How to Tell the Story of Crypto – Part II
The crypto "revolution" did not reinvent money; it reinvented shadow banks
This is the second installment of a three-part essay on the collapse of crypto in 2022–2023. Part I attempted the impossible: to explain blockchain in a Substack post. In Part II we see where the rubber meets the road: not in blockchain code, but in crypto exchanges.
Crypto is Not Now and Can Never Be Money
Part I ended with a 1,000-word account of crypto, which immediately raised the question: what does bitcoin blockchain really have to do with money? The answer, in technical terms, almost nothing.
Money is a relation between a creditor and a debtor, symbolized by a token (a coin, a bill, numbers in a deposit account), and denominated (named and measured, for example “€50”). The $100 in my bank account is my claim on Citibank; they are my debtor and $100 is what they owe me.
Bitcoin surely seems like a token: the pseudonymous inventor of Bitcoin, Satoshi Nakamoto, even created and released his own icons that depicted BTC as a gold coin:
Today it is common to refer to all crypto as “tokens.” But is a crypto “token” a token in the way that money is? That is, does it indicate a denominated debt held by a creditor as a claim on a debtor?
We can start with denomination: at first glance “bitcoin” appears to be the name for a whole new denomination (a new form of money). Yet this illusion quickly dissipates once we observe that the economic value of bitcoin is always expressed in other terms – namely, the terms of real money (dollars, euros, etc.). Of course, bitcoin has a price that can be expressed in money terms, but this is true of any commodity or financial asset. In contrast, money is denomination.1
Most significantly, bitcoin proudly makes no claim on anyone at all; it does away with the debtor, on purpose. However, without a debtor there can be no money. The bitcoin, and the technology behind it, mimics or virtualizes not money, but commodities. It purports to be an asset of positive value – digital gold or digital oil, that one could sell for real money ($) – but never money itself. The decentralized database built by the bitcoin protocol functions not as a bank ledger but as a property register. It records the ownership of virtual commodities. It does not facilitate money transfers, as the ACH in the US, bank transfer in the UK, or the visa network across the globe do. In all of these cases, the “thing” being transferred is a claim on a debtor. The blockchain cannot do this (and does not try): it only records the transfer of units of BTC from one address to the other.
Money is Bank Money and Banks are Political and Economic Institutions
To buy some quantity of “bitcoins” for real money requires access to the aforementioned banking networks. In its infancy, bitcoin was neither money nor a financial asset; it was a hacker’s toy, a game people played by getting their computers to run the bitcoin protocol and hoping to be awarded game points (bitcoins) through successful mining (recall our Starbucks app “stars” analogy from Part I). Bitcoin only starts to matter in terms of money/power when the first exchanges crop up (in 2010), allowing individuals other than hackers/gamers to pay real money to have the system allocate “value” to their bitcoin address. It proves essential to be clear about the function such exchanges perform, both then and now (from Mt. Gox to FTX to Binance). The exchanges act like banks. Specifically, they function as unchartered, unregulated, often truly unrecognized banks – not just shadow banks, but stealth banks.2
I am arguing that the radical and momentous event in bitcoin’s early history comes not with the publication of the white paper, not with the circulation of the original code, not with the first transfer of coins on chain, or the transfer of coins to someone who, in exchange, delivered pizzas or PayPal cash.3 Crypto became economically and politically significant the moment that people started sending real money (bank money) to the early exchanges. Those exchanges were taking customer deposits. The money customers sent to the exchanges became the liability of the exchange (what they owed to the customer) – a liability registered in the form of a specified number of crypto tokens4 held in a digital “wallet” on the exchange.
The story of crypto foregrounds a crucial point about banks and banking, one that helps us glimpse the nature of money. Anyone can be a bank. Here I am only reconstructing and slightly updating a famous line from Minsky: “Everyone can create money; the problem is to get it accepted.” Crypto has at times found ways to achieve the latter precisely by successfully acting like banks. In this context, Matt Levine offers an important formulation: “the banking system relies on bank deposits being usable as money.”
