The story of the interplay between SBF and CZ, of SBF and his, admittedly, polyamorous girlfriend Carolyn Ellison and the ultimate loss of, at this point, tens of billions of dollars has been ably chronicled many outlets.\u00a0 The story of the whole sordid details can go on for hours and, indeed, there are many pieces on the FTX collapse and more are being written at an ever-increasing pace.<\/p>\n
But only the highlights, taken from perhaps the single best overview by ColdFusion TV, in their short film The FTX Disaster is Deeper Than you Think<\/a>, matter for this analysis.\u00a0 In that approximately 30-minute documentary, they assert the following points:<\/p>\n With these preliminaries out of the way, the economics analysis can begin.\u00a0 There seems to be two major morals from this story:\u00a0 1) the presence of moral hazards typically results in disaster and 2) regulations as barriers to entry have consequences.\u00a0 Let\u2019s look at each of these in turn.<\/p>\n It is hard to deny that SBF wasn\u2019t awash in moral hazards<\/a>.\u00a0 First there was the overall grooming and institutional hubris surrounding MIT, Stanford, and other \u2018high-powered\u2019 schools that encourages the students and subsequent graduates to think that they are smarter than everyone else and that the rules are for those lesser people and not them.\u00a0 Second, FTX was surrounded by celebrities and sycophants who talked up the wiz-kids at Alameda and FTX.\u00a0 One investment house even cited the fact that SBF was playing the game League of Legends during an investment call.\u00a0 In addition, many institutional investors were happy to not ask questions about FTX using their own made-up FTT token as collateral.\u00a0 Finally, there is the connections between SBF and Caroline Ellison (polyamorous lovers), Caroline Ellison and MIT economics professor Glenn Ellison (father-daughter), Glenn Ellison and SEC Head Gary Gensler (boss to former employee \u2013 Gensler was an MIT economics professor), and Gary Gensler to SBF (regulator to regulatee).<\/p>\n If the Cold Fusion documentary is to be believed, there are credible allegations that the SEC provided FTX with a conditional no action relief, basically meaning that the SEC knew that something was wrong but chose to do nothing.<\/p>\n Economic historians will have to piece together how much of each of these moral hazards contributed to FTX\u2019s collapse but it is clear that because of them SBF and colleagues to threw caution to the end and embraced more risk than they ought to have.<\/p>\n And these risks may have actually never realized and FTX could conceivably dodged a bullet if it weren\u2019t for the fact that Binance pull the rug from under them.\u00a0 And the reason for this move was that SBF was currying political favor to lobby for regulations that, on the surface, would keep crypto safe but which, in reality, would have created a nearly unmeetable compliance burden for existing firms and an essentially insurmountable barrier to entry for new ones.<\/p>\n So, there you have it.\u00a0 At the end of the day, with all the technical terms and digital fa\u00e7ade removed, the story of the collapse of FTX and Alameda Research comes down to well-known names for the old-fashioned economic forces of moral hazards and regulatory effects along with a plane, garden-variety embezzlement.\u00a0 Speaking of names, maybe, going forward, SBF should stand for \u00a0Sam Bankman-Fraud.<\/p>\n","protected":false},"excerpt":{"rendered":" What\u2019s in a name? \u00a0Some names are long and some short.\u00a0 Some are descriptive while others are cryptic.\u00a0 It is often the case that the most famous (or infamous) amongst... 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