A Tempest in a Teapot?
The Fallout from the Crypto Catastrophe
Adam Tooze has dismissed the crypto catastrophe as “a minor blip” with no “systemic” consequences.
The FTX crypto blowup is spectacular and will generate pages of excellent financial journalism, but at $30 billion it is a minor blip in the broader scheme of things and the damage is largely confined to investors who though they may be prominent in the media are not systemic to the wider financial system.
Adam Tooze, FT editor. ChartBook, November 12, 2022.
The Toozian claim is not even true in a narrow financial sense. The reason is that the FTX debacle may very well have structural and therefore persistent consequences for securities markets. Just looking at who was left holding the bag does not tell you everything of financial importance. Let’s begin with three purely financial developments the FTX implosion has unleashed. Then we’ll come to the more important ramifications that our new FT editor ignores.
First, institutional money has left crypto and is not going to return. This is a death sentence for the industry. While the door was still open, there might have been a sort of “risk neutral” case [sensu EA; not finance] for getting in on the Ponzi scheme before the whales. That’s gone. All of crypto, and everything even vaguely associated with SBF, is now contaminated beyond repair. Simply put, crypto has again been relegated to the margins of finance; reduced to a plaything for Reddit traders with excessive risk tolerance. This is a stabilizing development of some significance for it means that we’ve avoided a much larger catastrophe — it’s good that crypto broke before it became truly systemically important.
Second, as organized securities fraud at scale, crypto has revealed a catastrophic failure of SEC deterrence; undermining the authority and legitimacy of the principal regulator of US securities. One of the bigger consequences of the FTX bankruptcy is that the SEC must now move very strongly to restore deterrence. This will have important consequences for securities markets well beyond crypto. We could very well be looking at something akin to a new response function of the SEC.
Third, Daniel Neilson has argued correctly that the innovations at the heart of the bubble will not vanish in the bust. Instead, they are in the process of being absorbed by more serious players, who may yet salvage something useful from it.
I have argued that there are three big ideas that have emerged out of crypto—programmable contracts, tokenization and distributed ledgers. Each of these is a genuinely new financial practice; each came to broad attention through crypto; and each is the subject of active R&D by well-resourced players. None of these ideas was responsible for FTX’s downfall.
Daniel Neilson, Soon Parted, November 19, 2022.
The recent publication by Tobias Adrian (the “father” of the macrofinance revolution) and coauthors at the IMF on “A Multi-Currency Exchange and Contracting Platform” is indicative of this development.
Considerably more important that these narrow financial developments is the broader fallout of the crypto catastrophe. The structuring feature here is Girard’s concept of contamination: when violence breaks out in a primitive society, everything associated with it — the site of the violence, the victim’s body, the perpetrator of violence, their families, their clothes, their houses, their streets, even their names — become radioactive. Violence infects everything it touches. So, as a rule, people in primitive society avoid everything associated with it like the plague.
Something very much like this process is now unfolding. Effective Altruism has been contaminated beyond rescue by SBF’s involvement in the movement. This is right and just and proper. For just as FTX was securities fraud, EA is intellectual fraud.
Even if you disagree with my opinion that EA is best thought of as midwit freshman philosophy at best, that there’s been no breakthrough in moral philosophy here, you can hardly deny that EA is now radioactive. Even EA-adjacent opinion-shapers are now engaged in a fighting retreat on all fronts. On the pages of Nation, Jeet Heer singled out Matthew Yglesias and David Shor; condemning them for their centrist neoliberalism. I’m not sympathetic to arguments by labeling. Anyway, luckily for both, they seemed to have dodged a bullet in that they had not yet accepted a check from SBF.
Plenty of others did; almost all of the them Democrat. This is hardly a new game for tech money and Dems. But what makes the fallout really explosive here is that Democrats were not only on SBF’s payroll, Democrat senators were out selling the contaminated securities to gullible Americans on live television. Democrats will also try to fight a fighting retreat, but honestly, it’ll going to prove mighty hard for them to evade the fallout.