By combining the two theses (Minksy and Levine) we come to understand bank money as money that is always accepted. This is a tautological formula for describing money itself, because money is a type of credit that is typically treated as if it were not a credit (a claim on a debtor) at all, but rather just the instantiation of positive value. Minsky’s point is that everyone can issue their own credits (IOUs), but these credits don’t successfully function as money until your creditors (those to whom we issue them) can transfer them to others. Levine’s point is that banks are in the business of doing risky things with customer deposits, yet the entire system depends on the belief that deposits are safe as houses – so safe then when I pay for something with bank deposits, no one even considers that I am offering to transfer my claim on my debtor (my bank); instead, they just treat my check or card as “money.”
From this understanding of bank money as the quintessence of money, we need to consider how to be or become a bank. Over the last 13 years, crypto finance has given a powerful answer; first, sustain a narrative that convinces people to give you deposits; second, insist that you are not in fact a bank. Why the latter? Mainly because to truly be a bank today means getting a bank charter and subjecting oneself to heavy regulatory rules and scrutiny. Secondarily, because admitting to being a bank means admitting that customer deposits are your liabilities to the customer, not just “commodities” for which you serve as “custodian.” The rhetorical insistence can prove quite comical, as Faux experienced when he interviewed the CEO of Celsius:
I asked Mashinsky if Celsius should be regulated like a bank, because it took deposits.
“We’re not a bank,” he said. “We take a loan from you with the promise of repayment, and then we lend it to an institution, charge them interest, give you most of that interest.”
“It sounds very similar to a bank,” I said. (Faux 155)
In a word, crypto matters not because it revolutionized money.
Crypto matters because it built a new system of stealth banks that took in billions of dollars of customer deposits. In not much more than a decade, “crypto has built a whole financial system from scratch.” Moreover, no financial system exists separately from a political system. To build a new financial system from the ground up cannot but be a political project.5 Marx understood this point as deeply as anyone, as demonstrated by his argument that all monetary systems encode the hierarchy of the social order in which they appear. Monetary systems express the structure of inequality already in place in society.6 Hence, within a capitalist social order, any financial system proves political through and through.
McKenzie himself seems to grasp this notion at the conceptual level, and his book therefore has the great merit of mapping out and proving the point with concrete examples. While Faux and Lewis simply take for granted some inchoate sense in which the project of crypto involves revolutionizing money or creating new “currencies,” McKenzie has the perspicacity to see this as the Achilles’ heel of the entire project. The utopian premise of crypto is money without trust (money free of meddling bankers and corrupt politicians). But here’s how McKenzie describes his thought-process while interviewing Sam Bankman-Fried on just this topic: “Sam and other crypto evangelists fundamentally misunderstood the nature of money” (McKenzie 158).
McKenzie goes straight to the heart of the crypto imaginary because he doesn’t just skim the surface of news headlines about the crypto world. Rather, he talks, and genuinely listens, to the true believers – from hackers, to start-up founders, to Robinhood-app day-traders. Readers of McKenzie’s book thus learn a great deal about the actual principles and beliefs, the epistemology of crypto bros. Crucially, McKenzie’s critical project consistently and repeatedly challenges crypto ideology. This means that rather than repeating the crypto call for the “decentralization” of money (meant to be implemented directly by the blockchain), McKenzie considers some of the mantras, watchwords, and shibboleths of the crypto universe.
Perhaps the most powerful and ubiquitous of these: “not your keys, not your coins,” a slogan meant to express both the central technology of crypto (blockchain decentralization) and a core libertarian political ethos of privacy and self-reliance. The idea is that the purest form of crypto requires the discipline of users to never trust anyone. Hence they should “hold their crypto”7 in a cold (i.e., offline) wallet; this could take the form of an offline computer device (such as a USB thumb-drive) or merely a piece of paper with the user’s public and private keys written on it. At this juncture McKenzie aptly captures the political and theoretical paradoxes of crypto: if you need to type out (or copy and paste from a “gapless” device) your 64-character alphanumeric keys every time you want to transfer crypto, how revolutionary (in either economic or political terms) can the technology really be? The problem, McKenzie sees, lies with the very nature of money, which no one in crypto seems to understand, otherwise it would be obvious to them that “cold storage” is incompatible with that nature. McKenzie spells out the basic point early on in his exploration of the crypto universe, and it guides him like a polestar: “the stated goal of cryptocurrency – to create a trustless form of money – is literal nonsense” (McKenzie 59, emphasis added).
