New York Times

What Paul Krugman gets wrong about crypto

Cryptocurrency has evolved over the last decade, but Krugman is still hung up on Bitcoin’s 2008 white paper.

In mid-November, as crypto markets reeled in the aftermath of FTX’s meltdown, Nobel Prize-winning economist Paul Krugman made use of his New York Times column to disparage crypto assets — again. Despite his unquestionable academic credentials, Krugman reiterated a common misunderstanding in his attempt to understand crypto assets — by conflating Bitcoin (BTC) with other cryptocurrencies.

Despite being the oldest, most valuable and most well-known member of this emerging class of digital assets, Bitcoin has a unique use case that differs widely from all others. Therefore, in order to understand this asset class as a whole, it would make more sense to choose as your starting point an asset with more tangible utility. Filecoin, for instance, provides storage for digital files in a similar vein to Google Drive or Dropbox, but in a decentralized manner. This network allows users with surplus storage to rent that capacity to other users in exchange for a fee. This fee is paid with the network’s native token, also called Filecoin. This example is far more representative of most crypto assets: a network that provides financial incentives for services in a decentralized manner, with added efficiency and reduced costs as a result of its lack of intermediaries and central counterparties. Bitcoin, however, is different.

But what exactly is Bitcoin? This seems to be another blind spot in Paul Krugman’s comprehension. Bitcoin has evolved over time, both in regards to its technology, with updates and improvements to its functionalities, and its most prominent investment thesis. Krugman, according to his own column, perceives Bitcoin (and, it goes without saying, other crypto assets) as a means of payment. That was, in fact, the intended purpose disclosed in the white paper that launched Bitcoin in 2008, remaining so in the years immediately following its publication.

Related: Crypto’s downturn is about more than the macro environment

However, this thesis has evolved over time. Most notably, in 2017, when a great debate arose within the Bitcoin community over whether to prioritize its functionality as a means of payment or its characteristics as a store of value. The will of the store of value proponents prevailed, and the dissidents created Bitcoin Cash. Since then, the predominant consensus is that Bitcoin should strive to be a substitute for gold, not fiduciary currencies — with the added benefits of greater portability and resistance to seizure.

In light of these characteristics, Bitcoin has become greatly sought after in extreme situations — such as the war in Ukraine and Venezuela’s hyperinflationary crisis — by ordinary people rather than criminals, as Krugman wrongly suggests. Evidently, Bitcoin has a long way to go before it effectively establishes itself as`a true store of value — the first step of which would be achieving greater price stability. Additionally, there are other use cases under development. The needed scalability improvements, which would allow it to flourish as a means of payment, have been assigned to the so-called layer-2 solutions, such as the Lightning Network. One of Bitcoin’s most recent updates implemented in September allowed for the creation of tokens within its network. Crypto has continued to evolve, but Krugman is still hung up on the 2008 white paper. The eventual failure of Bitcoin as a means of payment would not mean the end of Bitcoin itself, much less the end of all crypto assets.

Underpinned by this misunderstanding about the general nature of crypto assets and, in particular, of Bitcoin, Krugman arrives at conclusions that, despite being coherent within themselves, are completely mistaken, such as, for instance, his argument that the crypto industry would not survive increased levels of regulation. In 1998, when discussing a comparable topic, Krugman wrongly stated: “By 2005, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.” His bias against crypto assets may lead to predictions as inaccurate as his now-infamous quote about the future impact of the internet.

Related: From the NY Times to WaPo, the media is fawning over Bankman-Fried

Well-designed regulation for companies that provide services associated with crypto assets is welcomed by the vast majority of industry participants and is actually perceived as a development that would foster the confidence among investors needed to propel this technology toward mass adoption. Furthermore, many of the services offered by these companies are of a financial nature and, as the successive events that have occurred this year have shown us, contagion effects exist. This in itself justifies the need for greater regulation. Just as Krugman stated in the first line of his op-ed, “recent events have made clear the need to regulate crypto.” He was correct on that point.

It’s likely that the crisis created by FTX will spur regulators to expedite their efforts around the world and, consequently, help to consolidate crypto assets and blockchain technology. Just as Krugman’s misguided predictions haven’t meant the demise of his reputation, this crisis is not the end game for crypto.

