobel Prize–winning economist wrote about in a 1970 New York Times essay.

It's an especially important message at a moment in which special interest groups are bullying companies to adhere to an investment strategy called Environmental, Social, and Governance—or ESG—which prioritizes social goals over return on investment. The SEC is gearing up to regulate ESG ratings, threatening to turn this trendy "stakeholder capitalism" into a quasi-governmental program.  

Friedman believed that philanthropy was a social good but not when it involves corporate executives spending shareholders' money. And he asserted that the "one social responsibility of business" is "to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception fraud."  

And deception and fraud are exactly the accusations SBF now faces. Did his claim of prioritizing altruism over maximizing profits allow him to rationalize his alleged theft?  

Businessmen who talk about how their companies are "not concerned 'merely' with profit" and about the need for a "'social conscience'…are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades," Friedman wrote.

For SBF, these "shibboleths" were seemingly part of a "dumb game" to dupe progressive elites into helping him win trust. He could have played the same game in a variety of fields, but it's ironic that he chose crypto, an industry derived from an invention that was designed to eliminate the need to trust others with your money. 

In the original white paper explaining bitcoin, its pseudonymous founder Satoshi Nakamoto wrote that "what is needed is an electronic payment system based on cryptographic proof instead of trust" and then used the t-word 13 more times.

SBF displayed very little interest in this fundamental proposition at the heart of crypto.

"I think Sam [Bankman-Fried] saw crypto as a means to an end," Jesse Powell, co-founder of the major crypto exchange Kraken, told Reason recently. "Most people in this space see crypto as the end goal. That's what we need to deliver to humanity."

Satoshi wanted to replace trusted third parties with verifiable math, or rules over rulers.  The bitcoin network relies on open-source software, and it becomes harder for any single entity to modify as the number of its participants grows and grows. 

Bitcoin also made it possible to maintain custody of your own digital money instead of trusting it to a bank or an exchange like FTX. 

If anything, this saga shows that Satoshi was right: Don't just trust, verify. And when business owners seem more interested in magazine covers, running in elite circles, cozying up to regulators, and giving away their fortunes instead of making money for their investors, take your money and run the other way.

Produced by Zach Weissmueller; editing and graphics by Regan Taylor; additional graphics by Tomasz Kaye.