How to Tell the Story of Crypto – Part III
Where we learn about "box coin," a parable of crypto capitalism
This is the final 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.
Part II charted the rise of both crypto shadow banks and Sam Bankman-Fried as the proprietor of one of the more famous of them.
Finally, Part III explores SBF’s own prescient narration of that downfall and what it tells us about money and capitalism in 2024, a time when crypto seems to be making a big comeback.
“Box Coin”
Given that we know how the 2022–2023 crypto story ends,1 I want to close out this essay differently, by underscoring the extent to which that end – crypto winter, the collapse of dozens of crypto firms and exchanges, most famously FTX – was foreshadowed, perhaps even foretold by Bankman-Fried himself.2 This involves retelling a story now “famous” within both crypto circles and the world of finance.3
This pivotal event occurred in late April 2022, less than 6 months before FTX would declare bankruptcy, and it took place in the quintessential (at least for now) twenty-first-century medium: the podcast. Hosted by two Bloomberg editors, the hour-long podcast brought together Bankman-Fried and Bloomberg columnist (and world expert on money and money markets) Matt Levine, to discuss the topic “how to make money in crypto.” The key moment comes when Levine asks Bankman-Fried to explain crypto “yield farming.” It’s the oft-quoted answer that makes this podcast infamous.
Bankman-Fried begins by laying out the first principles of issuing a new crypto token:
You start with a company that builds a box and in practice this box, they probably dress it up to look like a life-changing, you know, world-altering protocol that's gonna replace all the big banks in 38 days or whatever. Maybe for now actually ignore what it does or pretend it does literally nothing. It's just a box.
…
then this protocol [of the box] issues a token, we'll call it whatever, ‘X token.’ And X token promises that anything cool that happens because of this box is going to ultimately be usable…. And of course, so far, we haven't exactly given a compelling reason for why there ever would be any proceeds from this box, but I don't know, you know, maybe there will be, so that's sort of where you start.
…
what they're gonna do is they are going to take half of all the X tokens…and they're going to give them away for free to whoever uses the box. …That’s for now, what X token does, it gets given away to the box people. And now what happens? Well, X token has some market cap, right? It's probably not zero. Let say it's, you know, a $20 million market…4
At this point, Levine interrupts: “wait, wait, wait, from like first principles, [the market cap] should be zero.” Bankman-Fried has been quite clear that the box does literally nothing, and the organization that created the box protocol generates zero revenue. But he still posits that the market cap of the box will be $20 million. When Levine points out that that makes no sense at all, Bankman-Fried merely agrees: “uh, sure. Okay. Completely reasonable comments.” But then he continues the story: “In the world that we're in, if you do this, everyone's gonna be like, ‘Ooh, box token. Maybe it's cool. If you buy in box token,’ you know, that's gonna appear on Twitter and it’ll have a $20 million market cap” (Boxcoin 24:10).
From here, Bankman-Fried adds layers to the narrative that also add zeros onto the box market cap, so that eventually it’s worth a billion dollars. This spurs Levine to intervene a second time: “I think of myself as like a fairly cynical person. And that was so much more cynical than how I would've described farming. You're just like, well, I'm in the Ponzi business and it's pretty good.” And again Bankman-Fried does not object or argue: “I think that’s a pretty reasonable response.” Levine knows, and he assumes that Bankman-Fried knows, that, by definition, Ponzi schemes cannot run indefinitely. (It’s basic math: eventually the scheme requires more new investors than there are humans on the planet.) So Levine asks the key, final question: how is box coin sustainable? Bankman-Fried’s answer is prescient:
So you've got this box and it’s kind of dumb, but like what's the end game, right? This box is worth zero obviously. …But on the other hand, if everyone kind of now thinks that this box token is worth about a billion dollar market cap, that's what people are pricing it at and sort of has that market cap. Everyone's gonna mark to market. In fact, you can even finance this, right? You put X token in a borrow lending protocol and borrow dollars with it. If you think it's worth like less than two thirds of that, you could even just like put some in there, take the dollars out. Never, you know, give the dollars back. You just get liquidated eventually. (Boxcoin 28:06)
Let’s be clear: this is the “end game” as described by Bankman-Fried, and in his account the creator of box protocol who issued millions of tokens to themselves, winds up with a lot of real dollars that they got by borrowing against the “market cap” of box token. The founder eventually “gets liquidated,” meaning they allow their lender (from whom they borrowed real dollars) to seize all the box tokens as collateral, because the box tokens are obviously worth zero. At the liquidation stage (i.e., bankruptcy of Box corp) most typical retail investors (e.g., bored people with jobs who day trade on their RobinHood app), who paid real dollars for the tokens, wind up with a completely worthless pile of magic beans, while institutional investors (e.g., venture capitalists) either lose or win depending on whether they sold their magic beans (for real money) early enough. As McKenzie spells out, if you never give the dollars back, you can: “take those dollars and buy some companies, some politicians, and naming rights to a sports stadium.”5 Having thereby added even more legitimacy to your aura as the wunderkind of crypto, you can “repeat the cycle” (McKenzie 220).6
In a passage that I left out above, and which to my knowledge no one else has commented on, Bankman-Fried specifies the magic that makes this all work. Following Levine’s first interjection about market cap, Bankman-Fried alludes to the core engine of crypto: “obviously already we are sort of hiding some of the magic impact, right? Like some of the magic is in like, how do you get that market cap to start with, but, you know, whatever we're gonna move on from that” (Boxcoin 29:53).
