If this sounds crazy, that’s because it is. I have no idea whether DeSantis believes any of it, or even knows what a central bank digital currency is or what it would do (more on that later). And it’s possible that he’s taking this stand out of general paranoia.

But Krugman doesn't think that DeSantis's resistance to a CBDC from the Fed is just based on paranoia. Krugman thinks that instead, big Republican donors are using anonymous money to hide their bad plans, which is good for them. As Krugman wraps up his piece, he says:

[These considerations] tells us what DeSantis’s attack on central bank digital currency would actually do. It wouldn’t protect the rights of Floridians to buy gas or guns; instead, it would protect the ability of wiseguys to evade taxes, launder money, buy and sell illegal drugs, and engage in extortion.

But hey, I guess thinking that money laundering and extortion are bad things is just another example of the wokeness that DeSantis is trying to kill.

As usual, Krugman's cocky arguments fall apart when they are looked at closely. First of all, my academic colleague Jonathan Newman pointed out that the Fed study Krugman linked to in his piece talked about how a CBDC could be a threat to privacy. In the words of the Fed study:

In other words, Ron DeSantis isn't the only one who knows a CBDC could be used to invade people's privacy. The Federal Reserve knows it, too.

On top of that, we have seen in recent past how political goals can be used to hurt monetary freedom. For example, the Canadian government froze the funds of Canadian truckers who were protesting Covid's practices, and many Americans had their donations stopped in the same way.

"Civil asset forfeiture" is another scary example of what could happen if a CBDC is used. Over the years, many drivers have been pulled over for a routine traffic stop. During these stops, the police have taken thousands of dollars in cash and held it until the driver could show he wasn't a drug dealer, which could take months. For example, Jerry Johnson, a businessman from Phoenix, had $39,500 in cash that he planned to use to buy a truck, but the cops took it from him at the airport. Even though Johnson had never been charged with or guilty of a crime, he did get his money back after two and a half years.

Suppose that the Federal Reserve sets up a CBDC based on how civil asset seizure works. All transactions would be kept on the Fed's ledger, where "suspicious" trends could be looked for by AI bots. And, just like what happens now with real money, the government could freeze a person's account until he or she could show his or her innocence, which would be hard to do without money.

The important thing to know is that a CBDC doesn't have to be like "FedCoin," which requires a MetaMask wallet and is only for people who are good with technology. In a recent podcast show, George Gammon told Cole Snell and me that all people would have to do is switch their checking accounts to the Fed. As long as people's checking account deposits were liabilities on the Fed's balance sheet, that would be a digital money issued by the central bank. They would still be "dollars," but the Fed would have full control. There wouldn't be a middle level of private business banks that compete with each other.

Krugman and his frequent partner Dean Baker unintentionally confirmed Gammon's fears when they said that it would be great if people could skip the middleman and bank directly with the Fed, but those greedy bankers would never let it happen. No matter what they say, Gammon is right. If most Americans had bank accounts directly with the Fed, it would have almost complete power over their lives, especially if cash is phased out.

Krugman says that DeSantis and others who warn about a CBDC are crazy, but they're not. They're just drawing the obvious conclusions from history. The Federal Reserve was founded in 1913 to smooth out changes in the business world and calm down the financial sector. After 16 years, the stock market crashed, which led to the Great Depression. Since then, every time they say they've fixed something, another problem happens.

We don't trust the government or central banks with the news or science, and we shouldn't give them power over money and banking either. Entrepreneurs need to find ways to handle cash and build up capital that aren't the same as what they've always done. Here at infineo, we are doing our part, and we ask anyone who is interested to take a look.

Roosevelt was hailed as a visionary and a savior for his repudiation of the government’s gold commitment. Citizens who distrusted the government’s currency management or integrity were branded as social enemies, and their gold was seized. And for what? So that the government could betray its promises and capture all the profit itself from the devaluation it planned. Shortly after Roosevelt banned private ownership of gold, he announced a devaluation of 59 percent in the gold value of the dollar. In other words, after Roosevelt seized the citizenry’s gold, he proclaimed that the gold would henceforth be of much greater value in dollar terms.

Dentists, jewelers, and industrial users were allowed to acquire gold to meet their “reasonable needs.” If you had a gold tooth, the government did not yank it out. But if you possessed more than $100 in monetary gold (coin or notes denominated in the yellow metal) after May 1, 1933, you were a villainous lawbreaker until private gold ownership was legalized four decades later.

With the passage of the Thomas Amendment to an agricultural bill on May 12, 1933, vast new presidential powers over money were affirmed by Congress. But even some of FDR’s own party still had a conscience. Democratic Senator Carter Glass of Virginia solemnly and honestly lamented,

It's dishonor, sir. This great government, strong in gold, is breaking its promises to pay gold to widows and orphans to whom it has sold government bonds with a pledge to pay gold coin of the present standard of value. It is breaking its promise to redeem its paper money in gold coin of the present standard of value. It’s dishonor, sir.

When FDR followed up in June by abrogating the gold clauses in both private and government contracts, he asked blind Oklahoma Senator Thomas Gore, a fellow Democrat, for his opinion. Gore had lost his eyesight at the age of 12 but he saw right through FDR on this matter. He famously replied, “Why that’s just plain stealing, isn’t it, Mr. President?”

In his book, Economics and the Public Welfare, A Financial and Economic History of the United States, 1914-1946, the great economist Benjamin Anderson recalled Senator Gore’s words on the Senate floor:

Henry VIII approached total depravity, as nearly as the imperfections of human nature would allow. But the vilest thing that Henry ever did was to debase the coin of the realm. [See: “How Henry VIII Debauched English Money to Feed His Lavish Lifestyle.”

Many Americans were cowed by government threats to do the “patriotic” thing and turn in their gold as Roosevelt mandated. But true to the rugged individualism and defiance of tyranny ingrained in our culture, FDR’s order prompted widespread noncompliance. Best estimates, corroborated in this short video and elsewhere, suggest that for every one dollar in gold that Americans relinquished, they quietly kept three.

If the federal government tried today to seize the gold holdings of private American citizens, how much do you think we would turn over?

Call me a scofflaw if you want, but it would NOT get its hands on mine.

Due to the way these events happened at the same time, many people saw the FTX embroglio as a perfect example and further proof (if it was needed) of Diamond and Dybvig's theory. The author of Money Changes Everything, William Goetzmann of Yale, called FTX's collapse "A Diamond-Dybvig moment" on Twitter. Campbell Harvey of Duke University, whose area of expertise is decentralized finance, called it "a classic Diamond-Dybvig bank run." Matt Levine, writing for Bloomberg, also said that the fact that FTX lent (or "repurposed") its clients' money made it "vulnerable to runs, Diamond-Dybvig, It's a Wonderful Life, etc., everyone knows this." Dozens of other reports called FTX's problems a "liquidity crisis," which is the kind of crisis that Diamond and Dybvig's famous article says causes banks to fail.

The problem with this is that the fall of FTX doesn't show anything about the Diamond-Dybvig story. Most runs on commercial banks don't happen either. And the difference between the kind of bank run Diamond and Dybvig describe and most real bank runs, like the one on FTX, is very important. For example, government-mandated deposit insurance or public last resort lending may be the best way to stop or respond to a Diamond and Dybvig-style run, but other reforms, like market-based ones, are better at stopping the kinds of runs that happen most often in the real world, like the one on FTX.

Of course, telling you that is a lot easier than getting you to agree. This is why this post is so long.

Illiquidity and Insolvency

To understand Diamond and Dybvig’s contribution, it’s essential to recognize the difference between a bank that’s insolvent and one that’s merely illiquid. Any bank that can fully pay off its creditors once its investments mature, or after liquidating them in an orderly fashion, rather than all at once, is solvent. But whether a bank is solvent or not, if it lacks cash with which to pay its current obligations, it’s illiquid.

The Diamond-Dybvig theory of bank runs is different from other theories because it tries (but doesn't always succeed) to show that banks are vulnerable to runs just because they are illiquid, which they will be if they borrow short to lend long. Diamond and Dybvig say that the possibility of runs on otherwise solvent banks is a reason for a lender of last resort, government-backed deposit insurance, or both. This is because runs can mess up financial arrangements that would otherwise allow patient and impatient depositors to share risk in the best way.

Diamond and Dybvig make it clear that their model is meant to show how runs can be dangerous to banks that are otherwise doing well. To do this, they assume that their hypothetical bank's investments are risk-free, and that if they are left to mature, they will bring in enough money to pay off all of its debts. Its problems don't come from the chance that its investments will go bad. Instead, it's because there's a chance that depositors will freak out, forcing the bank to sell those investments too soon. Diamond and Dybvig say that as long as trust is kept,

there can be efficient risk sharing, because in that equilibrium a withdrawal will indicate that a depositor should withdraw under optimal risk sharing. If agents panic, there is a bank run and incentives are distorted. In that equilibrium, everyone rushes in to withdraw their deposits before the bank gives out all of its assets. The bank must liquidate all its assets, even if not all depositors withdraw, because liquidated assets are sold at a loss.

Importantly, it’s only “because even ‘healthy’ banks can fail” that “bank runs cause real economic problems.” That’s because runs on insolvent banks—that is, banks that have invested badly—don’t necessarily spoil an otherwise optimal risk‐​sharing arrangement. Instead, by hastening the closure of banks that have invested imprudently, or otherwise mismanaged depositors’ funds, they can actually be efficient means for limiting waste.

As if to make this distinguishing feature of their theory especially clear, Diamond and Dybvig contrast it with Irving Fisher’s explanation of bank runs, in his 1911 book The Purchasing Power of Money. According to Fisher, it’s “the failure (or prospect of failure) of firms that have borrowed heavily from banks” that

induces fear on the part of many that the banks will not be able to realize on these loans. Hence the banks themselves fall under suspicion, and for this reason demand cash. Then occur ‘runs on the banks,’ which deplete the bank reserves at the very moment they are most needed.

Diamond and Dybvig compare Fisher's theory to their own and say that he thinks runs happen when a bank's "liquid but risky assets no longer cover the nominally fixed liability (demand deposits), so depositors pull out their money quickly to cut their losses." In their model, a run is caused by "a shift in expectations, which could be caused by almost anything, which is consistent with the seemingly irrational behavior of people running on banks." In fact, the only thing that can't cause a run on a Diamond and Dybvig bank is for depositors to find out that the bank is actually broke, because a Diamond and Dybvig bank is built to be a good bank. The only "shock" that its depositors should worry about is one that they could cause by losing their cool.

In the literature, Diamond‐​Dybvig type runs are often referred to as “random” runs; in contrast, Fisher‐​type runs are “information‐​based.” In a 1988 paper, Charles Jacklin and Sudipo Bhattacharya offer a formal theory of information‐​based runs, showing how their likelihood and welfare implications differ from those of runs of the Diamond and Dybvig type. Among other things, they show that, according to their model, runs aren’t a problem so long as banks’ investments are reasonably liquid and depositors aren’t highly risk averse. Runs can even prove beneficial, by forcing banks to liquidate investments that seem likely to go south. Finally, there are cases in which even risk‐​averse depositors won’t be inclined to run on a bank despite hearing bad news about it. Although Jacklin and Bhattacharya’s findings don’t necessarily rule out a role for deposit insurance or last resort lending in discouraging information‐​based runs, they point to other options that can work as well, or better.

One Bad Bank

Even though cryptocurrency exchanges aren't banks, some of them, like FTX, work like banks. They use the money they get from their customers, which they promise to return on demand, to make risky investments. So, their customers can run away if they have a good reason to think that some of their money has been gambled away.

Just a quick look at what led up to the run on FTX is enough to show that there was nothing crazy about it. Alameda Research was a trading company started by Sam Bankman Fried, who also started and ran FTX. On November 2, a disturbing report about Alameda Research came out. In the weeks before FTX went bankrupt, Alameda lost a lot of money and was almost certainly broke. But CoinDesk says that it filled the big hole in its $14.6 billion balance sheet at the time with FTT and other tokens that FTX made and lent to it. Alameda then put a price on the tokens based on their value on the bull's market. Even though FTX said it was just a custodian of its customers' cryptocurrency balances—that is, that the money it received from them was not its property and would not be lent—it made those customers Alameda's creditors, which meant they would be responsible if Alameda went out of business.

As soon as the truth came out, trust in both companies started to fall apart, and accusations of wrongdoing started to pile up. The run on FTX really got going when Binance, the largest cryptocurrency exchange in the world at the time, decided to sell about $500 million FTT tokens. Even though Binance later said it would buy FTX and save its creditors, it backed out of that deal on November 9. On the 10th, both FTX and its sister company, FTX.US, stopped letting customers withdraw money. On the 11th, both companies, along with Alameda and many other FTX affiliates, filed for bankruptcy in Delaware. At the beginning of November, one FTT token was worth more than $25, but as of this writing, it is worth $1.36.

So far, it looks like FTX's balance sheet only has a small amount of liquid USD assets, about $900 million. This is compared to about $8.7 billion in illiquid private equity and non-USD crypto token investments. FTX's liquidation value won't be known for a while, but calling its creditors' chances of getting their money back in full "slim" is probably an understatement. Recently, FTX account holder bankruptcy claims were selling for as little as ten cents on the dollar. In short, whatever kind of bank FTX was running, it was nothing like the one Diamond and Dybvig describe in their famous paper.