João Marco Braga da Cunha is the portfolio manager at Hashdex. He obtained a master of science in economics from Fundação Getulio Vargas before obtaining a doctorate in electrical and electronics engineering from the Pontifical Catholic University of Rio de Janeiro.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Legal professionals astonished as SBF admits failures, apologizes 12 times in interview

The former FTX CEO has offered multiple apologies and admitted failings at least a dozen times during the one-hour interview.

Former FTX CEO Sam Bankman-Fried apologized or admitted failure at least 12 times during his appearance at the New York Times’ DealBook Summit on Nov. 30. 

In a wide-ranging video interview, Bankman-Fried was asked to answer a number of questions surrounding the downfall of the now-defunct exchange, with some even suggesting that some of his statements could be used to incriminate him in legal proceedings.

In a Nov. 30 Twitter post, crypto attorney Jeremy Hogan, partner at Hogan & Hogan, said that the “light cross-examination” of Bankman-Fried at the DealBook Summit has already returned “at least 3 incriminating statements so far.”

Alan Rosca from the law firm Rosca Scarlato said it was “pretty astonishing that he’s in effect testifying at the DealBook summit. Hard to think of a precedent for this.”

Bankman-Fried’s first concession came while greeting interviewer Andrew Sorkin, when he said in reference to the collapse of FTX:

“Clearly, I made a lot of mistakes or things I would give anything to be able to do over again.”

An apology came moments later when Sorkin confronted him with a letter written by an FTX customer who lost $2 million in life savings after the exchange collapsed.

“I’m deeply sorry about what happened,” said Bankman-Fried in response to the customer’s story.

Former FTX CEO Sam Bankman-Fried during the hour-long live-video appearance. Source: New York Times’ DealBook Summit.

Later, when discussing the allegations that Alameda used FTX client funds to cover loans, Bankman-Fried said that while he “didn’t know exactly what was going on” at Alameda, he concedes it was still his duty as FTX CEO to “make sure I was doing diligence.”

“A lot of these are things that I’ve learned over the last month that I learned […] I mark that as a pretty big oversight that I wasn’t more aware of,” he said.

Bankman-Fried admitted failure again when quizzed about FTXs former standing in the industry and the loss of trust in crypto now that the exchange has collapsed, stating: “I mean, like, look, I screwed up:”

“I was CEO, I was the CEO of FTX. And I mean I say this again and again, that that means I had a responsibility that means that I was responsible ultimately for doing the right things and I mean, we didn’t. Like, we messed up big.”

He continued to concede FTX’s failings, stating “there absolutely were management failures” oversight failures, and transparency failures.

Toward the end of the interview, Sorkin directly asked Bankman-Fried whether he had been truthful with the audience and whether he agreed that there had been times that he had lied. 

Bankman-Fried said he wasn’t aware of any times that he lied, but explained that there were times when asking as a representative or “marketer” for FTX, that he would paint FTX “as compelling […] as possible.”

“I wasn’t talking about what are the risks involved with FTX […] I obviously wish that I spent more time dwelling on the downsides and less time thinking about the upsides.

Related: ‘I never opened the code for FTX:’ SBF has long, candid talk with vlogger

Bankman Fried was asked what his lawyers are telling him at the moment, and whether it was a good idea for him to be speaking publicly. He answered, “very much not:”

“I mean, you know, the classic advice, don’t say anything […] recede into a hole.”

Bankman-Fried said he believes he has a duty to talk to people and explain what happened and to “try and do what’s right.”

“I don’t see what good is accomplished by me just sitting locked in a room pretending the outside world doesn’t exist,” he explained.

“Soft-balled it,” says community

While the interview appeared to cover a number of confronting issues for Bankman-Fried, some in the community still believe that the questions were not challenging enough, nor was there an adequate follow-up to some of the hard-hitting questions.

A Twitter poll launched by self-proclaimed crypto trader Cantering Clark found that more than half of the 1,119 respondents believed Sorkin “Soft-balled” the interview with Bankman-Fried.

From the NY Times to WaPo, the media is fawning over Bankman-Fried

Mainstream media outlets just can’t seem to stop drooling over the disgraced FTX founder.

