PremiumLast week saw Sam Bankman-Fried’s crypto exchange implode and fake messages boom on Elon Musk’s platform, exposing the fragility of what’s held dear. The world needs to get real
Is ‘post-truth’, that gift of the digital age, finally facing a meltdown? For half a decade or so, we’ve bemoaned the growing influence of prior beliefs and emotions over objective facts, with the internet amplifying biases to bizarre levels. A set of online shudders last week should serve as a global wake-up call. Elon Musk’s Twitter had to do a back-flip on its new pay-to-verify policy after fakery boomed. A fake Eli Lilly offer of “free insulin", a snarky joke by a Tesla imposter about supplying Ukraine with “advanced explosive devices" and smart-alecky tweets from blue-ticked divinities formed just a small sample taken from what became an open platform for falsehood. Vying for attention was a financial spectacle: the implosion of crypto exchange FTX and the reputation of its once-celebrated promoter, Sam Bankman-Fried, evoking fears of a cascade of crashes across the cryptosphere. Whether this turns out to be a ‘Lehman moment’ for success built on illusory value, we’ll know soon enough. For now, we should hope that reality becomes less of an intrusion and more the norm.
The charisma that Sam Bankman-Fried, aged 30, is said to have exuded as a crypto whizkid played a role in the rise of FTX. Before word of its cryptic games got out, it was widely admired in America as a startup out to revolutionize e-finance. Even Sequoia, a top name in the field of venture capital, had been taken in by Bankman-Fried’s ‘vision’. In times of easy money, as ushered in by central banks in response to covid, digital dreams tend to get all too easily funded. But it usually takes elastic ethics applied to a flimsy house of cards for a single wobble to cause such a grand collapse. It’s not unusual for exchanges to offer traders a facility for margin trading; like banks, they know that the stuff they hold on behalf of their clients is unlikely to be withdrawn all in one go. The leverage this allows for further bets, however, can reach gasp-worthy risk levels if flaky tokens are used as back-up assets. In the case of FTX, Bankman-Fried’s platform was found to have loaned Alameda Research, a fund owned by him, the bulk of its customers’ assets, and that too against collateral in the form of crypto tokens issued by FTX itself. Once investors got wind of it, a rush for exits ensued and a crash in the token’s value left the whole gig short of money—and bankrupt.
Expect morality tales starring rash owners to be spun from the two episodes. Elon Musk’s takeover of Twitter has shaken confidence in its reliability as a source of information, while the wreckage of Bankman-Fried’s self-serving exchange has cast doubt on the safety of crypto holdings. A rival crypto exchange that called FTX out and led the sell-off, Binance, had also made a rescue attempt, but it aborted the move after it found a hole in FTX’s books that was too large to plug. Beyond the ethical elasticity of individual actions that led so many people to be misled, we must mull the matter of institutional design. How did one man get to play the roles of trader, trading platform and also tradable-asset issuer? As Douglas North argued, the rules we set in all spheres of interaction must always be clear. But we also have a bigger crisis of truth to confront. The post-modern notion of value lying in the eye of its beholder may suit crypto issuers, but at what cost to others? A chaotic week has shown that post-truth has gone too far. Truth matters. Let’s not let ourselves down.