When FTX went down, it caused a lot of other things to happen, like runs on other exchanges. But so far, these also seem to be based on facts rather than fear. Most of them seem to be caused by the "high degree of interconnectedness" of cryptocurrency markets rather than just an epidemic of fear. For example, the failure of Sam Bankman Fried's firms hurt other cryptocurrency firms that had direct credit exposure to them or relied on them for financing. In turn, the firms that were directly hurt hurt other firms that were connected to them, and so on. But the waves only went so far: as Annie Lowrey of The Atlantic wrote on November 12,

the FTX debacle has thus far had no evident impact on the stock market, nor has it had any effect on the stocks of publicly traded financial firms. The Wall Street ‘fear index,’ a measure of financial volatility, went down a touch when FTX went down in flames. A number of firms wrote down or are expected to write down the value of their investments in FTX. But there is little concern about systemic risk, at least for now.

Also, cryptocurrency companies were not attacked without any reason. Fortune's Jeff John Roberts says that instead, there were both winners and losers. The winners included both centralized exchanges that "resisted the urge to chase crypto riches through leverage and offshore shell games" and decentralized exchanges that "are properly collateralized and can't be destroyed by the greed or folly of a single individual." It's hard to square this kind of bias with the idea that runs are caused by unfounded fear.

The Usual Story

Even though the run on FTX was different from most bank runs in many ways, it wasn't because it was based on information. Most runs on banks have also been runs on companies that seemed to be bankrupt or close to it before the runs started. In other words, Diamond and Dybvig's "irrational observed behavior" hasn't been seen very often, and what Matt Levine calls "a classic normal bank run" isn't normal at all.

It's possible that this is why the run on Bailey Brothers Building & Loan, as shown in the movie It's a Wonderful Life, is economists' favorite example of a Diamond-Dybvig type run, even though it's made up. It was used as an example by the Nobel Prize committee. But even that run doesn't really show how Diamond and Dybvig's theory works, because it starts when depositors find out that "Uncle" Billy Bailey lost $8,000 of the bank's cash—a lot of money for a "measly one-horse" thrift in the 1940s. Also, because thrifts didn't offer demand deposits back then, Bailey Brothers Building & Loan wasn't required to let its upset depositors cash out their balances. Mary Poppins, the second most well-known example of a Diamond-Dybvig bank run, has a run that is caused by pure panic. Noah Smith talks about only the two Hollywood runs in an article that praises Diamond and Dybvig's theory for how relevant it is.

Smith's explanation makes me wonder, "Which real-world situations match the theory?" Most studies by economic historians show that few people do. Even in the United States, which has had more than its share of bank runs, failures, and crises, this has been the case. For example, most of the banks that failed during the so-called "free banking era" (1837–1863) did not fail because of bank runs or even because of fraud. Instead, they failed because the value of their assets went down. Often, the troublesome assets were ones that bankers were forced by law to buy. There were definitely runs. But Jerry Dwyer and Iftekhar Hasan say that they were caused by other shocks and don't seem to have caused more permanent bank closings on their own.

After carefully looking at bank runs during the pre-Fed National Banking Era (1863–1914), Charles Calomiris and Gary Gorton came to the conclusion that they didn't fit the Diamond–Dybvig theory. Instead, they usually happened when "bank depositors would change their beliefs about how risky banks were in a reasonable way." Even so-called "panics" during the time of national banking were caused by "rational revisions in beliefs about bank performance" rather than "irrational behavior" on the part of depositors.

But these early events aren't what most people think of when they think of banks that would have been fine if depositors didn't panic and force the banks to close. People instead think about "the scary but rather unique experience of the Great Depression," as the late George Kaufman put it. Even so, most of the bank failures in the early 1930s were caused by things other than runs. As Kaufman points out, and as I've said in other places, they mostly

reflected the severe problems in agriculture from a continuing sharp decline in commodity and land prices after an even sharper run up. Ninety percent of the banks that failed…had capital of less than $100,000, had loans and investments of less than $1,ooo,ooo, and were located in towns of less than 5,000 in population. Even after adjusting for the sixfold [in 1983] increase in prices since that period, these were Ma and Pa banks by any measure and were unlikely to have been diversified greatly or managed professionally.

During the Great Depression, it wasn't just rural banks that went out of business. In some cases, like the Chicago banking crisis in July 1932, depositors didn't just run away from good banks. Still, Calomiris and Joseph Mason say that even in that case, the runs were "caused by fears of bank insolvency, not by depositors' outside demand for cash." If some good banks were hit by runs, it was because they were often rightly thought to have business with or be in the same boat as banks that were already in trouble. In other words, the runs were based on information, but the information wasn't complete, so some good banks were suspected even though they were safe.

Of all the bank runs that happened in the 1930s, the ones that started in February 1933 and ended when FDR declared a national bank holiday on March 6 are usually seen as evidence of a widespread panic. But Barry Wigmore argued convincingly not long after Diamond and Dybvig's article came out that those runs were caused by worries about what the next president-elect would do with the gold standard. As Roosevelt's inauguration day (then March 4) got closer, people worried that he would lower the value of the dollar if he didn't make a firm promise to keep the gold standard. So, people rushed to their banks to deposit money, not because they didn't trust the banks, but because they didn't trust paper dollars. When people got their hands on Federal Reserve notes, they went back to the Fed, especially the Federal Reserve Bank of New York, to trade them for gold. The New York Fed asked New York State Governor Lehman to declare a bank holiday, even though most of the big commercial banks in New York didn't want to. The rest of the country's banks had to close because of this holiday.

During the Great Depression, both rural and urban bank runs were led by sophisticated people with big bank accounts, not by people with small accounts who didn't know much about money. Martin Frost did a study for the Federal Reserve that looked at runs on 67 urban banks that closed at the time. He found that accounts of $25,000 or more made up more than 40 percent of withdrawals, even though they only made up 28 percent of deposits. In 1932, the president of Chemical Bank told the Senate Banking Committee, "The smart guy gets out first, and he's the big depositor." Smart people were thought to know which banks were good and which ones were not.

Many bank depositors haven't had a reason to run on their banks for a while now, thanks to deposit insurance. However, runs still happen, and in the vast majority of cases, they target banks that are thought to be insolvent, usually with good reason. In an article published the same year as Diamond and Dybvig's, Joseph Aharony and Itzak Swary look at bank stock prices to see if they show any effects from what were, at the time, the three biggest bank failures in U.S. history: the Franklin National Bank of New York (FNB), the United States National Bank of San Diego (USNB), and the Hamilton National Bank of Chattanooga (HNB). They come to the conclusion that "the data do not back up the pure contagion effect hypothesis." In particular, they found that the failures of USNB and HNB, both of which had done fraud and other bad things, had no effect on other banks. Aharony and Swary come to the conclusion that "the implication is that the failure of a dishonestly run bank, even a big one, does not have to cause panic and a loss of public confidence in the integrity of the banking system as a whole."

According to Jonathan Rose, what was true in the past was still true during the Great Financial Crisis of 2008. Large depositors led runs on Wachovia, Washington Mutual, and some smaller banks, and each one happened right after a shock that hurt the banks' stability or a revelation about it. Even though some of the runs were contagious, the spread was quite limited, both in terms of location and whether or not banks nearby had also been in the news for the wrong reasons.

History, in Theory

Even though history shows otherwise, since Diamond and Dybvig published their article, many, if not most, economists have tended to see every financial firm failure as a "Diamond Dybvig Moment." Robert Shiller, who also won the Nobel Prize, is a good example of this. In the beginning of his 2011 "Financial Markets" Open Yale Course lecture on "Banks," Shiller says that Diamond and Dybvig's 1983 work is not "a" theory of banks, but "the" theory of banks. We shouldn't be surprised, then, when he goes on to talk about banking crises and treats them all as examples of Diamond and Dybvig's theory, that is, as events that happened because bank depositors got scared and tried to take all their money out, causing "the whole banking system" to collapse.

As I've already said, the "sheer panic" explanation doesn't work well even for the 1933 banking crisis, which was different from most in that it affected the "whole banking system." Shiller can't use it to explain how other runs work either. Take his first example, which is about the Northern Rock Bank in the UK, which failed in 2007. This was the first major bank run in the UK since 1866. "A rumor started," Shiller says, "that Northern Rock had a lot of subprime securities and was going to go bankrupt, so people rushed to Northern Rock...people thought, 'Well, this is just like 1933.'" Then, according to Shiller, the run stopped when Bank of England Governor Mervyn King offered to help everyone.

To call Shiller’s account of the run on Northern Rock less than accurate is to be generous to a fault. As Hyun Song Shin explains in a 2009 article in the Journal of Economic Perspectives,

the storyline of the Northern Rock bank run does not fit the conventional narrative. On September 13, 2007, the BBC’s evening television news broadcast first broke the news that Northern Rock had sought the Bank of England’s support. The next morning, the Bank of England announced that it would provide emergency liquidity support. It was only after that announcement…that retail depositors started queuing outside the branch offices.

Nor did Northern Rock hold many subprime loans or securities. It suffered from its unusually heavy reliance on wholesale rather than retail (deposit) funding. The market for wholesale funding all but froze up after the BNP Paribas suspended redemptions on three of its funds in August 2007. The Northern Rock run was, therefore, “an event in the aftermath of [its] liquidity crisis…rather than the event that triggered its liquidity crisis. In this sense, the Northern Rock episode was not an old‐​fashioned bank run of the sort we see in movies like It’s a Wonderful Life or Mary Poppins.”

Instead of being brought down by jittery retail depositors, Northern Rock’s fate was sealed “by sophisticated institutional investors.” As Hyun goes on to explain,

the irony of the images of Northern Rock’s retail customers standing in line to withdraw deposits is that retail deposit funding is perhaps the most stable form of funding available to a bank. Although retail deposits can be withdrawn on demand, bankers have been heard to joke that a depositor is more likely to get divorced than to switch banks.

Diamond and Dybvig’s research has been extremely influential, and that fact alone may justify their having received the Bank of Sweden’s prize for it. But as Shiller’s account of Northern Rock’s collapse makes clear, the theory’s influence hasn’t been entirely benign. When economists and policymakers, ignoring the work of economic historians, insist on viewing actual bank runs through Diamond‐​Dybvig colored glasses, they see a warped version of history; and warped versions of history can inspire unwise policies.

Good versus Bad Runs

Even though Northern Rock's run wasn't a Diamond-Dybvig run, it was a rare case of a bank failing not because of bad investments but because it didn't have enough cash. As such, it shows how dangerous it can be when people aren't the same age. Even so, Northern Rock's liquidity problems were caused by its own carelessness. It was careless not because it used ordinary retail demand deposits to fund its investments, but because it didn't. Most bankers have known for a long time that "core" retail deposits are a much more stable source of funding than short-term wholesale funds. So, it's not clear that better solutions to Northern Rock's liquidity problem would have been more complete deposit insurance or more timely last-resort loans.

Indeed, in many cases in which a bank is about to fail because it has acted imprudently, its failure may be optimal whether runs hasten it or not: as George Kaufman explains (pp. 6–7), a central bank that keeps a reckless bank alive by lending it funds with which to pay off its anxious creditors can reduce rather than enhance social welfare, and especially so if the bank’s net worth becomes negative while it is being kept on support. When allowed to proceed, runs on insolvent banks keep them from becoming “zombie” institutions the costs of whose failure ultimately falls on taxpayers. In short,

bank runs do not deserve the bad reputation they have received. They did a dirty job in maintaining market discipline. But someone had to do it! Eliminating dirty jobs per se does not eliminate the problems that give rise to these jobs.

Even though it's true that when depositors don't know everything about their bank's investments, the failure of an insolvent bank can cause runs on some solvent banks, that risk justifies last-resort lending to the solvent banks, not the insolvent ones, and since lending to solvent banks isn't very risky, it's much more likely to come from the private sector. Lastly, there is a case for insuring unsophisticated depositors against losses even when those losses are caused by their banks' bad behavior. However, that case hardly justifies coverage of "$250,000 per depositor, per insured bank, for each account ownership category" and other policies that may keep bank depositors whole by passing the cost of bank failures on to people who are even less to blame and maybe even less well off.

Even though it was a big deal, FTX's failure seems to be a perfect example of a run on a financial institution doing its "dirty job" of keeping the market in check. It didn't change the best way to share risks; instead, it helped stop a move away from those arrangements that couldn't last. Even though the collapse of FTX shook up other crypto markets, it did not pose a serious threat to the system as a whole. Could a much bigger failure like FTX have done it? Sure, but the only way to make it less likely that a huge mess will happen is to let people who are involved in smaller ones take their lumps. In short, if the choices are the Diamond-Dybvig solution of government guarantees, with all the problems that come with them because of moral hazard, or doing nothing, it's probably best to do nothing.

Better than Bailouts

But those aren’t the only choices. Because Diamond‐​Dybvig runs can happen for no reason at all, nothing short of blanket depositor guarantees, and the outright prohibition of all sorts of uninsured intermediaries that engage in maturity mismatching, can easily rule them out. In contrast, when runs are information‐​based, whether they afflict sound financial firms or only unsound ones depends on the accuracy of the information available to those firms’ customers. The more accurate that information, the less likely it is that runs will harm otherwise solvent businesses.

It follows that there are ways to protect clients of cryptocurrency firms from losses without undermining market discipline. This can be done by requiring that uninsured cryptocurrency exchanges and token issuers routinely publish audited reports listing their asset holdings. The Stablecoin Transparency Act (S. 3970 and H.R. 7328) is a reform in this spirit specifically aimed at USD stablecoin issuers, as is an earlier proposal put forward by my CMFA colleagues.

