As the crypto community grapples with what led to this, its biggest-ever crisis, a look at Shakespeare and his various king characters is useful.
Most of the bard’s monarchs are either megalomaniacal villains (Richard III, Claudius), dupes (Macbeth) or madmen (Lear). All of them are seduced by power, consumed by paranoia and fail to distinguish their self-interest from that of their subjects.
There are no allegations that Sam Bankman-Fried poisoned anyone or plotted against his next of kin. But there is now jaw-dropping evidence that, closeted in an island compound with a small cabal of insiders, the erstwhile CEO of FTX wielded power in an erratic, unchecked and highly destructive manner. All this while he cultivated, promoted and largely succeeded in embedding in popular consciousness the glossy image of a wise and benevolent leader.
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This wasn’t supposed to be the crypto way. Most FTX customers likely believed their investments in decentralized protocols supported systems that could free people, and their economic activity, from the need to trust a corruptible centralized authority. (Whether they understood the idea enough to discern which few tokens truly held such promise is a very different matter.)
Yet, there are fewer modern communities that have been so undermined by the investment of excessive trust in a leader figure. Its root cause is the age-old human habit of hero worship.
Crypto fanatics put this young, quirky leader on a pedestal, gave him the keys (literally) to the kingdom and allowed him to completely corrupt the authority they’d granted him. (Read the gob-smacking bankruptcy filing of SBF’s replacement CEO, John J. Ray III on the “unprecedented” accounting and business practices at FTX: a complete “failure of corporate controls,” an “absence of trustworthy financial information,” “compromised systems integrity,” and the “concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals.”)
And while SBF’s FTX takes the cake for crypto’s biggest con in dollar terms, it’s noteworthy how many other conmen crypto has produced: Mt. Gox’s Mark Karpeles, QuadrigaX’s Gerald Cotton, OneCoin’s Ruja Ignatova. The list goes on.
How could a community so obsessed with decentralized systems fall so frequently for the one thing it professes to resist? I’d say it’s a combination of interrelated, deeply human factors. Recognizing and understanding them is vital if the crypto community is to adopt a model of uber-governance that protects its members from being duped by such cons.
Crypto bros are human, after all
Hero worship is universal. It’s primal. It starts with alpha apes and tribal leaders and leads to our historical obsession with wartime leaders like Lincoln or Churchill, with celebrity CEOs like Warren Buffett or Jack Welch, or with sport coaches like Bill Belichick or Vince Lombardi. There is something deep-seated and innate in this most social of instincts. All groups are fearful of survival and look to leadership to set direction and protect them from such challenges.
So, if hero worship is innate and universal, anyone who advocates for a decentralized system to protect against its failings must also recognize that the same instinct lies within their own mind.
Look at the subculture of Bitcoin since its early days and at its all-defining origin story: that its code was created by a single, brilliant man who selflessly bequeathed it to the world and kept his own name and potential for fame out of it. There have been songs about Satoshi Nakamoto, and poems, and artwork and a hagiographic volume of his “collected writings” (IRC posts).
Read more: Who Is Satoshi Nakamoto?
There’s nothing wrong, per se, with any of this. As I said, it’s a natural state of mind. In fact, it’s hard to imagine the crypto community – itself so important to the formation of an ecosystem of money and value exchange – cohesively forming without these kinds of myths and objects of reverence.
What’s a problem is the denial that it exists, the idea that I’m not vulnerable to this kind of misplaced admiration because I’m a believer in math, not humans.
The vulnerability of invulnerability
This failure to see one’s own limitations is made doubly worse if you also have misplaced confidence in your safety because the system in which you believe you operate is supposed to be decentralized.
Security experts frequently observe that the systems most vulnerable to attack are those where actors have excessive faith in that system’s invulnerability. A false sense of security creates an ideal environment for an intruder.
The same goes for corruption. If there is outsized, unfounded trust in the incorruptibility of an ultimately flawed system, rogue actors can more easily abuse people.
How many of FTX’s customers mistakenly believed their investments were secure because the tokens they’d bought were associated with some decentralized blockchain, without realizing that those blockchain systems sat a few degrees of separation from the centralized, compromised entity acting as their intermediary?
The third piece of the puzzle is the lack of regulation, which opens a path to fixing this mess.
The absence of regulations curtailing the purse-string-controlling power of entities such as FTX tends to amplify the risks generated by these illusions of invulnerability.
Even if they intuitively understand how fractional reserve banking operates, people tend to think about their money in a bank account as being literally their dollars. The same goes for the amounts expressed in a third-party hosted crypto wallet. In both cases, the premise is false because customers’ funds and assets are commingled, not segregated; banks and centralized exchanges are debtors to their customers, not one-for-one custodians.
At least with a bank, the customer is protected by federal deposit insurance under regulatory requirements. A depositor with an under-regulated crypto exchange is really just an unsecured creditor with no recourse if the entity has used those collective assets to invest in outside projects whose value has evaporated. What makes them vulnerable to exploitation, then, is that they live under the illusion that their money is protected when it is not.
Does this mean the solution lies in tougher, globally universal regulations that compel centralized exchanges to ring-fence and protect their customers’ funds and for their controlling entities to be subject to strict audits? Maybe. But my point is not that governments are necessarily the answer but that some form of governance – be that a national regulator or an industry-wide self-regulatory system – is required to force the likes of FTX to protect their users.
Here we can take lessons from another king of history: England’s George III, the monarch who lost the American colonies and who then proceeded to go stark raving mad. The United States’ founders saw the human fallibility problem so clearly that, after some trial and error, they created a system to guard against it. The U.S. constitution, with its “checks and balances,” is one of the great decentralizing protocols of history.
The challenge then, for crypto, is not to figure out the best governance practices for each Layer 1 blockchain protocol, but to find the right framework of overarching governance for all the other human-led members of the surrounding ecosystem: the exchanges, the market-makers, the trading desks, the custodians, the wallet providers and so forth. Should it all be the government’s responsibility? Or is there a self-regulatory, industry-wide solution?
Whatever the fix, its protections should be founded on the famous maxim from Lord Acton upon which any functioning democracy is founded: “power tends to corrupt and absolute power corrupts absolutely.”
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