TL;DR there was substantial warning, months in advance that EA's reputation was becoming deeply entangled with cryptocurrencies, and cryptocurrencies gave substantial warning that they could eventually bubble in a housing-market like crash. SBF clearly exposed EA to this risk for years, and people should have noticed this.

 

Recently, I've been hearing a lot of people talking about the warning signs that could have prepared people for SBF and the FTX crisis. Intuitively, this seemed futile, since billionaires have to behave randomly; if they're predictable, then that leaves them vulnerable to being outmaneuvered and harvested by another billionaire, some of whom have a stronger appetite for predatory games than other billionaires.

However, SBF and FTX were an exception. It's been very strange to see tunnel vision on the tiniest bits and pieces of SBF's actions when there was this elephant in the room:

It's only two and a half minutes, and I highly recommend it. This slimy commercial, aired at the super bowl more than 8 months before the FTX crisis, was by far one of the biggest warning signs that something was off about SBF, and the people who noticed this should have felt emboldened to speak up and tell a lot of people when they notice something doesn't line up.

In this commercial, FTX depicts cryptocurrencies (including NFTs, which as late as Feb 2022 were pretty widely known to be bad deals) as on the same level as several other foundational innovations in the human race, such as the wheel, and the portable music device (the progenitor of the modern smartphone). The commercial depicts forward-thinking people and cryptocurrencies as an unstoppable force for progress, and caricatures all critics and dissidents as clownlike enemies of progress who are inevitably ignored, defeated, and marginalized, so that innovation can take place and justice can be restored.

It is definitely the case that many institutions have an internal culture that is stifling to progress. People with experience in Silicon Valley, however, know that isn't the entire story.

About a week ago, Zvi wrote a fantastic article on the FTX crisis, and it slipped in a section evaluating the entire industry. Included there:

I mean, it would take out a big chunk of EA because it would bring down all of crypto quite a lot. The failure of Tether would be a catastrophic event for crypto. ‘I do not hold any USDT’ is not a way to stay safe out there.

People familiar with economics can tell, at a glance, that it's worth checking to see if industry suffers heavily from Information Asymmetry: that one party to the transaction (in this case the sellers and the coin miners that they subsidize) has such superior knowledge of the product relative to the second party to the transaction that they routinely exploit the lesser party, such as lemons being much more profitable to sell at the used car market price than well-working used cars. Considering that coins can rapidly and unpredictably become worth a very small fraction of their original price, it definitely seems like that would be an even bigger issue here.

Even worse, Information Asymmetry is widely covered in intermediate microeconomics classes and is well-understood by everyone in business and most people in or adjacent to sales. All of this seems like a very worrying way for an industry to be structured, it would be precisely the same thing that drove the flow of toxic assets during the worst days of the mortgage-backed securities crisis around 15 years ago (the housing bubble). This is not because people are mimicking 2008 of course, but rather that it's generally the way that things fundamentally tend to unfold when there are large numbers of unscrupulous people who are trying to pump things as high as possible because they think they can time the market and make a ton of money.

I've seen a lot of people joking that SBF tried to triple his wealth, or become a trillionaire, or tried to "double-or-nothing the earth", and that the risk might have been worth it somehow. That doesn't really fit the evidence that we've been seeing from FTX for more than a year now has indicated that they are trying to spread awareness of cryptocurrencies, or, in other words, to turn very large numbers of people (e.g. the types who pay attention to sports or buy lottery tickets) to become amateur investors who buy and sell tokens of dubious value, in the same markets as professional investors who operate at a scale that lets them strategically time markets and hire sales teams to make transactions look more valuable then they actually are.

The fact is that SBF routinely threw his weight behind the concept of technological innovation, which is central to EA, and used it to spend massive sums of money promoting cryptocurrencies, to involve tens of millions of additional people into a high-tech industry with an inevitable net loss for the vast majority of participants, since the vast majority of participants were totally unprepared and incapable of fending for themselves in the murky world of cryptocurrency. The scale that tens of millions of people were operating at were "I heard about FTX from a commercial, I heard about FTX from the stadium getting renamed, so I think I'll try it out" and that's a scale that's too small to let a single individual get the information they need for a seat at the table. When billions of dollars move like that, it's one of the oldest indicators that an industry is not getting its investment inflows from investors who can actually forecast future profitability. The fact that cyptocurrencies have historically tended to quintuple in value, multiple times per decade, is by far the most attractive element in the minds of the masses; if it merely outperformed stock by 1.5x or 2x then that would not be nearly enough to compensate for the vagueness and doubt that any ordinary person would have.

A big takeaway from this super bowl commercial is that willingness of SBF and FTX to optimize for crypto at all costs, including knowingly and deliberately exposing EA to the risk of reputation loss, months in advance. Dustin Moscovitz doesn't do this, his investment porfolio has around as much crypto as anyone else on Wall Street nowadays. Peter Thiel's criticism of Warren Buffet in April was probably just some dispute between him and Warren Buffet, and he's not currently affiliated with EA anyway. Even Eliezer Yudkowsky (not a billionaire) refuses to talk about cryptocurrency, no matter how many people pester him about it. They weren't willing to throw their weight behind the dream that cryptocurrencies will replace normal currencies and commodities and multiply the early-adopters balances by 100x, and they certainly weren't willing to wager EA on that dream.

SBF was not like that. There were clear warning signs that he was risking EA for the future of cryptocurrencies, not risking cryptocurrencies for the future of EA.