A related reform is the "ring-fencing" of relatively liquid assets that can be used to back cryptocurrency balances. This ensures that holders of these balances will get their money back in full if a company goes bankrupt because of its or its affiliates' risky activities. Ring-fencing can be done by giving cryptocurrency firms' deposit-taking operations to a "bankruptcy remote" subsidiary or by putting a licensed third-party custodian in charge of protecting their customers' cryptocurrency balances.

Other good ways to change things don't need the government's help because the cryptocurrency industry and users are already doing them on their own. The first, called "Proof of Reserves" (PoR), uses cryptographic verification to show auditors of a centralized exchange where their clients' money is going or, in other words, what their account balances are backed by. PoR alone can't stop an unwise or dishonest exchange from making risky or illegal investments and failing as a result, but it can reassure customers of other exchanges that those exchanges aren't in the same boat. Soon after FTX went down, Binance said it would start using PoR on its accounts. Several other exchanges have also already used PoR in their audit reports after FXR.

Even more interesting would be to bring cryptocurrency transactions back to their decentralized roots. The original idea behind cryptocurrency was to get rid of the need for third parties, making transactions completely safe from bad actors. Using centralized exchanges like FTX may have some benefits for cryptocurrency users, but it defeats the point of cryptocurrency in the first place. But an open-source algorithm like the one that makes Bitcoin a truly decentralized currency also makes decentralized cryptocurrency exchange (DEX) possible. This means that you don't have to trust your coins to central counterparties with unclear balance sheets, which is a very risky thing to do. Campbell Harvey writes that:

I own asset A and I want to buy asset B. I send my asset A to the decentralized exchange and in return I get asset B. I see the liquidity and I see the price. I can do this 24/7. A DEX has no central counterparty. I interact directly with the algorithm. … I can see the liquidity in real time, essentially an instantaneous audit. There is no leverage. The liquidity is not lent to hedge funds. No broker/​dealer is involved… .When I trade, the execution and settlement are simultaneous. Most importantly, I do not delegate custody of my tokens. The result is no waiting in line as an unsecured creditor in a bankruptcy.

There are already a lot of DEX exchanges, and the number of people using them has grown since FTX went out of business.

All of these other ways to stop people from running out of cryptocurrency have bugs that need to be fixed, if not bigger problems. DEX, for example, puts the responsibility of storing and caring for coins back on the individual, though better cryptocurrency wallets can make this job a lot easier. PoR doesn't guarantee that a company won't go bankrupt, and without ring-fencing, holders of balances with "proven" reserves will be treated as unsecured creditors if the company goes bankrupt. But as my colleagues have said elsewhere, good cryptocurrency regulations are worth waiting for, and because information-based runs on cryptocurrency firms don't pose a systemic threat to the U.S. financial system yet, regulators will have plenty of time to get things right. That is, unless they get scared, they'll have plenty of time.

James Royal, the main reporter at Bankrate, tells CNBC Make It that more and more Americans are realizing that cryptocurrency is just a speculative craze and that the industry is full of scammers.

At that point, a recent CNBC Make It: Your Money survey, done in partnership with Momentive, found that about 60% of Americans think investing in digital currency is very risky, up from 45% in 2021. Another 26% think it's kind of risky.

According to the CNBC All-America Economic Survey, only 8% of Americans like cryptocurrency as of November 2022.

Overall, the crypto market lost a little more than $2 trillion in 2022, and popular digital coins like bitcoin are now worth much less than they did in 2021.

As of Dec. 22, CNBC's calculations show how much the value of seven popular cryptocurrencies changed in 2022.

1. Terra: -100%
2. Solana: -93%
3. AMP: -93%
4. Cardano: -80%
5. Ether: -67%
6. Bitcoin: -63%
7. Dogecoin: -55%

Prices are likely to go down even more when "traders and crypto companies start to see that they don't have an endless stream of marks willing to prop up crypto prices," says Royal.

In fact, Royal says that no one should invest in cryptocurrency at all.

Crypto is thought to be a very risky asset whose price rises and falls in ways that are hard to predict. Because of this, most financial experts will tell you not to put more money into crypto than you can afford to lose.

But many people who follow the crypto market were caught off guard by the year's ups and downs. High-profile company and project failures sent shock waves through the industry.

In May, an algorithmic stable coin called terraUSD, or UST, which was supposed to be worth the same as the U.S. dollar, failed. Its failure brought down terraUSD's sister coin, luna, and hurt companies that had investments in both coins.

Because of its exposure to terraUSD, Three Arrows Capital, a hedge fund that was optimistic about crypto, went into liquidation and filed for bankruptcy.

Then, in November, one of the biggest cryptocurrency exchanges in the world, FTX, shut down. It was run by Sam Bankman-Fried, an executive who was often in the news. The effects of FTX are still being felt in the cryptocurrency industry.

On top of crypto-specific failures, investors have also had to deal with rising interest rates, which have put pressure on risky assets like stocks and crypto.

Since its all-time high of nearly $69,000 in November 2021, Bitcoin's price has dropped by about 75%, and the value of the entire cryptocurrency market has dropped by more than $2 trillion. Bitcoin was worth just under $17,000 on Friday.

NBC reached out to the people behind some of the boldest price calls on bitcoin in 2022, asking them how they got it wrong and whether the year’s events have changed their outlook for the world’s largest digital currency. 

Tim Draper: $250,000 

“I expect a flight to quality and decentralized crypto like bitcoin, and for some of the weaker coins to become relics,” he told CNBC via email.

Bitcoin would need to rally nearly 1,400% from its current price of just under $17,000 for Draper’s prediction to come true. His rationale is that despite the liquidation of notable players in the market like FTX, there’s still a huge untapped demographic for bitcoin: women.

“My assumption is that, since women control 80% of retail spending and only 1 in 7 bitcoin wallets are currently held by women, the dam is about to break,” Draper said.

Nexo: $100,000 

In April, Antoni Trenchev, the CEO of crypto lender Nexo, told CNBC that he thought the world's biggest cryptocurrency could rise above $100,000 "within 12 months." Even though he still has four months to go, Trenchev knows it is unlikely that bitcoin will rise that high anytime soon.

Bitcoin "was on a very positive path," says Trenchev, and more institutions were using it. However, "a few major forces got in the way," such as a buildup of leverage, borrowing without collateral or against low-quality collateral, and fraud.

“I am pleasantly surprised by the stability of crypto prices, but I do not think we are out of the woods yet and that the second and third-order effects are still to play out, so I am somewhat skeptical as to a V-shape recovery,” Trenchev said. 

The entrepreneur says he’s also done making bitcoin price predictions. “My advice to everyone, however, remains unchanged,” he added. “Get a single digit percentage point of your investable assets in bitcoin and do not look at it for 5-10 years. Thank me later.” 

Guido Buehler: $75,000 

Guido Buehler, the former CEO of the Swiss bank Seba, which focuses on cryptocurrencies and is regulated, said on January 12 that his company's "internal valuation model" for bitcoin in 2022 was between $50,000 and $75,000.

Buehler thought that the price would go up with the help of institutional investors.

Bitcoin was worth between $42,000 and $45,000 at the time. In 2022, Bitcoin never got to $50,000.

When CNBC asked the executive, who now runs his own advisory and investment firm, what went wrong with the call, he said that 2022 has been a "year from hell."

"The war in Ukraine in February sent a shock through the world order paradigm and the financial markets," Buehler said, pointing out that the disruption of commodities like oil caused the markets to become more volatile and inflation to rise.

Another major factor was "the realization that interest rates are still the main driver of most asset classes," including crypto. This was a hard blow for the crypto community, which had thought that crypto is not related to traditional assets.

Buehler said that fraud, the lack of risk management in the crypto industry, and the lack of regulation have also had a big effect on prices.

The executive is still optimistic about bitcoin, saying that it will reach $75,000 "sometime in the future," but that it's just a matter of when.

“I believe that BTC has proven its robustness throughout all the crisis since 2008 and will continue to do so.”

Paolo Ardoino: $50,000 

In April, Bitfinex and Tether's chief technology officer, Paolo Ardoino, told CNBC that he thought the price of bitcoin would drop sharply below $40,000 but end the year "well above" $50,000.

"I'm optimistic about bitcoin... At the time, he said, "I'm very optimistic because I see so much going on in this field and so many countries interested in adopting bitcoin."

When the interview took place, bitcoin was worth more than $41,000. Ardoino was right about the first part of his prediction: bitcoin did fall well below $40,000. But it never got better again.

In an email this month, Ardoino said that he still has faith in bitcoin and the blockchain technology that makes it work.

“As mentioned, predictions are hard to make. No one could have predicted or foreseen the number of companies, well regarded by the global community, failing in such a spectacular fashion,” he told CNBC.

“Some legitimate concerns and questions remain around the future of crypto. It might be a volatile industry, but the technologies developed behind it are incredible.”

Deutsche Bank: $28,000 

The link between bitcoin and U.S. stock indexes, especially the tech-heavy Nasdaq 100, has been a major theme in 2022. In June, analysts at Deutsche Bank wrote in a note that the price of bitcoin could reach about $27,000 by the end of the year. At the time the note was written, bitcoin was worth just over $20,000 each.

It was based on the idea that the S&P 500 would jump to $4,750 by the end of the year from its current level of $4,350.

But it's unlikely that call will come.

Marion Laboure, who was one of the people who wrote Deutsche Bank's first report on cryptocurrencies in June, said that the bank now thinks that bitcoin will end the year at around $21,000.

“High inflation, monetary tightening, and slow economic growth have likely put additional downward pressure on the crypto ecosystem,” Laboure told CNBC, adding that more traditional assets such as bonds may begin to look more attractive to investors than bitcoin.

Laboure also said high-profile collapses continue to hit sentiment.

“Every time a major player in the crypto industry fails, the ecosystem suffers a confidence crisis,” she said.

“In addition to the lack of regulation, crypto’s biggest hurdles are transparency, conflicts of interest, liquidity, and the lack of reliable available data. The FTX collapse is a reminder that these problems continue to be unresolved.”

JPMorgan: $13,000 

Nikolaos Panigirtzoglou, a JPMorgan analyst, and his team wrote in a research note on November 9 that the price of bitcoin would fall to $13,000 "in the coming weeks." After the FTX liquidity crisis, they could look back and say that it would lead to a "new phase of crypto deleveraging," which would push prices down.

Analysts said that the cost for miners to make new bitcoins has been a "floor" for the price of bitcoin in the past and that it is likely to go back to a low of $13,000 that was seen in the summer. That's not as far off from the current price of bitcoin as some other predictions, but it's still a lot less than the price on Friday, which was just under $17,000.

A JPMorgan representative said that Panigirtzoglou "is not available to comment further" on his team's prediction.

 

Absolute Strategy Research: $13,000 

Absolute Strategy Research's co-founder and chief investment officer Ian Harnett warned in June that the world's top digital currency could fall as low as $13,000.

Harnett explained his bearish prediction at the time by saying that after crypto rallies in the past, bitcoin had fallen about 80% from its all-time high. In 2018, for example, the token fell from a high of almost $20,000 in late 2017 to almost $3,000.

Harnett's goal is closer than most, but bitcoin would have to drop by another 22% to reach it.

When asked how he felt about the call today, Harnett said he was "very happy to suggest that we are still in the process of the bitcoin bubble deflating" and that a drop of close to $13,000 is still likely.

“Bubbles usually see an 80% reversal,” he said in response to emailed questions.

With the U.S. Federal Reserve likely set to raise interest rates further next year, an extended drop below $13,000 to $12,000 or even $10,000 next can’t be ruled out, according to Harnett.

“Sadly, there is no intrinsic valuation model for this asset — indeed, there is no agreement whether it is a commodity or a currency — which means that there is every possibility that this could trade lower if we see tight liquidity conditions and/or a failure of other digital entities / exchanges,” he said.

Mark Mobius: $20,000 then $10,000

VMark Mobius, who has been an investor for a long time, has probably been one of the most accurate people to predict bitcoin.

In May, when the price of bitcoin was over $28,000, he told Financial News that bitcoin would probably fall to $20,000, then bounce back up, but eventually go down to $10,000.

Bitcoin did fall below $20,000 in June, but it went back up in August before falling again for the rest of the year.

But the goal of $10,000 was not reached.

Mobius told CNBC he forecasts bitcoin to hit $10,000 in 2023.

Carol Alexander: $10,000  

A month after bitcoin's all-time high in December 2021, a professor of finance at Sussex University named Carol Alexander said she thought the price would fall to $10,000 "or even more" in 2022.

At the time, Bitcoin had dropped about 30% from its near $69,000 high. Still, at the time, many people who talked about crypto said that it would go up even more. Alexander was one of the few people who spoke out against the general trend.

“If I were an investor now I would think about coming out of bitcoin soon because its price will probably crash next year,” she said at the time. Her bearish call rested on the idea that bitcoin has little intrinsic value and is mostly used for “speculation.”

Bitcoin didn’t quite slump as low as $10,000 — but Alexander is feeling good about her prediction. “Compared with others’ predictions, mine was by far the closest,” she said in emailed comments to CNBC.

 

 

 

 

 

The Path Forward

With this in mind, I suggest three takeaways for policymakers in the wake of the FTX bankruptcy.

Differentiate Decentralized Projects from Centralized Exchanges

First, there are important differences between a centralized entity like FTX and decentralized projects that try to minimize the role of human financial intermediaries. Lawmakers should make sure there are clear differences between centralized and decentralized exchanges, and they shouldn't be forced to follow rules that don't fit the risks they face.