What’s the magic? In short, it’s wash sales and obfuscation of value through the misused phrase “market cap.” The primary element for this magic is a crypto variation on “wash trading,”7 in which one entity (individual or institution) creates a number of addresses and then sells a token back and forth to themselves. With the extremely thin markets in most tokens, this activity can look like the entire market, driving the apparent price of the token up. As McKenzie puts it: “To the outside view it might look like crypto is surging in price; in reality all that’s happening is fake money is being transferred from one hand to another to inflate the value of that token” (McKenzie: 37). The next step is to use the price indicator created by wash trading to calculate a market cap for the token: if the token last sold for $50 and there are 1,000,000 issued (or potentially issued) tokens then the token’s “market cap” is $50 million. Crypto advocates then compare this $50 million number to, say, the market capitalization of a Fortune 500 company – as proof of the robust importance of the “crypto industry.”
However, to synthesize from above, the “market cap” for a new token can be established by first issuing tokens to yourself, then selling 1% of those tokens (perhaps largely to yourself), while holding the other 99% on your own books. You then calculate your net worth by multiplying the price of a few sold tokens by the hypothetical number of tokens you could potentially issue. In other words, you make up box coin, give yourself almost all the coins, and then write down “market cap” numbers as if box = Apple and you = Steve Jobs.
Molly White has spent the past few years patiently tracking this basic logic, the “practice of pumping,” that undergirds crypto, while also documenting the literally thousands of other basic scams. But only recently, with the ignominious fall of Bankman-Fried, did outlets like the New York Times start publishing op-eds by White, rather than apologias-cum-marketing-flyers from the crypto “industry.” White has also been the most consistent critic of crypto’s hypostatization of “market cap” numbers, and the story of box coin makes crystal clear why all these references amount to something less than fairy tales.8
Crypto Capitalism
We need a proper telling of the crypto story because it is a key chapter in twenty-first-century capitalism. Crypto must not be understood as some sort of excrescence on a relatively pure industrial or productive core. Crypto is not “mere fraud” (though it is utterly fraudulent) because the basic logic of crypto replicates the venture-capital logic of our current moment. We cannot forget that figures like Bankman-Fried were not just winning money from other gamblers in the crypto casino (as shown above, Bankman-Fried actually did this a lot less than he led everyone to believe), not just stealing money from hardcore crypto bros and naive day-traders; they were also taking gobs of cash from established, famous, well-heeled, and incredibly “reputable” venture capitalists.9
Everyone wants to compare Bankman-Fried to Bernie Madoff, but the analogy is both easy and poor. Instead, we should consider the ways Bankman-Fried resembles Adam Neumann. Neumann, the putatively “disgraced” founder of WeWork, also hyped a multi-billion-dollar company that ended up going bankrupt and being worth a minuscule fraction of its reported “market cap” at its peak. The difference between Neumann and Bankman-Fried is that Neumann got essentially all of his money from venture capital; he also had good lawyers who made sure that when he was kicked out of his own company, he took billions with him. Bankman-Fried, in contrast, used the much smaller quantity of (still very real) money from venture capitalists to continue pumping his bags and inflating the value of his company. “On paper” Neumann was never worth more than about $ 4 billion while Bankman-Fried was supposedly worth $26.5 billion. (For his part, Madoff was never a billionaire.)
On the one hand the calculations are similar, and similarly ridiculous. Neumann was worth $4 billion because venture capitalists had bought X % of his company (in the form of private shares) for Y $. The math is crude: (100/X) * Y tells us the “value” of the company; multiply that result by the percentage the founder owns and you get their “net worth.” Bankman-Fried was “worth” $26.5 billion given the valuations of (and his percentage stakes in) FTX and Alameda. These formulas do not reflect current value measured in real dollars, but rather projected future value, or perhaps merely “probabilistic value” (Levine, 9 November 2023).