Money is a relation of credit/debt. Hence money can never be stored in isolation. To have or hold “money” is to possess nothing more or less than a claim on a debtor, and to spend or circulate money is to transfer that claim to someone else. For this reason, one can never hold positive value in one’s hands, independent of all other individuals and institutions. Relationality, dependency, and “trust” all remain intrinsic to the money relation.8
The Real “Revolution”
It should therefore come as little surprise that changes wrought by the so-called “crypto industry” have much less to do with their invention of so-called innovative technologies9 and much more to do with their building of monetary (and political) institutions. On this point, Lewis’s deeper dive into the specificities of Alameda Research and FTX chimes nicely with McKenzie’s account: “the people who set out to eliminate financial intermediaries simply created some new ones of their own, including, by early 2019, two hundred fifty-four crypto exchanges” (Lewis 107). Lewis shows that crypto institutions actually depend a great deal more on customer trust than do institutions of traditional finance. The crypto paradox thus emerges in Lewis’s narrative as well: “In traditional finance, founded on principles of trust, no one really had to trust anyone. In crypto finance, founded on a principle of mistrust, people trusted total strangers with vast sums of money” (Lewis 108).
What Lewis means is that when I deposit my paycheck at Ally bank, I am not actively trusting my banker (I don’t even know who “my banker” is). The complex layers of insurance and various banking regulations bakes “trust” directly into the system, so that I need not think about it all. If a group of completely corrupt crooks somehow gets themselves in power at Ally and try to make off with the funds from my paycheck, I am protected by FDIC deposit insurance and a whole host of other safety mechanisms. To contextualize this point, we should consider that more than 600 banks failed in the GFC, while hundreds more were in danger of failing. Yet the vast majority of their depositors never even thought about whether they should trust the bank.10 In contrast, almost anyone who sends money to a crypto exchange knows very well to think twice about whether to trust the exchange. And if somehow they don’t know, the crypto “community” will remind them with another standard slogan: “do your own research” (DYOR). The crypto worldview holds firm on this point: if you send money to an exchange that steals it, that’s your fault.
This helps to make sense of the almost jingoistic devotion that so many crypto customers display toward crypto institutions. They have to believe in them, because they really do need to trust them.11 In turn, we can now also see how the founders of crypto exchanges (essentially bank CEOs) could come to be seen as larger-than-life heroes. Almost no one knows or cares who is at the top of the organizational chart for their bank. But in the crypto world, everyone knows “CZ” (Changpeng Zhao, founder and CEO of Binance, the world’s largest exchange12) and, of course, “SBF.”
Of Founders and Foundings
Although only one of these books is explicitly about Sam Bankman-Fried – the founder of FTX, who has now been convicted of seven counts of fraud and conspiracy and will likely spend most of his life in prison – in an important way all three of them cannot help but revolve around his overwhelming gravitational force. Both McKenzie and Faux interview Bankman-Fried in depth. For anyone trying to tell the story of crypto in 2023, the collapse of FTX, the disappearance of at least $8 billion in customer deposits, and the eventual arrest and conviction of Bankman-Fried seems like it simply must close the book, and it does for all three authors. However, in order to understand the fuller arc of the crypto story, we need to see figures like Bankman-Fried in a clearer light, and here Lewis performs a key service.
Because he obviously likes Bankman-Fried, because he tries to empathize with him (including entertaining Bankman-Fried’s main claim, made at trial, that he never intentionally meant to steal customer funds), and because he refuses to condemn him, Lewis’s book has been dismissed by many as the work of a partisan. But this is an extremely short-sighted conclusion, a misreading likely based on a refusal to read Lewis at all. I argue very much the opposite: anyone intending to understand crypto, or even aiming to build a case against crypto, must read Lewis’s book. It prepares the grounds for a much deeper indictment of Bankman-Fried, and it provides crucial information one could use to dispel the myth of the genius founder. Of course, crypto did not create this myth (Silicon Valley did), but it drives the crypto imaginary, and most of the crypto “industry” relies on it heavily.
Compared to the many unsympathetic screeds against the FTX founder and felon, Lewis gives readers far better tools to grasp Bankman-Fried as a symptom of crypto. While both the mainstream press and his sharpest critics have painted Bankman-Fried as a genius who perpetrated a really serious fraud (thus a fraudster), a careful read of Going Infinite exposes Bankman-Fried as not just a fraudster, but as, fundamentally, a fraud.