Cryptocurrencies are new and different because they let people store and send money anywhere in the world without going through trusted third parties. Cryptocurrencies try to solve the problem of financial frauds like unauthorized transfers and false bookkeeping by giving people an alternative to banks and brokers, who have traditionally been trusted to hold and transfer assets and keep honest ledgers. In broad terms, cryptocurrencies replace "the books" with a public digital ledger (called a "blockchain") that records transactions and verifies them with cryptographic proof. Also, "the bookkeepers" are replaced by programs that run on computers and check each other's work.

DeFi takes this idea one step further by cutting out the middleman from not only token transfers but also a wide range of other financial transactions, such as giving and getting loans, trading different types of crypto tokens, and making up new ways to get insurance. Instead of using financial middlemen, DeFi uses "smart contracts," which are software programs that run themselves and are put on cryptocurrency blockchains. When certain conditions are met, these "smart contracts" deliver financial instruments. DeFi has the potential to change the world because it can be used without permission and can be put together with other projects.

People may doubt that crypto can reduce risks by cutting out the middleman because of what happened with FTX. But without more information, such questions can misrepresent FTX, which is a traditional middleman at its core. Like a traditional bank or broker, FTX took people's assets, such as cash and cryptocurrency, by controlling their "private keys." And FTX kept the books, as bad as they were.

These centralized exchanges are like the way financial instruments have always been traded through middlemen. They let people trade cryptocurrencies for fiat currencies and usually hold their assets for them. Most centralized exchanges organize sales with central limit order books, which match willing buyers and sellers at the best price (i.e., the highest bid and lowest ask touchlines). Their backend software and transaction histories are not by nature public. Centralized exchanges can add or remove tokens from their lists and let users trade or stop them from doing so.

DEXs, which stand for "decentralized exchanges," are an alternative to these centralized markets. DEXs break with history because they use open-source software instead of middlemen. Even though DEXs come in different shapes and sizes, in their most basic form, they decentralize core exchange services like custody, market making or order book matching, and settlement. DEXs let users keep their own tokens and use different ways to set up sales, such as automated market maker pools (AMMs) and on-chain order books. DEXs made up of smart contracts written in open-source code that can be checked are also designed to be public and record transactions directly on a public blockchain ledger. Users can usually list their own tokens on DEX protocols, as long as the blockchain infrastructure of the tokens is compatible with the DEX smart contracts. Even though the companies that make DEX protocols' front-end graphical user interfaces can remove certain tokens from their front ends, DEX smart contracts can be freely copied and changed, so the choices of a single front end don't limit what a DEX protocol can do.

DEXs do not solve every problem or eliminate every risk. For example, users can swap between certain cryptocurrencies, but they can't use debit or credit cards to buy cryptocurrencies. Hackers can also try to break into smart contracts. But DEXs are not reliant on a middleman keeping his word because they are made up of smart contracts that are public and can be checked. Also, real DEXs are written in open-source code, which means that if users don't like everything about one DEX version, they can change it and start over.

This doesn't mean that DeFi is better than centralized finance all the time. Almost certainly, this will depend on what the user needs. It's also not to guess how well DeFi, centralized finance, or any other project will do. Instead, the goal is to help explain what makes DeFi special so that policies that want to deal with financial risks can see how centralized firms and DeFi projects are different. This means knowing not only the risks of decentralized exchanges, like complicated (if public) transaction histories and security holes, but also how decentralization can help reduce other risks by making transaction data public and letting people store their own digital assets. Different kinds of risks should be dealt with in different ways.

Understanding these risks also means knowing that forcing DEXs to follow rules made for traditional intermediaries that work for everyone takes away from what makes DEXs different. It's also counterproductive because, as you might expect, following rules made for intermediaries usually means giving tasks to intermediaries. This brings back some of the risks that DEXs try to avoid.

Establish Clear Rules for the Regulation of Crypto Marketplaces and Token Issuers

Second, whether you think the SEC was sleeping at the wheel or that the fact that FTX was based in the Bahamas meant that no U.S. regulation could have stopped its collapse, the lack of clarity in U.S. regulations is still a problem that leaves known risks unaddressed and can drive innovation to countries with clearer rules.

A sensible regulatory framework should tell both crypto exchanges and token issuers how to tell the difference between projects that copy the risks of traditional finance and those that reduce those risks by cutting out the middleman.

Crypto marketplaces: In the United States, modern exchange regulation tries to deal with the "intermediary risks" posed by the middlemen who make up secondary markets for financial instruments. In order to do this, the Commodity Exchange Act of 1936, as changed by the Commodity Futures Trading Commission Act of 1974, and the Securities Exchange Act of 1934 require, among other things, that exchanges register with and follow the rules of their main federal regulator (e.g., the CFTC or SEC) and keep an eye on and police the behavior of their members. Both regulators want to deal with risks that have to do with where assets are kept, how transparent markets are, how markets can be manipulated, and fraud. But these risks are different in centralized and decentralized marketplaces.

No matter what kind of marketplace it happens in, fraud should never be allowed. This is already covered by securities laws and regulations. It is against the law to defraud, lie, or leave out important facts that could be misleading when buying or selling a security. The same is true in the case of commodities, where it is illegal to knowingly or carelessly defraud someone or make a false or misleading statement or leave out a material fact in a contract to sell a commodity in interstate commerce.

Aside from anti-fraud agencies, however, applying securities and commodity futures exchange rules to crypto marketplaces creates regulatory uncertainty, which hurts those marketplaces and doesn't distinguish between centralized and decentralized exchanges. It doesn't make sense to put rules in place to deal with the risks of middlemen for software that is meant to get rid of middlemen. For example, requirements to hold customer property in a way that makes it less likely to get lost don't apply to DEXs where users keep their own tokens. In the same way, requirements that trading data be made public are, at best, unnecessary for DEXs and, at worst, counterproductive because they could mean that information has to be given in ways that can only be done with more active management of DEX projects.

Congress should make it easy for centralized marketplaces to register with their relevant regulator, the CFTC for crypto commodities marketplaces and the SEC for crypto securities marketplaces. This way, rules can be made that are narrowly focused on relevant risks. Congress should also define decentralized exchanges and make it possible for DEXs that meet certain criteria to register voluntarily with the regulator that oversees them. When DEX registration isn't required, it shows that DEXs can use technology to deal with intermediary risks. It also encourages innovation in DEX design, including consumer protections, keeps up with the speed at which DEXs change, and gives DEXs a lot of room to show what they can do (e.g., their openness and interoperability).

Token Issuers: Taking care of how markets are regulated, however, is only part of the job. It's also important to be clear about whether crypto projects need to be regulated as securities. This will help figure out which regulator has control over the trading of these instruments and what kind of customer protections are needed. If a cryptocurrency project isn't regulated as a security, it should be thought of as a commodity.

Like with exchanges, decentralization is a key factor in deciding whether crypto projects should be governed by the federal securities law regime that is already in place. At a high level, the goal of federal securities law is to make sure that what people say about possible investment opportunities is true. Securities laws were made in part to protect investors from the risks that come from a management body being able to know things that investors don't and from being able to do things that aren't in the best interests of investors. So, securities rules are a good way to deal with the specific risks of fraud, deception, and manipulation by developers, sellers, or promoters who continue to run a cryptocurrency project.

Congress should make it clear that securities laws do not apply to projects that do not have a central point of control. This means that securities laws wouldn't apply to tokens where the developer, seller, or promoter doesn't promise to do the work needed to deliver the token and its benefits, i.e. act like a manager. For example, this could mean making software or trying to get users or merchants to use it. When developers say they will do these things, the crypto project is centralized, and security measures should be put in place. But if the project can work as planned without the help of managers, it is decentralized, and securities laws do not apply to the sale of its tokens.

Congress should make it easier for cryptocurrency projects that are moving toward decentralization but aren't quite there yet to avoid having to follow securities laws. This could be done by giving a streamlined disclosure option that covers information that crypto buyers need to know. Even SEC Chair Gary Gensler, who has been, to say the least, against giving more guidance about crypto, has said that crypto projects may need different disclosure rules than traditional securities like stocks.

To get effective regulation in this space, it is important to make it clear when securities laws apply to crypto projects. Without clear and logical answers, legal uncertainty will continue to confuse developers and users, stifling innovation or sending it overseas, and leaving risks unaddressed that are similar to those already covered by the law.

The Market Should Decide Crypto’s Promise

Lastly, after FTX went bankrupt, there were the usual calls to "protect consumers" from risks by banning crypto, giving crypto the same strict rules as traditional banking, or, paradoxically, not regulating crypto in order to make it look less legitimate. This kind of "protection," which is based on a value judgment about the worth of the crypto ecosystem, takes the choice to engage in technological innovation out of the hands of consumers, investors, and entrepreneurs and puts it squarely in the hands of the government, where it does not belong.

Even though it's reasonable to be cautious around a new type of asset or technology, it's a very different thing to actively stop people from using a tool that, by some estimates, about one in five Americans already uses for things like trading and sending money back home. People from underrepresented groups are more likely to invest in cryptocurrencies. This could be because they are looking for solutions to problems that the traditional financial system doesn't offer. Even though crypto hasn't reached all of the goals that it or others have set for the ecosystem, this is not a reason to limit access to it. Regulatory interventions shouldn't change the results by slowing down the natural growth of an industry.

Also, the fact that some people might lose money if they invest in crypto does not mean that strict rules are needed. Risk is a natural part of markets, and sometimes failure is needed for growth. People shouldn't be protected from loss by the government. Americans should be able to take part in this process, whether it's good or bad, without putting the government's efforts to protect them at risk.

This week, the sharp financial journalist Andrew Ross Sorkin did a livestreamed interview with a different SBF. The crypto entrepreneur's right arm kept shaking, and he looked embarrassed. At one point, SBF said, "Look, I've had a bad month," which might be the biggest understatement of 2022.

In the past few weeks, SBF's $32 billion cryptocurrency exchange, FTX, has fallen apart.

Investors have lost millions. The mostly imaginary wealth of SBF has gone down. Several well-known investors have tried to cut ties with him. And the once-shining star doesn't seem to be able to directly answer questions about his own role in what more and more people think is a fake crypto scheme. "I told you the truth as far as I know it," he told Sorkin. "I don't remember ever lying." (The answer depends on what the word means.)

Were there any signs that FTX was a house of cards or that its founder, a smart kid, might not have known which way was up? The answer depends in part on how skeptical you are and how well you understand how the crypto market works. Yes, in a nutshell. It was said that federal prosecutors were looking into FTX months before it went down. But there were other reasons to be wary of a new business owner who seemed too eager to fit the Silicon Valley "mad genius" stereotype. So why did investors, crypto fans, and the media do it again? Or, as writer and known billionaire-skeptic Anand Giridharadas put it, "My only take on the SBF interview is that I don't know why we keep trusting highly limited, semi-adult men with the keys to our prosperity and society... He doesn't have much to teach. A lot to find out. So many people got it wrong."

Margaret O'Mara is a history professor at the University of Washington and the author of The Code: Silicon Valley and the Remaking of America. I asked her this question. O'Mara said right away that everyone loves the hero's journey. We're still very interested in the idea of the strange genius doing amazing things.

O'Mara says that people still use Bill Gates as a prime example. Gates was the ultimate nerd, but he went on to run a company that changed the world. A generation later, two computer scientists named Larry and Sergey gave the world a clean, uncluttered search portal as an answer to the pop-up chaos of the late dotcom era. They also gave their employees bean-bag chairs to sit on and kept control of a special class of voting shares in their company. It's possible that "founder control" was their best idea, not "search."

In the cases of Sam Bankman-Fried and Elizabeth Holmes, who just got a prison sentence for fraud, the general positive interest in them may have come from old-fashioned solutionism. "Right?" says O'Mara. "They were both trying to fix a mistake." "Holmes comes on the scene at a time when people are asking, "Where are all the women in tech? Also, you people in Silicon Valley only make apps. She makes medical tools that will change the way health care is done.'"

In recent years, people have also thought that the world of crypto isn't perfect and can even be dangerous. Then SBF came along, and the same thing happened again. O'Mara says, "He fits the stereotype of the nerdy guy in cargo shorts with a good background." "He's a quant. Then he talks about politics and helping other people. He doesn't just talk about the technology he's working on; he also talks about the world and how he can use what he's doing in a bigger way.

O'Mara says that the main problem is that people are too optimistic about technology. Even though technology hasn't made us smarter, more efficient, or more productive in the past 20 years—something I talked about in another long conversation I had this week—we still wonder if technology itself can solve the problems it has caused. O'Mara says, "There's this hope that technology will save us, even though we have a lot of proof that it can be a problem."

It might be a simple way to explain why so many people put SBF on a pedestal so quickly, but that doesn't mean it's wrong. We are, after all, people. (This reminds me of something else Giridharadas said about how people look up to tech founders: "They are as limited at people as I am at coding. But because of that, I don't do any coding, and they won't stop ruling over people.

Maybe that's what I was looking for when I watched that Zoom event with SBF in April: proof of humanity and a better idea of how an unregulated exchange for digital coins could be worth the same as billions of US dollars. Now, after a big fall, at least one of those things is clear as day.

Time Travel

When I'm writing Steven's newsletter, this is my favorite part because I get to look through the library in our San Francisco office and flip through old, paper copies of WIRED. (Magazines back then were thicker.)

This month, ten years ago, Mat Honan, who is now the editor-in-chief of MIT Technology Review, wrote a cover story for WIRED about the end of passwords. The story was the best of the best. 2010 WIRED: It was smart and very nerdy. It was about a 14-year-old hacker named Dictate and was based on personal technology. It was written by a white guy.