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I don't think the content of the commercial was objectionable. I think it's on par with all the other fanciful commercials out there. (Given, I think there is a larger moral conversation about commercials/marketing undermining the free will of people to make decisions based on their cognition and not through emotions and biases).

I think you are right that crypto is not the same type of asset as owning a stock or real estate, and the fact that regular people will more frequently come out as net losers in crypto than with stocks or real estate should have prompted moral questions. Because that means the success of FTX/SBF (and thus his potential EA giving) was in tension with financial welfare of many regular people.

I think another observation is that Super Bowl commercials and putting hundreds of millions of dollars into a basketball arena and a video game team were HUGE investments that should have been predicated on some serious ROI analysis and probably should have prompted questions from EAs adjacent to FTX's inner circle. Apparently the video-game team sponsorship was tens of millions of dollars above the price for a sponsorship in that industry.

It's not that these high-dollar marketing investments couldn't be justified ROI-wise, but they should have prompted questions (by EAs that had direct contact with FTX) about if due diligence was been conducted by the FTX team, considering the stakes.

In general I think the most realistic red flags that could have been spotted was the management practices of FTX's inner circle. One of those being the large amount of money burned on marketing, especially sponsoring that team way above the market price (it reeks of being a decision driven by the inner circle's affinity for video games than a prudent marketing decision).

I think the line of questioning we need to ask about red flags should be directed towards the EA orgs and influential EAs that interacted directly with the FTX team, and it should go like this: Did they miss the red flags because they legit weren't aware of any; did they see red flags but not recognize them as being red flags; did they recognize red flags but decide that things must be okay because the people at FTX are closer to the situation and are reasonable people; did they recognize red flags but not bring them up to people at FTX because they didn't want to offend or felt they couldn't approach FTX about those issues.

Highly agree. The amount of non-speculator money flowing into crypto is miniscule (edit: relative to speculator money). Unless that changes on a very large scale, every dollar made off of crypto is made at somebody else's expense.  Which is fine if it's only VC's gambling with each other, but taking out a superbowl ad was a deliberate attempt to sucker in clueless retail investors, knowing full well that most of them would lose their hats

The amount of non-speculator money flowing into crypto is miniscule

I think this is false. ~17% of crypto at this point is stablecoins (roughly, coins that are pegged to a fiat currency, usually the dollar). I think a reasonable fraction of the use of cryptocurrency is a replacement currency for either evading capital controls directly (e.g. East Asia, Venezuala), or for  when a country's currency is very unstable for other reasons (e.g. Ukraine). Whether this use case is legitimate or not seems like a somewhat subjective question and reliant on both how much you respect various nontrivially shady political entities and how much you trust nontrivially shady crypto entities.

My current guess is that stablecoins would be net positive if not for the exposure to the rest of the crypto ecosystem, but unclear in practice given such exposure.

How clear is it that stablecoins have value other than by enabling speculative transactions on blockchains? My main model of stablecoins, borrowing from Matt Levine, is that if you do a lot of stuff on-chain, it is also useful to have an on-chain way to transact in fiat.

I could definitely think of many situations in which stablecoins would be useful, but on priors I would guess they’re fairly small compared to uses facilitating speculation.

How clear is it that stablecoins have value other than by enabling speculative transactions on blockchains?

I don't have a good sense of this tbh, I mostly got this from pretty anecdotal evidence rather than looking at data (and realistically I won't do a deep dive on this data unless some analysis was handed to me on a platter).[1]


My current guess is that there is significant uses for stablecoins in practice right now. My guess is that their theoretical value is probably lower than if you were to use the same resources to build more centralized systems like MPesa or Wave, but of course there's less VC interest and also less of an easy path to profitability than from being subsidized by crypto speculation/fraud.

  1. ^

     If I search around there's certainly evidence of significant crypto uses in some places, but I'm not sure about the reliability of this evidence.

 It's hard to get a good gauge of stablecoins while a sizeable portion of them are possibly fraudulent. For example the largest stablecoin, Tether, is widely considered to be suspect and have been caught out lying about their reserves before. There may be more Terra-Luna style crashes in the making as well (I'm not sure how many algorithmic stablecoins are left, but I doubt a single one will survive long term). 

Sending money across borders is a use case for crypto, but I find it highly unlikely to generate enough revenue to pay out much compared to the billions of dollars in speculation. I also doubt this of "alternative" currency use. Stablecoins only work when they are backed by another currency like the USD, so why not just use USD? For digital payments, developing countries have overwhelmingly chosen to use mobile money over crypto, and I trust their judgement on that matter, it seems far more convenient. 

I think I agree with most if not everything you said. I don't see any of them as good arguments for 

The amount of non-speculator money flowing into crypto is miniscule

Actually that's a fair point, I meant miniscule relative to the amount of speculator money and market caps of these coins. I'll edit the comment. 

Counterview: I liked the commercial a lot.  I knew close to nothing about crypto (and now more than I ever wanted to) but I thought it was really funny. I have a close friend who is an economist and he also thought it was clever and well-done. 

I do want to be clear that I now cannot watch the commercial without feeling sick (I just tested this theory). This is due to the apparent disconnect between the marketing of customer safety of funds and the reality of what seems to have been going on behind the scenes but, overall, I'm putting this post in my folder of "Hindsight is 20/20". 

I do think it's mostly hindsight bias, and I don't know how useful this comment is, but watching these two videos this week definitely made me sad: https://youtu.be/5YZyUTg7MHQ?t=1607 and https://youtu.be/uymLJoKFlW8