What’s more, Lewis points to an additional underlying, and crucial truth: Bankman-Fried is not a genius. The stories of his intellectual power, of his skills as a “disruptive innovator”13 are themselves fabrications (he is entirely a fraud). Lewis never states this truth in such bald terms (Lewis often appears to buy the myth) but his book nevertheless lets us discover it for ourselves.
We can start with the origin tale of Bankman-Fried’s early success in crypto and his founding of Alameda Research. Almost everyone tells the story this way: as an intellectually gifted MIT graduate and former trader at the elite Wall Street trading firm, Jane Street,14 Bankman-Fried brilliantly spotted an arbitrage opportunity, which he exploited by using the leftover bonus from the job he quit – ultimately earning his new firm hundreds of millions of dollars in the bitcoin market. It turns out, however, that almost nothing in that version of the story holds up under scrutiny.
First, the idea of founding a trading firm that exploited crypto market inefficiencies was not Bankman-Fried’s to begin with; it was the mathematician and Effective Altruist15 Tara Mac Aulay’s. She did the first trades, and in doing so she gave Bankman-Fried the idea for Alameda. They then founded the firm together. Within just a few months Mac Aulay quickly concluded that Bankman-Fried was: truly a terrible manager; only pretending to be an effective altruist; responsible for the disappearance over $4 million in firm funds; and ultimately “dishonest and manipulative” (Lewis 95). Only a few months after the firm’s founding, Mac Aulay, the entire management team, and half of Alameda’s employees all quit (Lewis 97).
Second, while it’s true that Bankman-Fried had previously given Mac Aulay some of his own personal funds ($50,000) with which to trade, Alameda’s initial working capital did not come from previous earnings of Bankman-Fried. In 2017 Mac Aulay was head of operations of the Centre for Effective Altruism. When she left that job to help found Alameda Research, she brought with her funding from effective altruists. But the money did not come in the form of venture capital seed money (where “angel investors” hand over cash in exchange for ownership of a percentage of the company). Instead, effective altruists funded Alameda with what co-founder Nishad Singh described as “shark loans,” and which Lewis states carried a 50% interest rate (Lewis 97).16 Alameda’s foundation was not built from Bankman-Fried’s prior success as a trader at Jane Street; Alameda was dramatically leveraged from the very start.
Third, the term “arbitrage opportunity” paints a picture of Bankman-Fried as a daring genius, an innovative technologist with a unique vision. Indeed, the typical account will use the jargon of finance to describe the incredible bitcoin arb that SBF pulled off (somehow “doing an arb” just sounds cool). Yet anyone at all could read the prices for bitcoin in early 2018: higher on Japanese exchanges (than US), and much higher on Korean exchanges.
However, this price discrepancy comes about not because of some secret of the markets, knowable only by brilliant quants. Bitcoin was priced higher on Korean exchanges because South Korea put explicit capital controls in place, constraining the ability to move won (₩) out of the country (i.e., into other currencies). We must observe both sides of this coin: the arbitrage opportunity exists precisely because of regulation; the ability to execute the arb depends on circumventing that regulation.
In most cases, and certainly in this one, “circumventing regulation” is just a euphemism for breaking the law. In using “a graduate student friend in South Korea” as their “mule,” Alameda knew full well they that they were engaging in illegal activity. But as Lewis somehow gets Singh to freely admit: “the law is what happens, not what is written”; that is to say, breaking the law only matters if you get caught and punished (Lewis 91). Alameda’s profits were directly tied to “risk,” but such risk was political not economic. To do this trade Alameda did not invent any new trading models or algorithms; they just figured out a way to make money by doing something illegal.
Finally, in dozens of interviews given over the years, Bankman-Fried’s interviewers allow him to obfuscate the actual terms of “the trade” in order to make it all seem too complex for average readers to understand. McKenzie and Faux cannot even agree on where Alameda made their early money – Korea (McKenzie) or Japan (Faux) – and neither tells us how they did it.17 Lewis is literally the only source I know that gets the full story, a feat that requires talking to people other than Bankman-Fried.18 And while the details are a bit boring and a tad arcane, they are not hard to follow, and they prove important. Most significantly, this was not a bitcoin arb at all; it was a “ripple arb.”19
What’s ripple?