"The age of the password is over; we just don't know it yet. And nobody knows what will come in its place. What we know for sure is that access to our data can no longer depend on secrets that only we should know, like a string of characters, 10 strings of characters, or the answers to 50 questions. You can't keep a secret on the Internet. Everyone can find out everything with just a few clicks."

Honan goes on to say that in the future, passwords will be multifaceted systems that cross-reference personal identity information with geolocation and biometric data. For more secure passwords, you'll have to give up some convenience or privacy, and the whole thing might feel a little bit creepy, even though it's all to stop creepy scammers. So far, a lot of that has been shown to be true. Many of us rely on two-factor authentication (2FA) and unlock our phones with our faces or fingerprints. If a charge is made halfway around the world, our banks call us right away.

We still use passwords, though. We store these meaningless strings of characters in another app that has its own password. Lily Hay Newman of WIRED said last year that passwords are still "deeply familiar and ridiculously common." And schemes that don't require a password often require people to buy new devices or have at least a smartphone and at least one other device. Honan's predictions have been mostly right. But our next idea of the future should probably include fewer devices, not more.

Just one thing

This week I don't have a reader question because I haven't figured out how to get into Steven's email yet. But someone asked me a question last week that always comes up this time of year. Liz, one of my best friends, told me she was ready for a smartwatch and asked me which one she should get. Liz is one of those high-energy people who likes to bike 100 miles just for fun. And her bike already has a Garmin. So my first thought was to suggest the Garmin Fenix watch I've worn for years. But then she said that she wants a watch that will make her less likely to use her phone.

Since she has an iPhone, it's pretty clear that the answer is an Apple Watch. Is it also a good watch for sports? Yes, especially if someone wants to pay a lot of money for the big Apple Watch Ultra. But it's interesting to think about how the Apple Watch has changed over the past seven years, from an iPhone on your wrist to a pretty good health tracker to, okay, it's not a phone replacement, but it might make you look at your phone screen less. Tech as a way to solve a problem with tech. It will still keep you wirelessly and figuratively connected to your iPhone.

Bitfront said the move is unrelated to recent issues among certain crypto exchanges that have been accused of "misconduct".

Authorities are now looking into "criminal misconduct" at FTX, which was one of the biggest cryptocurrency exchanges in the world.

The company had already filed for bankruptcy earlier this month. On Monday, BlockFi, a company that lends money in cryptocurrency, filed for Chapter 11 bankruptcy protection because it was hurt by FTX's failure.

Bitfront said that it has stopped taking new sign-ups and payments by credit card as of November 28 and that it will stop taking withdrawals on March 31, 2023. The company made it clear that deposits made between December 5 and December 11 will get their interest on December 13, 2022.

I, on the other hand, have a lot of doubts about Sam Bankman-Fried because I've written a lot of books. "There is a lot of loose talk among the crypto bros," I said on May 1.

How about this from Sam Bankman-Fried, … who was asked to explain the practice of yield-farming on Bloomberg’s “Odd Lots” podcast. Yield farming, to put it simply, is borrowing someone else’s crypto tokens in exchange for your own “governance tokens,” and then exchanging the borrowed tokens for higher-yielding DeFi (decentralized finance) instruments.

Bankman-Fried's explanation:

Like this is a valuable box as demonstrated by all the money that people have apparently decided should be in the box. And who are we to say that they’re wrong about that? … And so then, you know, [the governance] token price goes way up. And now it’s a $130 million market cap token because of, you know, the bullishness of people’s usage of the box. And now all of a sudden, of course, the smart money [goes and pours] another $300 million in the box and … it goes to infinity. And then everyone makes money.

"Forget about the Wild West. This is the Wacko West," I said.

Bankman-Fried was one of the people who talked about cryptocurrency at a conference I went to at the end of September. When this happens, I make notes. My first thought was, "He has a constant jiggling knee problem and an F-word problem." The moderator asked him in a nice way what cryptocurrency was all about. He said, "The industry needs to get its sh*t together," which wasn't very helpful. He said, "Who the f*** knows?" when asked when the "crypto winter" would end. He also said that he didn't want scams on the exchange and that unclear regulations were "more than half" of the problem.

"SBF" was said to be worth a bazillion dollars at the time of the conference (I forget the exact figure that was being bandied about). This has gone from "no money and probably jail" to "no money and probably jail" very quickly.

The most important thing to know is that as of November 10, FTX owed $8 billion more than it had in cash. For a while, people thought that it had been hacked for up to $477 million. In fact, these remaining assets were moved to a wallet that belonged to the Securities Commission of The Bahamas, where FTX was based.

Traders of cryptocurrencies like Genesis and Galois Capital have said that hundreds of millions of dollars are stuck on the FTX exchange. They have a lot of people with them. Shortly, a lot of people who gave SBF their money will never see it again. They might have thought that their crypto was in a safe. Their code is kept in a crypt.

So, what's the best comparison? This past week, I've heard a few: The Lehman moment for Crypto. Long-Term Capital Management is the time for crypto. Nope. In 1998 and 2008, the Federal Reserve stepped in to stop collapses from becoming financial crises. In the case of Lehman Bros., the Treasury had to help out. Some things are too important to fail. This isn't happening because neither FTX nor crypto is a very big deal.

The dot-com bust of 1999-2000 might be a better comparison. But in Web 2.0's mass-extinction event, there wasn't that much fraud. Cryptocurrency might be more like Enron in that it is a bubble and a fraud.

In reality, though, these modern comparisons don't do Bankman-rise Fried's and fall justice. To really understand what just happened, you have to go back 150 years to Anthony Trollope's brilliant book The Way We Live Now (1875). Partially based on the fall of Overend, Gurney and Co. in 1866, the novel tells the story of Auguste Melmotte's rise and fall. Victorian society praises Melmotte as a financial genius, not because he is one, but because he offers the wealthy the chance to get rich quickly.

Today, the internet seems like the best place to make easy money, if only we could "monetize" it. In the 1800s, railroads were another network that made it easy to make money. Melmotte lists the South Central Pacific and Mexican Railway Board on the stock exchange. This company is supposed to build a new railroad line from Salt Lake City, Utah, to Veracruz, Mexico. Even though the railroad doesn't exist, Lady Matilda Carbury and her son Sir Felix are interested in it because it will make them a lot of money in the future. Melmotte and the American businessman Hamilton K. Fisker go together like hand and glove.

Melmotte rises to the top of society in London, buys a country estate, and is elected to the Parliament. Of course, the whole thing is a huge scam, which becomes clear when Melmotte fakes documents to get the money for the country estate. Everything falls to pieces. Melmotte kills himself because he is ashamed.

Orlando Bloom, Tom Brady, Bill Clinton, Katy Perry, and all the other celebrities who recently flew to FTX's base in the Bahamas are today's Lady Carburys. So are the Miami Heat basketball team, for whom SBF paid $135 million to rename their arena, and Larry David, who was in an FTX Super Bowl ad.

But it wasn't only famous people. Some well-known organizations that invested with FTX were the Ontario Teachers' Pension Plan and the Temasek fund in Singapore.

One of the biggest names in venture capital, Sequoia, seems to have been fooled completely. In the 1800s, it was common for journalists to write about stocks. Let's look at that profile of Sequoia again. We read that SBF had a "vision about the future of money itself" and could "very well end up making the dominant all-in-one financial super-app of the future."

Bankman-Fried was superhuman. He could get a 10 out of 10 in a meeting with top venture capitalists while playing League of Legends at the same time. He was "as good as anyone in the world at explaining the basics of macroeconomics," but, unlike, say, Harvard's Greg Mankiw, SBF could teach macro "while playing Storybook Brawl round after round." The man was "clearly very smart." He was "a trillionaire in the making."

How do you explain how Bankman-Fried went from being a future trillionaire to being a nobody? The New York Times said some very moving things. Yes, SBF had lost "most of his fortune," but he was "surprisingly calm," slept pretty well, and still played Storybook Brawl during interviews. Had FTX done something wrong by using billions of dollars from customers to support his hedge fund Alameda Research? "He could only give a few details." He just wished he hadn't taken on so much.

Still don't know exactly what happened? Let's see what social media SBF has. On Nov. 10, he tweeted, "I screwed up and should have done better." But relax. "THIS IS ALL ABOUT THE NON-US EXCHANGE, FTX INTERNATIONAL. FTX US USERS ARE FINE!" (Cut to meme of dog in burning house.)

He went on to say, "At the moment, the total market value of FTX International's assets and collateral is higher than client deposits (prices change!). But this isn't the same as liquidity for delivery." SBF was shocked to find out that some FTX users were using margin credit to gamble on crypto tokens and that his exchange could have a run on it. "Because when it rains, it pours," she said. No kidding!

Last Tuesday, he shed more light on the situation. "After September 11, 2001... a) Alameda had more assets than liabilities M2M (but was not liquid!) b) Alameda had a margin position on FTX Intl." The Wall Street Journal in other words: "Behind the scenes, FTX used billions of dollars from customers to pay for risky trades by Alameda Research."

FTX was also spending money in a way that is usually associated with drunken sailors. From October 2021 to March 2022, the company spent $1.1 billion on acquisitions, $153 million on sales and marketing, and $122 million on real estate.

As financial historians, we have seen this movie many times before. Here's what I wrote about why SBF should try reading books when he has more free time in my 2008 book The Ascent of Money:

Since the first time people bought and sold stocks 400 years ago, there have been many financial bubbles. Share prices have gone up and down many times, reaching heights that can't be kept up. Skulduggery has always been a part of this process, as shady insiders have tried to make money at the expense of naive newcomers. This pattern is so common that it can be broken down into just five steps:

1. Displacement: Some change in economic circumstances creates new and profitable opportunities for certain companies. 
2. Euphoria or overtrading: A feedback process sets in whereby rising expected profits lead to rapid growth in share prices. 
3. Mania or bubble: The prospect of easy capital gains attracts first-time investors and swindlers eager to mulct them of their money. 
4. Distress: The insiders discern that expected profits cannot possibly justify the now exorbitant price of the shares and begin to take profits by selling.
5. Revulsion or discredit: As share prices fall, the outsiders all stampede for the exits, causing the bubble to burst altogether

 

In many ways, the rise and fall of SBF is a classic case. My advisory firm, Greenmantle, told its clients back in January that the price of Bitcoin, the first cryptocurrency that was supposed to be immune to inflation, was still likely to go down this year. We wrote, "The main reason is that big central banks are getting ready to tighten monetary policy." Since the start of the pandemic, monetary and fiscal stimulus have helped the price of Bitcoin a lot. But this will soon be over."

We thought wrongly that the price of Bitcoin would be "below $30,000" by the end of the year and that there was only a 10% chance it would fall below $15,000-$20,000. We thought this because we thought that if a lot of people used Bitcoin as a "option on digital gold," there would be a higher floor than in previous crashes. It was traded for about $16,500 on Friday.

It turned out that the trend of adoption had stopped, and what mattered more was how rising rates affected players with a lot of debt. This year, one of the risky things Alameda did was sign a $500 million loan agreement with a failed crypto lender called Voyager Digital. Soon after, Voyager Digital filed for bankruptcy because it was connected to Three Arrows Capital (3AC), a hedge fund whose investment strategy was to "lever long" on crypto. 3AC's main idea was that the world was in a crypto "supercycle" where the prices of tokens could only go up.

But 3AC was one of the biggest losers when the Terra stablecoin and its sister token Luna crashed. In just a few days, 3AC lost between $200 million and $500 million. This made it hard for everyone in the industry to get credit, and as prices fell and interest rates went up, 3AC got margin calls it couldn't meet. Counterparties to 3AC took a hit, and Blockchain.com lost $270 million in loans to 3AC. From 3AC to Voyager to Alameda to FTX, there was a chain reaction.

The ghost of John Law, the Scottish banker who blew up the Mississippi Bubble in early 18th-century France, would not be surprised by anything in this story. Almost always, cheap credit is used to blow up bubbles. When monetary conditions get tighter, the players with the most debt go down first. This causes a chain reaction of illiquidity, which leads to bankruptcy as asset prices fall.

The role of shady political influence is another classic part of the FTX story. In the same way that Law made friends with the Duke of Orleans, who was the regent when Louis XV was too young to rule, financial fraudsters have always relied on friends in high places to keep them out of trouble with the law or regulators.

Take Enron, a company that traded in energy and went bankrupt in December 2001. Ken Lay, the company's CEO, couldn't have built his "castle in the air" without Alan Greenspan's "put" on monetary policy. However, Enron also bought protection for itself by giving about $6 million to political campaigns, of which a third went to Republicans. The company also tried to buy fame by paying the Houston Astros to change the name of their ballpark to "Enron Field."

Do you recognize it? In 2020, Bankman-Fried gave at least $10 million to Joe Biden's campaign. During the midterm elections in 2022, he gave $39.8 million to Democrats, making him the second-largest donor after George Soros. Most of these donations, about $27 million, went to the Protect Our Future PAC, which backed candidates who put an emphasis on stopping pandemics.

Not everyone who blows bubbles acts like a philosopher king. Law did, but not as much as Lay. As the son of two law school professors, SBF was very good at making himself look good. There are a lot of gems in the Sequoia profile:

Q: You just happen to be alive in the most important time in the history of the future race. The existential point! Really?

SBF: It certainly would not be one’s prior — at least, not naively. But if you want to really needle on that, there are some anthropic considerations by which that might not be as crazy as it sounds.

People often think that a young man who wants to make billions of dollars very quickly is driven by greed. By raising him to be a strict utilitarian, professors Bankman and Fried gave their son the perfect excuse: he was only making money to do "effective altruism," which is the utilitarian version of "get rich quick." Because you can only do the most good for the most people if you start by making the most money.