Even more significantly, SBF was writing checks left, right and center to ensure that crypto be regulated by the CFTC (which, unlike the SEC, does not have the kind of institutional muscle to impose order). That’s out of the question now. And anyone associated with that idea is now contaminated.
The big question is whether SBF’s political spending bought Democrat policy on this question. Senator Hawley has rightly demanded an investigation into this nexus. So, we can already see that, as I told Tooze on Twitter, this is hardly “a tempest in a teapot.”
But these are perhaps merely tactical considerations. Of greater strategic import, in my judgement, is that the crypto crisis intensifies Gurri’s ‘crisis of authority in the New Millenium’.
The loci of the legitimation crisis extend well beyond the crypto bros, EA, and EA-adjacent scribes like Matt Yglesias and Eric Levitz. While FTX has been demonstrated to be securities fraud, EA as intellectual fraud, and EA-adjacent scribes as some combination of gullible and self-serving, the crisis of authority extends well beyond — to the Senate, the SEC, venture-capitalist firms that went in heavy, institutional capital allocators, and so on and so forth. Heads will probably roll at Sequoia, Singapore’s sovereign wealth fund, and Ontario Teachers Pension Plan — all of these fiduciaries who invested in FTX clearly failed to perform their due diligence as required by the law. They might even get engulfed in lawsuits, just as Senator Gillibrand may be investigated for conflicts of interest and perhaps even forced to withdraw from public affairs in humiliation.
This is before we come to the much more complex but also more important question of the broader fallout on elite-mass relations. Whereas crypto during the bubble signaled a kind of social dynamism, it will henceforth be seen as a symptom of the deep corruption of American elites. That cannot fail to exacerbate the secular deterioration of elite-mass relations and the broader crisis of authority in the United States, and perhaps elsewhere in the West as well.
The big question to me is whether the present crisis will be productive, at least in the sense that the dot-com crash turned out to be. We can only dimly perceive the most important historical processes unfolding underneath all the froth and the drama. Hard to detect in real time, surely, but we shouldn’t imagine that historical processes are not unfolding simply because we remain, in the moment, ignorant of them.
One of the most striking features of the present conjuncture is that the oligarchy has come to weigh on domestic and foreign affairs in a particularly blatant way. This is a symptom of the decay of American democracy; a decay exacerbated by the breakdown of elite-mass relations. The poster child of this development is not so much SBF as Elon Musk, who has surfaced as the most powerful man on the planet.
Not only has the biggest of the oligarchs seized control of an important social media platform, and restored a censored President to boot, the man is conducting his own private foreign and military policy. Biden was asked what he thought about the Starlink outages, an astonishing instance of private foreign policy pursued by an oligarch of the sort familiar to us from the post-Soviet world. The President said it would be “worth looking into.” But this is the strange world we’re now in: it is not clear at all that the White House has the upper hand in this confrontation with the biggest of the American oligarchs.
Elon has thrown his weight behind Ron DeSantis. So, he’s an enemy combatant as far as Democrat partisans are concerned. But what can they do to him? He can write bigger checks to Republicans than SBF could’ve written for the Dems. He can even impose discipline on Twitter with an iron fist, in a way totally not conducive to Democrat interests, but totally within his authority as the owner and operator of the platform (“new adventures in private property”). Having presided over draconian censorship themselves, Democrats are in no position to point fingers. We must grapple with the very serious possibility that a single oligarch could take on the White House and the Democratic Party and prevail. When was the last time this was a real possibility?
In this context, perhaps the most important political economy consequence of the FTX implosion is to clear the field for Elon Musk. For SBF was the Dems’ and the professional class’s answer to Musk. With SBF likely going to jail for securities fraud, the Dems are on the back foot not just against Republicans but against a single oligarch who seems to have made up his mind to teach them a lesson. Had it not been for the fact that he was born in South Africa, Elon Musk, self-styled populist hero, would have a better than even chance of seizing control of the United States government. If this is not a wake up call for the adults, then what is?