Back in 2001, precious few Americans could have explained what Houston-based Enron did as a company and how it got so spectacularly wealthy. But when it filed for a record-breaking bankruptcy, Americans got schooled fast about not putting their trust and money behind swaggering, fast-talking con artists.
But fools and their money regrouped over the years, and along came FTX, a $32 billion cryptocurrency exchange that repeated many of Enron's mistakes and yielded the same abysmal results. We suspect that a lot of investors who lost their shirts in the FTX failure would have trouble explaining exactly what FTX did, and that's largely because the entire cryptocurrency industry is built on fantasy.
Even the person in charge of the company, Sam Bankman-Fried, didn't understand it completely. "I didn't know exactly what was going on," he told the New York Times last week in a DealBook video interview. A year ago, Bankman-Fried was worth an estimated $26.5 billion. Today, the 30-year-old might have around $100,000 in assets. "I've had a bad month," he told the Times.
The losses he and his investors suffered are far more complex to explain than what happened at Enron. That company actually dealt in a tangible asset — energy — but was guilty of creating fake companies and shuffling money-losing accounts among them to hide its financial losses. In the case of FTX, it was an exchange where people bought and sold imaginary cryptocurrency, whose value was based on nothing that anyone could see or touch. And yet millions of people around the world poured billions of real dollars into it.
When the imaginary world of cryptocurrency and FTX came crashing down, investors demanded their real, tangible money back. But it was gone. That prompted the equivalent of a bank run that exposed the myth behind everything Bankman-Fried was doing. He invented currency. When that wasn't enough, he invented an exchange for other invented currencies. As long as everyone believed in the myth, the money poured in.
Company officers apparently used FTX assets to take out real loans to make investments in real, money-based enterprises. When the run on the bank began, they apparently began using customers' money to pay off other customers — a Ponzi scheme, in other words. Former President Bill Clinton was among the prominent personalities who got burned by associating themselves with FTX.
To his credit, though, Clinton gave a talk at the FTX headquarters in the Bahamas reportedly warning all involved to "do right by it in the regulatory space," meaning to make sure FTX operations abided by U.S. securities and banking regulations. Because the industry took off way before U.S. regulators could catch up, it's not clear what they can do now to hold FTX officials legally accountable.
That shouldn't stop Congress from trying. The internet isn't going away anytime soon, nor will its imaginary currency market.