Effective altruism also seems to have helped SBF and Caroline Ellison, the CEO of Alameda and one of his girlfriends at the time, make sense of the crazy risks they took as investors. In an interview with my Bloomberg Opinion colleague Tyler Cowen, Bankman-Fried almost agreed that it would be worth playing a game where there was a 51% chance you could "double the Earth out somewhere else" but a 49% chance the Earth would disappear.

This was great news for the people who give money to Democrats. A young man who was willing to take huge risks to make billions, give it all away to solve all the problems in the world, and help Democratic candidates win close congressional races. Will you meet with someone who is so smart? You will, of course. If he's lucky, he'll be the first trillionaire in the world. Don't mind that there's a 90% chance he will blow up.

There are still three questions about FTX that need to be answered. Each of these questions shows how this bubble is different from others in history. First, what in the world did the regulators think they were doing? Last week, we read in the Financial Times that the US Securities and Exchange Commission is looking into FTX's lending of crypto and how it handles customer funds. Bankman-Fried is being looked into by the SEC now? instead of months ago?

Second, what will happen to crypto exchanges in the future? On one level, SBF's demise was caused by a fight between FTX and Binance, a bigger exchange that was started in 2017 by Changpeng Zhao, also known as CZ. CZ still had a lot of FTT, the FTX token, even though he used to invest in FTX. In an article from November 2, the cryptocurrency news site CoinDesk showed how much generously priced FTT Alameda had on its balance sheet. Four days later, CZ said on Twitter that he was selling about $530 million worth of FTT for "risk management" reasons.

This wasn't the only reason he did it. He wrote, "We won't act like we're in love after the divorce." "We won't back people who try to hurt other people in their industry behind their backs." This was the war declaration that caused the price of FTT to drop and people to rush to buy FTX.

"A competitor is spreading false rumors about us to hurt us," Bankman-Fried tweeted on Nov. 7. "FTX works well. The assets are good." (Again, a dog in a house on fire meme.) For a short time, Zhao looked like he was willing to buy out his competitor, who was sick. But then he sent SBF and his team a Signal message. "Sam, I'm sorry, but we won't be able to keep this deal," he wrote. Way too much trouble. CZ.” Bankman-Fried told his team that Binance "probably never really intended to go through with the deal."

Anyone who has studied the history of money in the 19th century will recognize the dynamic. It was how banks and railroads with joint stock fought for market dominance. But there is a puzzle when it comes to crypto. Why do these conversations even happen? The original idea, which goes back to the white paper that Bitcoin's pseudonymous creator, Satoshi Nakamoto, wrote about the currency, was that it would let people pay each other directly without the need for a middleman. The blockchain would record all transactions in a way that could not be changed.

Pure supporters of decentralized finance, like my Hoover Institution colleague Manny Rincon-Cruz, have said for a long time that the exchanges are an oddity, an unwelcome intrusion from the world of traditional finance into the world of DeFi (traditional finance). Sure, exchanges were helpful, especially for speculative day traders who wanted to make money quickly. But they could also be seen through. Transparency was a problem for an effective altruist who wanted to make a lot of money quickly. This is why SBF pushed for the Digital Commodities Consumer Protection Act of 2022 to "kill" DeFi.

I never used FTX because I preferred to try out Cryptoland with a more reputable US-based exchange. But as soon as the crypto bubble started to burst—the collapse of Terra's $15 billion UST stablecoin was the proverbial canary in the coal mine—I took everything out and put it on a Ledger hardware wallet. Those who kept trusting FTX found out the hard way that the old crypto saying "not your keys, not your coins" was true.

After spending a few anxious hours trying to remember how Ledger, Uniswap, and MetaMask work, I would say that DeFi is about as easy to use as PC software was before Windows. As long as this is the case, crypto exchanges will have a role to play. It's possible that, like with Web 2.0, a single exchange will become the most important one, centralizing what was supposed to be a decentralized network, just as Amazon centralized e-commerce, Google centralized search, Facebook centralized social networking, and Twitter centralized outrage. But I think the idea behind trying to call crypto Web 3.0 something else was a bad one. When financial services instead of personal information are traded online, the stakes are just too high.

Lastly, what will happen to cryptocurrency if exchanges aren't necessarily the future? People like my friend Nouriel Roubini, who have been saying for a long time that "sh**coins" will fail, have had a good year in 2022. In his new book, Megathreats, he calls crypto a giant Ponzi scheme made up by "scammers and carnival barkers" to take advantage of naive retail investors with FOMO brought on by the internet. Many crypto coins and tokens will go to zero; in fact, many have already done so. But I'm still not sure that the blockchain-based finance experiment will turn out to be a total failure.

If Roubini had lived in the 1720s, he probably would have said the same kind of funeral prayers for stocks. But the end of equity financing and stock trading did not come with the collapse of the Mississippi and South Sea Bubbles, any more than the many financial panics of the 19th century ended joint-stock banking.

On the other hand, both stock markets and banks were very important in the later stages of the Industrial Revolution, when more money was needed. Antonio Garcia Martinez said, "Innovation begins in mad genius, grift, and bubbles, and ends in institutions of the establishment." Every Web giant you see around you, like Square, Stripe, Twitter, Facebook, Airbnb, and Uber, all started or grew a lot after another panic. Then came the biggest tech boom in a generation after that."

Will there be a DeFi boom after this crypto winter? Or will it always be winter and never Christmas, like in C.S. Lewis's Narnia? The history of money is more on Martinez's side than on Roubini's.

And that’s another reason why Sam Bankman-Fried should read books. I suggest starting with The Ascent of Money.

Slowing Monetary Inflation Creates a Problem for Leveraged Crypto

From Yield Famine to Collapse

Even though SBF's business practices were clearly dishonest and his accounting was a mess, he was able to keep up the ruse for years.

But the truth is that many investors fall for scams like the ones SBF is pushing because they want to believe them. Investors are desperate to find a hero who can promise big returns, even if the risks seem high, because of years of financial repression that has caused "yield starvation." Economist Brendan Brown has said that there will always be manias and stories based on speculation. But when the need to make money is very strong, things get much worse.

Then, the financial world falls in love with financial stars like SBF. SBF was on the cover of Fortune magazine. SBF was featured on a lot of news shows as a young expert on the new economy. This was made worse by the fact that a lot of the client money SBF mismanaged—that is, stole—was spent on huge PR campaigns to boost his image and power. He gave a lot of money to the Democratic Party and used some of that money to win over a lot of media elites. Even after SBF's fraud was found out, the New York Times and the Washington Post still ran stories about how SBF and its members are just good people who are misunderstood. SBF himself said that his whole image was a trick.

The PR worked, and people looking for easy money kept putting money into FTX without doing much or any real research. Many investors forget that when money is easy to make, even frauds or people who aren't very good with money can make themselves look like real geniuses. Unfortunately, sometimes all it takes is a small change in money to show up the scam, and then the party is over.

Bankman-Fried became a lobbyist for FTX and the crypto industry as a whole. He got involved in a wide range of ambitious philanthropic projects, spent a lot of time tweeting and giving interviews, and, most importantly, kept building up his original trading firm, Alameda Research, at the same time as FTX. In the end, it looks like the Alameda anchor was what brought down the FTX ship.

CoinDesk spoke to several current and former @FTX_Official and Alameda employees who agreed to talk on the condition of anonymity.

“The whole operation was run by a gang of kids in the Bahamas,” a person familiar with the matter said.https://t.co/nO5n2bOuc7

— CoinDesk (@CoinDesk) November 12, 2022

David Yaffe-Bellany of the New York Times did an investigation based on interviews with Bankman-subordinates Fried's and close friends. He found that the business operations of FTX and Alameda were often mixed together. Caroline Ellison, a former trader and one-time lover of Bankman-Fried, has been in charge of Alameda for the past few years. And, Yaffe-Bellany says, "a guest who visited FTX's complex in the past few months said that Ms. Ellison had been sitting near computers that were showing [FTX's] trading data." By design, Bankman-operations Fried's blurred the lines between work and personal life. For example, all of the FTX senior brain trust lived, worked, and often dated in the same isolated Bahamas resort compound.

Techno-futurists who see the dot-com billionaire class as a way out of the snobbish, bureaucratized business culture may find this kind of work environment ideal. The movie version of Bankman-Odyssey Fried's will have beautiful sets, if nothing else. Here was a group of young, tech-savvy globetrotters working in T-shirts and cargo shorts to build the financial infrastructure of the future. National laws and borders didn't matter much to these crypto kings. When Bankman-Fried found US regulations too restrictive, he moved to Hong Kong, but then he decided he liked the West Indies better.

And since crypto is a completely virtual asset whose value is backed by nothing but a complicated set of cryptographic algorithms, Bankman-Fried didn't have to worry about a supply chain, deal with labor unions, or keep stock in warehouses. Between FTX and Alameda, Bankman-Fried and his sometimes girlfriend never had more than about 350 employees working for them. This is about the same number of people who work at a single Walmart Supercenter. In other words, it was the top job in the laptop class.

This highly mobile and geographically dispersed business model is typical of the crypto industry as a whole. The pioneers of the crypto industry are very skeptical of not only the traditional banking system but also the checks and balances, oversight mechanisms, and reporting requirements that govern how it works. Putting aside the question of whether or not it is possible (or even desirable) to challenge (much less overthrow) the dominance of fiat currencies, FTX's story shows that even the most mundane legal, regulatory, and human resources rules can be helpful. It's one thing to make a set of currencies based on a libertarian philosophy, but it's a different thing to make corporations based on that same philosophy. An algorithm can be perfected, or at the very least, it can be set up so that it corrects itself automatically. But not so with a person.

In the case of FTX, having someone in the Bahamas who was ready and able to blow the whistle on suspicious related-party transactions, like the ones Bankman-Fried is said to have used to bail out Alameda with FTX assets, would have been a good thing. Bankman-Fried put a lot of faith in his own judgment (it's said that he doesn't even read books), and he mostly stuck to a small group of loyal subordinates whose lavish lifestyles were made possible by his patronage. No one in that group was able to convince him, which wasn't a surprise, that his empire was becoming financially unstable.

The arrogance and lack of skill of business leaders is not a new story, of course. But the risk has grown because digital technology is so easy to scale up. In the industrial age, an entrepreneur with a groundbreaking idea, like a new way to make plastic injection molds or a new drug, would usually have to spend years in a lab, build pilot projects, apply for patents, spread the word at trade shows, find skilled engineers, and find distributors before making a single sale. Even with the help of computers, it still takes an established car company about four years to get a car from the idea stage to the showroom. But an algorithm for taking advantage of inefficiencies in the crypto markets, like the one Bankman-Fried started using in 2018 at the age of 26, can go from being talked about in a Reddit thread to being used in a way that makes money in a matter of hours. The careers of industrial age moguls often followed the natural working lives of their most important capital assets, like blast furnaces, kilns, railroads, and car factories. This is why so many of these people were still important well into their old age. In the digital age, on the other hand, magnates can go through whole boom and bust cycles while still in their 20s.

Also, the traditional way to build up an industrial operation has been for entrepreneurs to work with bankers, investors, lawyers, and auditors. All of these people tend to be conservative, so they tend to make operations more cautious. Capital costs and other barriers to entering a market are often so high that entrepreneurs sell out to established operators or at least fill their boards of directors with people from outside the company. But because crypto and other digital businesses can be scaled instantly and globally with little capital, entrepreneurs can avoid all of these influences. This lets them live like old teenagers from an Adam Sandler movie, often in small peer groups made up of similarly naive brainiacs.

Network effects are another part of digital culture that can make it easier for plutocrats to act on impulse. Even though Elon Musk is not a teenager, he can act like one on Twitter because he knows that millions of users are stuck with his product because of our carefully built network of friends, contacts, and business partners: The collective-action problem will make it hard for a lot of people to switch to a different product, like Mastodon. This helps explain why so many business journalists are still obsessed with Musk's behavior at Twitter, despite the fact that the company doesn't have much of an economic impact. The bitter tone of their reporting shows that they don't like how much power Musk has over our professional subculture, and they feel bad that we give him more power with every tweet we send, even ones that criticize Twitter.

Imagine that Musk's business path had been different—that he had bought Tesla with the tens of billions of dollars he made from starting Twitter instead of the other way around. Would Musk be brave enough to fire half of Tesla's engineers in his first month on the job? Or show that he doesn't care about a lot of Tesla's customers? Nothing like this would ever happen because cars are mostly interchangeable and switching brands is easy. And if Tesla had a disaster, people would just switch to other brands.

There is no easy way to solve any of these problems, except for the way people act. Power users who only use Musk's service to connect with the rest of the world and can't even imagine a world without Twitter are the most dependent on Twitter's network effects. In reality, Facebook, LinkedIn, Substack, TikTok, Instagram, YouTube, and a dozen other services can be used in ways that are similar to Twitter's best features—sharing content, promoting yourself professionally, and connecting with people—but with fewer of Twitter's negative side effects (shaming, mobbing, and ideological self-segregation).

None of these other social media sites can fully replace Twitter on their own. But on the other hand, one thing we can learn from this Musk moment is that we shouldn't use social media as a one-stop shop: Even if Musk sold Twitter tomorrow, there's no guarantee that the next owner would be less rash and unpredictable. In the long run, the only way for users to avoid being held hostage by fickle digital overlords is to start treating social media services like any other consumer good (or professional tool) that exists in a competitive marketplace. This means that we should use social media services more or less (or not at all) depending on how their costs and benefits compare to those of competing services.

