Cyber Wars Going Infinite: Buckle Up

The Michael Lewis book, Going Infinite, The Rise And Fall of A New Tycoon and Erica Stanford’s earlier book Cyber Wars, reflect an accurate but disturbing picture of this unregulated market.  At times, the market appears to be a huge Ponzi Scam: 

The Z/Yen Group believes over 60% of the cyber coins on offer are fake. 

In the UK, 80% of Bank Account scams start on social media with crypto a favourite to make you think you will be rich.  

Some ewallets in which cyber coins and Digital Art (NFTs) are held can be hacked when opened on the web. Here all contents can be removed and then promptly moved elsewhere. Where is the custodian?

Little of the actual infrastructure of a regulated market exists, for example, coins are often held by theseller. Exchanges can extend credit to their buyers and to themselves via intermediates often other cyber exchanges.

There is no underlying asset, just a string of numbers that identify and details of the owner of that coin.When lost by the owners can go to extreme lengths trying to recover the lost disks thrown out with the rubbish.

Pricing from initial valuation of a few cents, to thousands of dollars per coin can happen virtually instantly. 

Sam Bankman-Fried

The New Tycoon is an intelligent, amoral, well educated in non-social areas and from an excellent, well to do family. An outliner, excellent at puzzles, loves changing rules at anytime and lives with the mantras of:

1. Every event should be acted upon based on a calculation of expected value/risk at that moment. Decisions made can be reversed quickly with new information.  One UK VC had a similar philosophy when asked about being investigated by the Serious Fraud Squad replied, “it is less than 5% chance, I’m happy with that risk”.
2. Effective altruism (EA) by “doing good” by pursuing a lucrative career in order to donate to causes. Even here the EA seems distorted. The EA loans to build a company came at interest rates of up to 50%. The donations by Sam of millions of dollars were to himself and family for real estate in the Bahamas.

The structure of the business – FXT and Alameda Research - allowed Sam to manipulate the crypto market and business practises to his advantage. For example Alameda sold short FTT (a coin created by Sam) in the billions to its own group and subsequent took the tax loss and used it against the currency gains. (“a fake loss”) 

Sam minted 350 million FTT and offered them to: employees ($0.05 per coin); important crypto people ($0.1); investors ($0.2 to $0.7) and a public offering of ($1.0).  The FTT was different from most of the other crypto coins as it had rights to a third of FXT revenue. In 2021 revenue was $1 billion and looked likely to do the same in 2022 and holding $15 billion in customer deposits.

In June 2022 with second biggest hedge fund, after Alameda, collapsed causing the crypto market investors to start reducing their positions. By November 8 2022, FXT stopped refunding customers leaving it with $3 billion and by November 11 2022 Sam declared bankruptcy and a new CEO installed.

Michael could have had deja vu from his previous books:

Liar’s Poker where corporate treasures were sold bonds from the Company’s Propriety trading account. The Volcker Rule now restricts prop trading.

The Big Short where the Sub Prime Mortgage Bonds melt down contributed to a severe worldwide economic recession. The worlds’ regulators helped with a programme of subsidies to end the crisis. The UK Government still owns 33% of one of a major banks.

No such fate for FXT and the crypto market as there is unregulated. 

Having visited Zimbabwe when the taxis drivers were adding two zeros on the fare and the cost of Zim Dollar 1million note was not worth the paper it was printed on, crypto could be an answer.  Before crypto the answer was to use real US Dollars.

Crypto clearly needs regulating.