In a word, it’s a “box” coin.
What’s a box coin?
Part III will tell all.
Nothing can stop us from positing a relation between the economic value of one commodity and the economic value of another. But positing these relations does not make either of those commodities money. Indeed, as Geoffrey Ingham shows, the matrix in which such positing occurs already depends upon the prior existence of a money of account.
Since the great financial crisis (GFC) “shadow bank” has typically been used to describe financial institutions that do not hold a bank charter, whose deposits are ineligible for national deposit insurance (e.g., FDIC coverage), and that face much less regulatory scrutiny than real banks. All crypto exchanges meet these criteria; moreover, unlike most shadow banks, most crypto exchanges lack almost any regulatory oversight, ignore the most basic auditing rules, and fail to disclose their balance sheets.
I refer here to crypto lore concerning various “firsts”: first time BTC was transferred; first time BTC was transferred in exchange for payment “off-chain”; first time BTC was transferred for delivery of goods off-chain. For more on the power of crypto myth-making, see my post on the Sotheby’s auction of “bitcoin ordinals.”
The standard language of “tokens” serves to reify “crypto” as concrete and discrete things. But there really aren’t any tokens: there is just a name (“dogecoin”) and a number (47) held at an address. Satoshi brashly declared the invention of digital cash; however, while federal reserve notes have serial numbers, “bitcoins” do not; there is no such thing as a single “bitcoin,” just a unit of value written as “100000000” in the code (and translating to 1.00000000 BTC). As I explored in an earlier post, the invention of “sats” and “ordinals” is an attempt to overcome this “deficiency” in the code.
I do not mean there is a politics “to” or “of” that project, in the sense that actors want to use this project as a tool for a separate set of political ends (though surely many did), nor that the actors who built the new financial system themselves had their own politics (again, many did). I am making an ontological claim: there is a politics in the very being of that project, and it exceeds the intentions of any individual actors.
Though surely they could encode it in different ways and to different extents and with different implications for the possibility of a democratic politics. The point is not, for example, that “embedded liberalism” and “neoliberalism” are equivalent, but that both are hierarchical – both terms describe societies structured in domination. This does not at all mean we cannot have excellent reasons for living in one type of society rather than another.
This is the standard phrase used to describe cold wallets, but it is fundamentally in error. Bitcoins – that is, some numbered quantity of BTC value – can never be “stored” offline. The only way to own bitcoin is to have the bitcoin blockchain register that ownership – for a specific block to record a transaction transferring some quantity to your address. And by definition, the bitcoin blockchain has to be run by computers on a network, which are constantly verifying new blocks and thereby verifying all the previous blocks. The bitcoins are always online. Certainly one can take various measures to secure one’s private keys. However, there is no justification in conflating (1) storing your gold in a safe-deposit box inside a bank, while hiding the key to the box under your floorboards at home, with (2) burying the gold in your backyard. Because bitcoin is digital gold, it depends for its existence on a public, distributed network of computers. Here we see again how the underlying technology of crypto stands in the way of its political dreams of completely trustless privacy and security. Of course, the technologically astute understand this point quite well, and for them the phrase “not your keys, not your coins,” just means: do not hold your crypto on an exchange. Rather, run the bitcoin protocol on your own computer. But as already shown above: if you do not move your crypto through the exchanges (the crypto banking system), how will you get someone to pay your for your digital assets? Your tokens may be “safer” if they never pass through exchanges, but they will not really be worth anything.
McKenzie’s instincts about the nature of money (as they animate his critical investigation of crypto) prove sounder than the explicit sources he turns to for an alternative account. McKenzie follows Jacob Goldstein in positing that “money is trust” (McKenzie 59). Goldstein argues that money is mere social consensus, literally a “made-up thing” that has value because everyone believes it has value. Goldstein thinks money is fiction. I think money is quite real.
As discussed in Part I, the bitcoin code is absolutely novel in its combination of previously established technologies and many smart people think it’s brilliant. But to be a new technology it would need to, you know, do something. And 15 years after its creation, it still doesn’t.