When it comes to FTX and crypto in general, consumers need to learn something even simpler. In fact, it reminds us of one of the first things high school students learn in their first economics classes: that money has more than one use, such as being a medium of exchange and a place to store value. Many crypto fans seem to think that because crypto has shown itself to be a really innovative way to trade, it must also be a good way to store value, even though this is not the case. But it's not, as any Bitcoin investor from the year 2021 can tell you. A good rule of thumb is that you should think twice before investing in anything that has no real value and whose price goes up and down based on Twitter feuds between billionaires and the daily chatter of fanatical crypto bros on Discord.

Find more statistics at Statista

There have been many asset bubbles and market manias in the past. And people who lost their FTX assets or were hurt by the "crypto winter" in general have been in good company in the past. There's nothing wrong with it. In fact, it's important to remember that some of the same media outlets that now portray crypto as a Ponzi scheme and Bankman-Fried as a likely fraud were, just a few months ago, building up his reputation as a boy wonder and even a possible industry savior.

The lesson here is not that all crypto users are fools, let alone that "You Can Forget About Crypto Now," as one provocative Atlantic headline put it. It's that even those of us who still use crypto for some types of financial transactions shouldn't put our life savings in it. If the Bankman-Fried biopic, which is sure to be coming to a theater near you soon, can find a way to get that message across, it will be a very good movie.

Even though the DCCPA makes it clear that bitcoin and ether are digital commodities regulated by the Commodity Futures Trading Commission (CFTC), it doesn't make it clear where the line is between crypto securities and crypto commodities. Also, the DCCPA is hard on decentralized finance because it requires all platforms for buying, selling, and trading crypto tokens to register with the CFTC and follow other rules (DeFi). To protect the creativity of DeFi, registration of decentralized crypto token exchanges (DEX) should be completely optional.

Cryptocurrencies are new and different because they let people store and send money anywhere in the world without going through trusted third parties. DeFi takes this idea one step further by cutting out the middleman from not only token transfers but also a wide range of other financial transactions, such as making and getting loans, trading different types of crypto tokens, and setting up new insurance plans.

DeFi uses self-executing smart contracts on cryptocurrency blockchains instead of financial middlemen to deliver financial instruments when certain conditions are met. For instance, if a user locks the right collateral into the smart contract of a lending protocol, a crypto token loan will be made.

DeFi has the potential to change the world because it can be used without permission and can be put together with other projects. The way of lending described above is called "permissionless." To get a loan, the borrower doesn't need a traditional credit score or a "in" with the right institution. Instead, all they need is the right collateral.

DeFi is also composable, which means that functions can be built on top of each other like interoperable Lego blocks. This is possible because the smart contracts that make up DeFi are written with open-source code and standards. For example, a Web3 app that only accepts ether (ETH) as payment can still do business with people who own other cryptocurrencies by using a third-party token swap protocol to change the ether into the other currency.

The DCCPA could hurt what makes DeFi special. Even though the law never uses the word "decentralized," it is very likely that DEXs are covered by it because of how broadly it defines "digital commodity trading facility," which is anything that makes it easier to sell or trade digital commodities between people. Because of this, DEXs would have to follow a lot of rules, starting with having to register with the CFTC.

The problem with these rules is that many of them are aimed at what Kristin N. Johnson, the current head of the CFTC, called "intermediary risks" in a 2021 law review article. This is the chance that financial middlemen will mess up with the assets and information they have. For software that is meant to get rid of middlemen, it doesn't make sense to have rules that protect against risks related to middlemen.

For example, under the DCCPA, covered platforms would have to "hold customer property (including digital commodities) in a way that minimizes the risk of loss." This is important for a centralized exchange that holds users' tokens, but not for a DEX where users hold their own tokens.

Also, as required by the CFTC, trading facilities would have to "make public in a timely manner information on price, trading volume, and other trading data." At best, this requirement is unnecessary for DEXs with smart contracts that are open and can be checked, and where transactions are settled on public blockchains. At worst, it could mean that information has to be given in ways that can only be done if DEX projects are managed more actively.

In the same way, the DCCPA would require digital commodity platforms to name a "chief compliance officer." Regulators micromanaging staff is a problem in any situation, but adding managers to a project that is otherwise a series of smart contracts that run themselves is the worst thing that could be done to reduce risks for intermediaries.

Think about how a mandatory registration system would affect composability and the lack of permissions in the case of a Web3 app that uses a DEX protocol to convert tokens. Given that the DCCPA has a broad definition of "trading facility," the app itself could be seen as a covered digital commodity exchange. If that's the case, DEX interoperability would be a compliance risk, which would take away from the benefits of composable code.

But even if the law were interpreted to put most of the responsibility for compliance on the DEX, the fact that the app and the DEX would have to agree on policies and terms would make the ecosystem much less permissionless.

Any exchange regulation must ask what makes a decentralized exchange different from a centralized exchange and how their risk profiles are different. This will help keep DeFi flexible and permissionless. Decentralization can be defined by technical features, such as whether or not one person or group has majority control over governance decisions and whether or not an exchange is made up of open-source, self-executing smart contracts that can be checked by the public.

The law should also make a distinction between project teams that put themselves between users and a DEX protocol and use their own judgment to decide what to do and developers who let the software, not people, do the work. The important question is whether there is a provider in the loop who makes promises to users that go beyond what is written in code.

For example, if a front-end user interface provider makes promises about how its own performance will help users, such as by actively whitelisting or promoting what it thinks are valuable tokens, that provider is more like a traditional middleman who you expect to act in good faith. Unless these promises are made, though, it doesn't make much sense to put real decentralized exchanges that are just simple front ends and public, auditable smart contracts under rules that are meant to protect against risks from intermediaries.

If a law is going to make DeFi do a lot of things, it should at least know what it is regulating. The best place to start is by defining what it means to be a decentralized exchange, since rules should be made to fit different risks. Anything broader would make it too hard to get into the market, which would reduce the competition that drives innovation, including in consumer protection.

Passing a law that limits the creative potential of DeFi by mistaking disintermediated exchanges for their opposite is a serious risk in and of itself.

Cramer says that crypto's long-term value "is its timeliness" as a decentralized, peer-to-peer currency that could become widely used over time. He suggests bitcoin and ethereum because they have the most fans and "seem the most real."

He also says that owning crypto can be a good short-term bet that takes advantage of price swings. This is especially true since there are a lot of enthusiastic investors in the space who are willing to "buy high."

But there's a catch: "You have to admit it's a gamble" and know that your bet might not pay off. As with any investment, how well it did in the past doesn't mean it will do well in the future.

The recent drop in the value of cryptocurrencies shows how big this risk is, since there's no way to know how much cryptocurrencies could go down in value. Experts usually tell investors to only put in as much money as they are willing to lose.

Cramer says that you should never borrow money to buy cryptocurrency because of these risks. "Borrow for your house, borrow for your car, but don't borrow for crypto," he says.

Cryptocurrency should also be treated differently than safer long-term investments like blue-chip stocks. "Don't put it in the same class as Procter & Gamble. "It's neither Coke nor Apple," he says.

Cramer says that you shouldn't put more than 5% of your money into crypto or gold, both of which are risky investments.

Even though owning crypto has risks, Cramer says he would never tell someone not to invest because "there have been so many fortunes made in it." He also thinks that a whole new group of people could still make a lot of money in it.

He says, "I'd like that to be you."

========

Bitcoin use seems to be low

Jaime Garcia hoped that when El Salvador's Bitcoin Law went into effect on September 7, 2021, it would fix some big problems with how Salvadorans send, receive, and spend money.

As part of the law, some prices are now listed in bitcoin, tax payments can be made with the digital currency, and there will be no capital gains tax on bitcoin trades. But what's most important is that Bukele promoted the law as a way to make more people financially included. This is a big deal in a country where, according to the Bitcoin Law, about 70% of the population does not have access to traditional financial services.

El Salvador created a virtual wallet called "chivo" (Salvadoran slang for "cool") to make it easier for the whole country to use Bitcoin. The wallet offers free transactions, quick cross-border payments, and all you need is a mobile phone and an internet connection to use it. It aimed to get users on board quickly, both to get more people to use bitcoin and to make it easy for people who had never used a bank to start.

Bukele tweeted in January that about 60% of the population, or 4 million people, used the chivo app. A research note from Deutsche Bank on September 20 says that more Salvadorans have chivo wallets than traditional bank accounts. Still, that note says that only 64.6% of the country has a cell phone with internet.

But a report from the U.S. National Bureau of Economic Research that came out in April showed that after spending the $30 bonus, only 20% of those who downloaded the wallet kept using it. The study was based on the results of a "nationally representative survey" of 1,800 households.

Garcia lives in the Canadian province of Saskatchewan. He left El Salvador when he was 11 because rebels bombed his house, but he stays in touch with family and friends who stayed behind and sometimes sends money back home, too.

"Bitcoin is popular in some places, like El Zonte, but it's clear that it's not everywhere," said Garcia.

"Big chains like McDonald's and Starbucks and most stores in a mall will accept bitcoin, but are people using it? "Not much around here," he said. "Most people who use bitcoin are tourists."

A survey by El Salvador's public opinion think tank El Instituto de Opinion Publica found that seven out of ten Salvadorans don't think the Bitcoin Law has helped their family's economy.

In another survey, the institute found that 76 out of 100 small and medium-sized businesses in El Salvador do not accept bitcoin payments.

According to a CNBC translation of what Laura Andrade, director of El Salvador's Universidad Centroamericana, said in Spanish, "Bitcoin's first year has gone from being a commercial expectation to something that traders don't care about."

Andrade said that a lot of big businesses still say they accept bitcoin as payment, but they don't. For example, they might say that their system doesn't work or that their bitcoin wallet isn't available.

"All of this shows that this cryptocurrency has never really been used in national commerce," said Andrade.

"There seems to be evidence that most people used it mostly to get the free money from the government, but they haven't used it regularly because of the volatility and fees," Ziemba said.

Those who did use the government's crypto wallet, on the other hand, had trouble with the app, according to reports. Other Salvadorans fell for identity theft schemes, in which hackers used their national ID number to open a chivo e-wallet and get the free $30 worth of bitcoin that the government was giving away as an incentive to join.

A survey by the Chamber of Commerce and Industry of El Salvador, which was released in March, found that 86% of businesses have never made a sale in bitcoin, and only 20% of businesses accept bitcoin, even though the law says that all merchants must do so.

"They gave the wallets to the people and made businesses take them, but it's basically a big nothing," said Frank Muci, a policy fellow at the London School of Economics who has advised governments in Latin America. "No one really pays with bitcoins through the app. People who do use it mostly do so to make money."

As part of the experiment, bitcoin ATMs were set up all over the country, but most people can't use them because they are too far away.

The Chivo wallet was also supposed to help save hundreds of millions of dollars in remittance fees. Remittances, or the money that migrants send home, make up more than 20% of El Salvador's gross domestic product, and for some households, this is the only source of income. Existing services can charge fees of 10% or more for international transfers, which can take days to arrive and need to be picked up in person.

But new data shows that only 1.6% of money sent to El Salvador in 2022 was done so through digital wallets. According to a report from Deutsche Bank in September, one reason bitcoin transfers haven't taken off is because it's hard to buy and sell bitcoin for dollars. The report says that "people who send and receive remittances often use informal brokers to convert local currency into and out of bitcoin," and that the highly volatile prices of the cryptocurrency make buying and selling it a difficult task that requires technical knowledge.

"This is new money and a new way to do things in a country where most people are used to dollars. "Most of this group doesn't have a bank account and would rather deal with cash they can see and touch," Garcia said.

Miles Suter, the crypto product lead at Cash App, told CNBC at a panel at the Messari Mainnet conference in New York that the government's 90-day rollout of the chivo wallet and nationwide adoption of bitcoin was "rushed" and that there are still a lot of problems.

Suter, who spent six months in El Salvador before the Bitcoin Law was passed, said, "You shouldn't force people to accept a certain currency." But Suter said that what the media says is worse than what is really happening on the ground.

"I saw and felt how people's lives changed when they got access to a new form of money," he said.

'Sleepwalking into a debt default'

The country was in a lot of trouble long before Bukele bet that bitcoin would fix long-term economic problems.

The World Bank thinks that the economy of El Salvador will grow by 2.9% this year and 1.9% in 2023, which is less than the 10.7% growth rate in 2021. But that growth was a bounce-back from a decline of 8.6% in 2020.

Its debt-to-GDP ratio is almost 90%, and it costs about 5% per year to pay off its debt, while the U.S. pays only 1.5% per year. The country also has a huge deficit, and there are no plans to reduce it, either by raising taxes or cutting spending by a lot.

In a research note from JPMorgan, analysts say that El Salvador's eurobonds have entered "distressed territory" in the last year, and S&P Global data reportedly shows that the cost of insurance against a sovereign debt default is hitting multi-year highs.

Both JPMorgan and the International Monetary Fund say the country is on a path that can't be kept up for long. From 2022 on, the country's gross financing needs will be more than 15% of GDP, and if current policies stay the same, the public debt will reach 96% of GDP by 2026.

El Salvador owes a lot of money to both foreign and domestic creditors. It has to pay back debts worth billions of dollars soon, like a $800 million eurobond that comes due in January.

Muci, who used to work at the Growth Lab at the Harvard Kennedy School of Government, said, "The domestic debt is very big, has a short term, and needs to be rolled over often."

Since early 2021, El Salvador has been trying to get a $1.3 billion loan from the IMF. However, this seems to have failed because Bukele won't listen to the organization's advice to stop using bitcoin as legal currency.