Nearly three weeks have passed since FTX founder Sam “SBF” Bankman-Fried announced that his exchange was facing a deep liquidity crisis, was unable to find a last-minute bailout, and was forced to file for Chapter 11 bankruptcy. The insolvency impacted millions of investors, leaving many portfolios completely wiped out.

Bankman-Fried has openly admitted that FTX loaned customer deposits to Alameda Research, FTX’s sister hedge fund, although he has characterized this as a mistake that was caused by “confusing internal labeling.” FTX’s terms of service explicitly state that customer funds will never be lent to other financial institutions or used by FTX for proprietary trades. Sam publicly stated in a now-deleted tweet, “We don’t invest client assets (even in treasuries).”

The broader crypto markets have bled red in response, and other industry stalwarts now face insolvency risk with the contagion spreading to Genesis, Grayscale and many other firms that held assets on FTX or were owed money by Alameda Research.

Related: The fall of FTX and Sam Bankman-Fried might be good for crypto

FTX’s new turnaround CEO John Ray III stated in court documents, “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.” In the same court documents, FTX admitted that it may have more than 1 million creditors, the majority of whom were users who lost money when SBF took it and loaned it to Alameda Research for its proprietary trading business.

In the wake of Bankman-Fried’s actions, it’s deeply appalling that mainstream media outlets like The Wall Street Journal, The New York Times, The Washington Post, Forbes, and many others have covered the FTX scandal and ensuing meltdown with kiddy gloves, refusing to call out Bankman-Fried and his inner circle for using and abusing customer funds.

Instead, these publications have largely framed the FTX disaster as a series of honest mistakes by overly ambitious and quirky entrepreneurs that adhere to the effective altruism movement. Bankman-Fried and insiders like Caroline Ellison, former CEO of Alameda Research, were simply trying to do good for the world and will no longer be able to see their benevolent aspirations through.

Related: Will SBF face consequences for mismanaging FTX? Don’t count on it

The Wall Street Journal, for instance, published an article focused primarily on Bankman-Fried’s charitable aspirations — while lightly glossing over the fact that he misused customer funds:

Bankman-Fried has said his law-professor parents instilled in him an interest in utilitarianism, the philosophy of trying to do the greatest good for the greatest number of people. He said he started putting those ideals into practice while majoring in physics at MIT. Concerned with the suffering of animals on factory farms, he said, he stopped eating meat.

The WSJ also delved into the FTX Foundation and its Future Fund (a nonprofit arm of FTX), discussing how many good causes are no longer able to collect on promised grants:

The collapse of Mr. Bankman-Fried’s empire has reverberated well beyond its Bahamas base, through the halls of academia and pioneering laboratories around the world. Several grant recipients […] were still owed funds when FTX failed, according to people familiar with the matter.

Not once did the WSJ condemn Bankman-Fried for his actions. While it discussed multi-million dollar losses that charitable causes have suffered, it failed to mention the multiple billions that were stolen from FTX customers who were promised their deposits were safe.

Similarly, The Washington Post reported that Sam Bankman-Fried and his brother Gabe wanted to make a difference after the global pandemic rocked the world in 2020:

A Washington Post review of lobbying disclosures, federal records and other sources found that the brothers and their network have spent at least $70 million since October 2021 on research projects, campaign donations and other initiatives intended to improve biosecurity and prevent the next pandemic.

The publication omitted the fact that charitable donations were, in fact, funded by money SBF obtained from customers. The article further lamented that the brothers will no longer be able to fund their pandemic-related philanthropic efforts:

But the sudden collapse of FTX, which filed for bankruptcy last Friday after reports that customer funds were being used to prop up a sister trading firm, has sparked a financial contagion expected to doom the brothers’ pandemic-prevention agenda.

Unfortunately, the impact of FTX collapsing goes far beyond negatively impacting pandemic-prevention funding. Millions of people lost their money by trusting FTX to custody their crypto. Companies using FTX to hold their corporate treasuries are now going under. Hedge funds, venture capitals, and centralized finance platforms have all been severely crippled, with some investors that have otherwise outperformed the market now facing 50% losses because of the embezzling of their funds.