Disclosure: my own personal bank was placed on the “unofficial problem bank list” in 2010 and I moved my money somewhere else. But I only knew this because I was reading housing-bubble and real-estate blogs (where the problem bank list was published), so I am the exception that proves the rule.
In crypto, the whole game is trust. This explains why SBF became a celebrity; doing so was his explicit goal. Here we strike at the core meaning of “confidence” in the name con man.
After this essay was written, but before publication, Zhao plead guilty to breaking US anti-money-laundering laws and stepped down as CEO of Binance. Zhao, who currently awaits sentencing, agreed to pay a fine of $50 million; Binance agreed to pay a fine of $4.3 billion.
This language has become so ubiquitous that it requires a great deal of rhetorical force to question it. Here’s Sci-Fi novelist Kim Stanley Robinson, providing that force: “Disrupt, innovate, entrepreneur: these are all buzzwords out of a failed political economy that has wrecked things…I would rather go to hell than be called an innovator.”
Lewis devotes an entire chapter to the culture, logic, and ethos of Jane Street, offering a detailed drawing of Bankman-Fried’s time there. Readers and reviewers have been especially animated by the story of Bankman-Fried’s humiliation of a fellow trader-trainee, “Asher.” Bankman-Fried goes out of his way not just to best Asher but to embarrass him, by maximizing Asher’s losses. Lewis foregrounds the unemotional cruelty here, yet still offers the account as yet another example of Bankman-Fried’s brilliance. However, as Matt Levine has carefully explained, while Asher made a clear mistake in offering the first bet, Bankman-Fried’s further bets were not just mean, but also quite dumb. Although Lewis provides compelling evidence to debunk the genius myth, McKenzie remains the one author who consistently and polemically rejects the notion. Hence the very much on-the-nose title to the chapter in which he interviews Bankman-Fried: “The Emperor is Butt-Ass Naked” (McKenzie 149).
Effective Altruism could certainly be the topic of another three-post essay. Lewis’s book goes much more in depth concerning the beliefs, practices, and culture around the movement, along with Bankman-Fried’s relation to it. For the purposes of this essay, we can boil-down effective altruism as part of a revival of a financially turbocharged vision of utilitarianism, which argues that the highest moral position entails making as much money as possible with the claimed intention to give it all away. (I cannot help but note that the return to utilitarianism somehow seems to have missed the critique of utilitarianism as always capable of, and tempted to, undermine principles of human equality, rights, and dignity.)
Lewis does not fail to observe the deep irony in the fact that people who supposedly do not care about money (because they plan to give it all away) were usurious in dealings with other effective altruists. If both the funders and founders of Alameda were effective altruists – earning only in order to give – what would be the point of the former charging the latter 50% interest on the loans?
So far as I can tell, Faux and others may have been led astray by Bankman-Fried’s own telling of his origin story. When talking to crypto news outlets, Bankman-Fried seems clear that he did a trade in Korea, but speaking to more mainstream journalists, he instead chooses to emphasize Japan.
This point cannot be overemphasized: while McKenzie and Faux both interview Bankman-Fried, and while both question his answers and his motives, neither really checks other first-hand sources. Lewis does just this because, paradoxically, in making his story all about Bankman-Fried, Lewis’s narrative actually decenters the ostensible wunderkind, telling his story from the perspective of those around him.
Here is my reconstruction of the actual trade, which involves two monies (USD and won) and two tokens (XRP and BTC). Note that XRP is the token of Ripple labs, and the token itself was commonly referred to as “ripple.” Alameda’s starting position includes: A) an account on a US exchange where you deposit real dollars; B) an account on a Korean exchange, owned by a friend, who is acting illegally (no money in account). The trade is then executed as follows:
1 Buy XRP on A
2 Transfer XRP from wallet at A to wallet at B
3 Sell XRP on B for won held in account at B
4 Buy BTC with won (on B)
5 Transfer BTC from wallet at B to wallet at A
6 Sell BTC on A for USD
7 GOTO 1
The trade works because the price premium for XRP on B (say 25%) is larger than the price premium for BTC on B (say 20%). The arb doesn’t realize the BTC price differential: it realizes the XRP differential minus the BTC differential, because one must buy BTC high in order to transfer value back to the US exchange. Why does all of this matter? In a word, because Bankman-Fried’s originary trade was in a “shitcoin.”