Rating agencies, such as Fitch, have lowered El Salvador's credit score because the country's financial future is uncertain now that bitcoin is a legal form of currency. That makes it even more expensive for Bukele to borrow money that he really needs.

Aside from the fact that global lenders don't want to give money to a country that spends millions of tax dollars on a cryptocurrency whose price is very volatile, the U.S., which is the largest shareholder in the IMF, is going after Salvadoran officials as part of a wider effort to punish "corrupt actors" around the world.

This risk premium for global lenders has also gone up because of the president's efforts to get more power.

The Legislative Assembly of the country is run by Bukele's New Ideas party. In 2021, the new assembly was criticized for getting rid of the attorney general and the highest-ranking judges. Because of this, the U.S. Agency for International Development took money away from El Salvador's national police and a public information institute and gave it to civil society groups instead.

Also, El Salvador can't just make money out of thin air to fix its finances. The colon, El Salvador's local currency, was replaced by the U.S. dollar. The Federal Reserve is the only group that can print more money. Its other national currency, bitcoin, is also respected because it can't be created out of thin air.

"One of the big problems has been that the bitcoin gimmick has taken attention away from the country's financial and economic problems and made it harder for the country to get loans and better terms from the IFI," Ziemba said.

Ziemba also said that the country has done some swaps with big crypto companies to get cash to pay off the debt due this year and maybe early next year. However, the long-term sustainability of the debt remains a problem.

"They've scared the bejesus out of financial markets and the IMF," said Muci, who told CNBC that nobody wants to lend money to Bukele unless they have to pay "eye-gouging rates" of 20% to 25%.

Muci said, "The country is sleepingwalking into a debt default."

Tourism and the president's popularity are doing well

On the day that the Bitcoin Law went into effect, Bukele said that the country had started giving bitcoin to the government. Since then, the price of the cryptocurrency has dropped by more than 60%. Rising interest rates, failed projects, and bankruptcies in the industry have all contributed to this drop.

Sources, like the bitcoin company Coinkite, which tracks the president's public announcements of bitcoin purchases, say that the government has an unrealized paper loss on bitcoin of around $60 million. None of these losses are set in stone until the country sells all of its bitcoin.

Estimates show that the whole experiment and all of its costs have cost the government a total of about $375 million. That's not nothing, especially when you consider that El Salvador has $7.7 billion in outstanding bonds, but compared to its $29 billion economy, it's not much.

El Salvador's millennial, tech-savvy president, who once called himself the "world's coolest dictator" on his Twitter bio, has tied his political future to the country's crypto gamble, so he has a big reason to make it work in the long run and pay off the country's debt in the short term. In 2024, Bukele could run for another five-year term as president.

At least El Salvador's big bet on bitcoin has paid off in terms of getting tourists who use bitcoin.

Government estimates say that since the Bitcoin Law went into effect, the tourism industry has grown by 30%. The tourism minister of the country also says that 60% of visitors now come from the U.S.

Even though the president tried out bitcoin, it hasn't hurt his popularity. Bukele has approval ratings of more than 85%, which is due in large part to the fact that he is tough on crime. That's a big deal for a country that was five years ago more dangerous per person than Afghanistan.

Suter said that the project has also taught many locals how to save money. He said that before the Bitcoin Law, most people didn't have a way to hold their money digitally or do business with each other.

"It was all cash, and most people spent the money they made in a week because they didn't have much hope of making it grow through investments."

In November, the president of El Salvador announced plans to build a "Bitcoin City" next to the Conchagua volcano in the country's southeast. The bitcoin-funded city would offer big tax breaks, and bitcoin miners would be powered by the geothermal energy coming off the nearby volcano.

But Bitcoin City and the $1 billion bitcoin bond sale have been put on hold. They were put on hold in March because the market wasn't good enough.

"Ultimately, El Salvador's problems are just tangential to currency," Muci said.

"The plane is going to crash eventually if they don't change things," he said. "If they don't raise taxes, cut spending, start being much more disciplined, and convince markets that they're sustainable, the plane will crash."

He also said, "Bitcoin doesn't solve any of El Salvador's big economic problems."

===========

In July 2017, a global police operation called "Operation Bayonet" shut down the huge drug and cybercrime market AlphaBay. The site's main server was seized in Lithuania, and its creator, Alexandre Cazes, was arrested outside his home in Bangkok. But in August of last year, AlphaBay's number-two administrator and security expert, who was only known as "DeSnake," suddenly showed up again and said that AlphaBay was coming back in a new and better way. Now, 10 months later, thanks in part to a flurry of takedowns and the mysterious disappearances of competing dark web markets, DeSnake's reborn AlphaBay is well on its way to returning to its former position at the top of the digital underworld. By some measures, it looks like it's already back where it was.

"Yes, AlphaBay is the most popular darknet market right now," said DeSnake in a text conversation with WIRED last week. "I did tell you we were going to be #1 before," he said, referring to our interview with AlphaBay's new admin at the time of its relaunch last summer. "I do what I say, as I've already told you."

At least some of what DeSnake says is true: AlphaBay had more than 30,000 unique listings for products as of last week. Most of these were for drugs like ecstasy, opioids, and methamphetamines, but there were also thousands of listings for malware and stolen information like Social Security numbers and credit card details. In September of last year, there were only 500 listings. More than 50,000 listings are shown on an older market called ASAP. But vendors are known to be able to post the same listing more than once on ASAP. And according to the security company Flashpoint, which keeps a close eye on the competing markets, AlphaBay had more than 1,300 active vendors in the first half of this year, while ASAP only had about 1,000. Flashpoint's data also shows that AlphaBay's listings seem to be growing much faster.

Other markets that are talked about in dark web forums like Archetyp and Incognito only have a few thousand or a few hundred listings. All of this shows that AlphaBay may already be the most popular place for people to sell things on the dark web.

AlphaBay still only has tens of thousands of listings for products, which is a very small number compared to the more than 350,000 it had before it was shut down in 2017. Before that, it was the biggest dark web market ever seen. According to the FBI, it was 10 times as big as the famous Silk Road drug market. DeSnake admits that the new AlphaBay hasn't made nearly as much money as it did at its peak in 2017. At that time, a blockchain analysis company called Chainalysis said that AlphaBay made as much as $2 million a day in sales. (DeSnake wouldn't say how much money they make now, but they said it's "in the big digits.")

Also, unlike most competitors, the new version of AlphaBay only lets users buy and sell in the privacy-focused cryptocurrency Monero, not Bitcoin, whose transactions can often be tracked through blockchain surveillance. Because of this, it's hard to figure out how many sales the site makes, and since many users prefer to trade in Bitcoin, it's possible that the site makes less money per listing.

But even after taking into account this difference and other unknowns in a side-by-side comparison of dark web markets, Ian Gray, a dark web-focused analyst at security firm Flashpoint, says AlphaBay seems to be the leading market, or will be soon. "It's written on the wall that AlphaBay is probably going to get back to being the most popular market," says Gray. "It already seems to have the most sellers."

Gray calls it "the Great Cyber Resignation," and it has helped AlphaBay grow quickly, or grow back. In the last 18 months, at least 10 dark web markets have shut down for different reasons. Some have been shut down by law enforcement, like Dark Market, which was the target of a Europol-led takedown operation early last year, or Hydra, a huge Russian-language drug and money-laundering market whose servers were seized in an April raid. Others, like Dark0de and World Market, are thought to have used "exit scams" to steal their users' money and then vanished without a trace. Still others, like Cannazon and White House Market, left in a more organized way that gave users time to get any money they had on the sites.

That left a site called Versus as the only top market until the end of May. But then, just two weeks ago, DeSnake posted on the dark web market forum Dread evidence that pointed to a security flaw in Versus. The evidence, which DeSnake said was given to him by a user named "threesixty," showed that Versus' IP address was exposed, making its users potentially vulnerable to hackers or law enforcement. "Both I and threesixty are trying to help," DeSnake wrote in his post. "We hope that our talk about security on marketplaces will be useful."

Versus's response was to announce its retirement right away. The site's administrator, who went by the name William Gibson, wrote, "We will say that there was a clear goal behind how this was handled at first, but we'll let you figure out what that was."

DeSnake, on the other hand, said both on Dread and to WIRED that he doesn't know or work with threesixty, the hacker whose discovery of a vulnerability shut down AlphaBay's largest remaining competitor. "Because the situation was so bad, we did the best we could," says DeSnake.

Ian Gray of Flashpoint thinks that the fact that the number of dark web markets has been going down lately might not just be because of what happened with Versus, but also because of how hostile the web is in general. Distributed denial of service attacks are often used by competitors to knock markets offline by flooding them with junk traffic. Markets also have to deal with constant fights between buyers and sellers. The threat of law enforcement is also always there for the people in charge of the market. All of this encourages dark web administrators who reach a certain level of success to take the money and run. This has helped DeSnake, who seems to be more ambitious and determined in his goals, bring AlphaBay back to the top. "There are so few players left in the space after all these other closures," says Gray. "There is only one that is pretty well known, and that is AlphaBay."

When AlphaBay came back for the first time, Gray and other dark web analysts and users thought that law enforcement might have hacked DeSnake. Even though he seemed to prove his identity as the former AlphaBay's right hand by signing messages with the same PGP cryptographic key he'd used before, many people on the dark web were worried that he might be controlled by a police agency as part of an undercover operation, like when Dutch police secretly took over the Hansa dark web drug market in 2017.

But after almost a year of being back online, DeSnake says he feels "vindicated" because very few undercover operations have lasted that long. "The question has been answered for most vendors and customers," says DeSnake.

Even if DeSnake proves that he is the rightful heir to AlphaBay and doesn't pull an exit scam himself, he still runs the risk of being shut down by the police. This risk grows as the new market gets more attention. "Running a dark web marketplace is like playing Russian roulette, especially with all the information we got from the AlphaBay takedown," says Grant Rabenn, a former federal prosecutor who led the investigation that led to the 2017 bust of AlphaBay and the arrest of its original admin, Alexandre Cazes, who was later found dead in a Thai jail, apparently by suicide. (DeSnake has said that Cazes was killed, but he hasn't shown proof.)

Rabenn hints that US law enforcement got a "fair amount of information" about AlphaBay's staff as a result of the 2017 case. As the dark web market grows, the investigation from before might lead to clues about who DeSnake is. Federal agencies would then turn their attention back to AlphaBay and its new boss. "It definitely puts a target on your back, not only because of what you've done in the past and your connections, but also because you're the best," says Rabenn. "That one will be looked for by everyone."

DeSnake tells WIRED, though, that he's come up with a few ways to protect himself that give him confidence that he'll always stay one step ahead of the feds. He says he lives in an ex-Soviet country that does not have an extradition treaty with the US. This may be the most important part. Since he chose for AlphaBay to only use Monero instead of Bitcoin, the kind of blockchain analysis that helped shut down the original site may be much harder to do. And he says he has built complex technical protections, like redundant infrastructure in multiple countries and a system called AlphaGuard that will automatically relaunch the site on new servers if the business fails. DeSnake says, "We'll be back up and running in a few days, and we won't lose a dime."

DeSnake has said that he wants to create a "decentralized marketplace network" where dark web markets are hosted on hundreds or thousands of servers. This would be like Bittorrent, which can't be shut down or seized, being the Napster of the dark web. He says that a test version of that decentralized plan is planned for the end of this year and that AlphaBay will move to it sometime in 2023. "First, we want to get back to the size we were at in 2017. That's our goal. Second, we want to start a beta version of the decentralized project," says DeSnake. "Then move step by step to make sure AlphaBay will be around for a long time and usher the [darknet market] scene into a new golden age, just like we did before."

It's not clear if that plan or DeSnake's claim that he can't be hurt is real or just a mirage. But he seems to have kept or will soon keep his first promise: to take back the crown of the dark web. And AlphaBay may be about to rule for yet another time.

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Metaverse project Decentraland is a sandbox where people can buy and sell virtual land, but it isn't exactly full of people. Even though companies betting on a metaverse future have been valued at billions of dollars, they haven't made much progress.

In fact, data aggregator DappRadar says that Ethereum-based world Decentraland only had 38 "active users" over the course of 24 hours. This is a shockingly low number, especially considering that the company has a market cap of a whopping $1.2 billion.

But Decentraland pushed back, saying that "active users" are defined as unique blockchain wallet addresses that interact with its system. According to CoinDesk, this means that users who only log in to chat or talk to other people are not counted.

"DappRadar doesn't track our users; it only tracks people who interact with our contracts," Sam Hamilton, the creative director of Decentraland, told CoinDesk. He also said that on an average day, around 8,000 people use the platform.

Any Anchor

Active Users

Even 8,000 users on a given day is a small number for something that is supposed to be the future of online communities. And if blockchain is the way the project's economy works, it's embarrassing if only a few dozen transactions happen every day.

In short, it's a perfect example of the huge difference between market value and actual users that has been a problem in the Web3 world for years. It could also be a sign that people are losing interest in virtual real estate and other blockchain-related assets, such as cryptocurrencies and non-fungible tokens (NFTs).

Vaporverse

Decentraland's Twitter account also tried to fix things by saying that in September, "1,074 users interacted with smart contracts" on the platform.

When you look at how much money is going into metaverse platforms like Decentraland, though, none of these numbers really mean much.

And that doesn't look good for the metaverse's future.

Sasha Fleyshman, portfolio manager at digital asset investment firm Arca, told CoinDesk, "Anyone who says there's a metaverse that works today is lying through their teeth."

==========

What the upgrade does