Perhaps the most egregious reports have come from The New York Times. In one widely criticized puff piece, the author painted a picture of an ambitious but overextended entrepreneur who made mistakes but did so legally. With a little bit more oversight or perhaps a larger team, they advised, these costly mistakes may have been avoided. They even described SBF as a philanthropist who let his charitable ambitions get too large:

Even as he kept hiring down, Mr. Bankman-Fried built an ambitious philanthropic operation, invested in dozens of other crypto companies, bought stock in the trading firm Robinhood, donated to political campaigns, gave media interviews and offered Elon Musk billions of dollars to help finance the mogul’s Twitter takeover. Mr. Bankman-Fried said he wished ‘we’d bitten off a lot less.’

The downright offensive reporting painted the embattled ex-CEO as simply being too busy and overworked to properly monitor what was going on in his companies.

FTX and Alameda Research are described as closely linked. However, they are not described as related parties that should have clear restrictions when doing business with one another. In no world was it appropriate to commingle funds between the two parties when FTX’s assets were primarily customer funds. Instead, the article explained Bankman-Fried’s defense of the muddied relationship by pointing out that Alameda is a crucial market maker and liquidity provider to FTX.

Related: My story of telling the SEC ‘I told you so’ on FTX

In a follow-up post, the NYT explored SBF’s political and charitable contributions in depth, describing the now-shamed entrepreneur as the Democratic Party’s second-largest donor behind George Soros, and depicting his broad influence on politics and regulation:

A network of political action committees, nonprofits and consulting firms funded by FTX or its executives worked to court politicians, regulators and others in the policy orbit, with the goal of making Mr. Bankman-Fried the authoritative voice of crypto, while also shaping regulation for the industry and other causes, according to interviews, email exchanges and an encrypted group chat viewed by The New York Times.

Amid the discussion of his numerous donations, the article never once posited where Bankman-Fried’s generous funding came from. There is no mention that FTX and Alameda are now bankrupt, and that many lives are ruined. Funds that were stolen from users to prop up FTX’s equity value or FTT’s price that are then used for political and charitable donations should be clawed back. Put simply, the money was not Bankman-Fried’s to give.

Forbes wrote a similar puff piece on the other antagonist in the FTX downfall and former CEO of Alameda Research, Caroline Ellison. It led with effusive compliments for the now-fired executive:

Alameda Research CEO Caroline Ellison is a math whiz who loves Harry Potter, fringe political philosophy and taking big risks. She is also one of the supporting players in Sam Bankman-Fried’s FTX catastrophe.

The article went on to profile her ascension from star student at Stanford to Alameda Research, where she eventually took the reins at the proprietary trading firm. It discussed her penchant for math, polyamory and, of course, effective altruism. It also suggested she may be the scapegoat for the downfall of Alameda:

Many of the people who have flocked to Ellison’s defense gather on Urbit, a peer-to-peer platform […], one of her online supporters told Forbes. They think Ellison was set up to be the fall person, and claim that former co-CEO Sam Trabucco, who they derisively call ‘Sam Tabasco,’ is behind Alameda’s implosion.

Forbes hinted that Ellison could flee Hong Kong for Dubai, but did little in assigning accountability to the former CEO. It blatantly omitted the fact that she was at the helm of disastrous trading and risk management at Alameda, including her involvement in transferring FTX customer funds to Alameda to backstop her trading losses.

The mainstream media should be accountable to higher standards of journalism than we’ve seen in this coverage. Too many outlets have compromised the veracity of their reporting, perhaps because their reporters share Bankman-Fried’s left-leaning politics.

It’s clear Bankman-Fried’s influence reaches far beyond the crypto industry and extends into the mainstream media. We need stronger citizen journalism to get the full truth out, and we must collectively make sure that the former billionaire is held accountable for his actions.

Matthew Liu is the co-founder of Origin Protocol, a blockchain platform that brings NFTs and DeFi to the masses through its two flagship products, Origin Story (story.xyz) and Origin Dollar (ousd.com). A serial entrepreneur, he previously co-founded PriceSlash (acquired by BillShark) and Unicycle Labs. He was one of the earliest PMs at YouTube before it was acquired by Google, and also served as VP of Product at Qwiki (acquired by Yahoo!) and Bonobos (acquired by Walmart). He bought his first BTC in 2012 and participated in the Ethereum crowdsale in 2014.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.