On the other hand, the differences are vast. Neumann owned a percentage value of a company that was still losing money and would eventually go bankrupt. However, Neumann managed to turn that money “on paper” (the ledger valuation of his share of the company) into actual cash deposits in his personal bank account. He accomplished this end mainly by selling private WeWork shares early (before the fall) for real dollars. At the time of my writing Neumann is worth over $2 billion, but he has recently received a massive venture capital investment for a new company, so those numbers may go up. Bankman-Fried also owned a percentage of his company, but its valuation depended on FTT tokens (box coins) that he had issued to himself. The value of these (inevitably?) went to zero and Bankman-Fried (inevitably?) went to jail. Stepping back we can say that while both the monetary and practical differences between Neumann and Bankman-Fried prove quite significant, in terms of the logic of twenty-first-century capitalism, they both “generated wealth” (and “generational wealth” at that) in the same way.
From the perspective of political theory and political economy, perhaps the most worrying thing about the previously discussed podcast interview is not the bracingly honest testimony of Bankman-Fried, but the guileless comments of the podcast hosts (the Bloomberg editors). Early in the box-coin discussion Joe Wiesenthal makes what he takes to be a critical remark: “At no point did any of this require any sort of like economic case, it’s just like other people put money in the box” (Boxcoin 27:27). He’s right that there is no “economic case” for investing in box coin, but Weisenthal here completely misses the magic that Bankman-Fried said he was hiding, because no, no one really ever puts money (certainly not very much) in the box. The illusion that the box contains money – that’s the magic produced by wash sales, initial issuances of coins to founders, and the obfuscation of market cap numbers.
After Bankman-Fried concludes the story by arguing that you can borrow dollars against the box and then let box coin be liquidated, the first to comment is Tracy Alloway: “so are you saying that the value has to derive from everyone agreeing that it’s worth something” (Boxcoin 29:15, cf. 53:01). Here again she cannot see that there is no value in box coin, because, in fact, there never is a moment where “everyone” “agrees” to anything at all.10 Rather, the founders of X issue tokens to themselves, trade X with themselves, and then use their website to list the high price and market cap of X. They claim X token has value, but that doesn’t mean it does.
Of course, it’s quite possible that some individuals might then go onto an exchange and pay that high price for X. But the fact that sometimes people really do buy “swampland in Florida” doesn’t mean that everyone agrees swampland in Florida is valuable.
Alloway’s conclusion proves tempting because it fits within the new rubric that says since money is not a commodity, it must therefore be a collective fiction, a universal consensus that something has value. But that’s not how money works. My claim on a debtor (my money) has validity because when I transfer it to some other party, they accept that claim on the debtor – they are happy to have Ally bank owe them, rather than me owe them. There’s no collective delusion here, just a chain of relations – banks are social animals – all linked together through a web of economic and political frameworks (including especially bank charters and bank financial regulation).
In calling out these comments by Weisenthal and Alloway, I do not mean to pick nits. Rather, such remarks prove significant because the scam that is crypto can only be sustained by the crypto imaginary, which itself gets money quite wrong. In this post-FTX moment, here at the end of the crypto winter (with signs of spring seemingly on the horizon), we can easily point to basic facts showing that there is literally no such thing as a crypto industry. Crypto has not merely failed to reinvent money; it long ago abandoned any genuine efforts to do so. As McKenzie persuasively insists throughout his book: no one in crypto has any good answers to the question of crypto’s use.
Despite all this, the poor politics of crypto will persevere if we do not challenge this crypto imaginary. Doing so requires us first to understand the economics and politics of crypto, before we might then consider ways to counter it. This latter should be a project of and for contemporary theory. And I suspect it will prove to be an ongoing project, because the crypto story is far from over.
On this stage, Lewis’s work provides a more sophisticated account of the conditions that precipitate FTX’s downfall. It’s not a movement of markets, but a series of calculated (and quite miscalculated) strategic political moves. Bankman-Fried brings down his own house of cards with a major misstep in the geopolitics of financial regulation. As part of a larger goal to make Dubai FTX’s “Eastern Hemisphere headquarters,” Bankman-Fried tried to get the UAE government to push Binance out of the country. The effort backfires: it elicits a direct response from Zhao, who pulls on the thread that ultimately, and quite quickly, unravels FTX (Lewis 194).
Surely his vision excluded his own fraud conviction, but nonetheless it included the collapse of exchanges and the revelation of fraud. Bankman-Fried just assumed that others would fall and he would be left standing as king.
Conspicuously, especially for those critical of Lewis as a naive defender of Bankman-Fried, Lewis doesn’t mention this episode at all. McKenzie alludes to it briefly, as Bankman-Fried acknowledging Ponzi schemes (McKenzie 226) and while Faux actually quotes from the podcast transcript in some length, he never unpacks its significance for the entire politico-economic structure of crypto – instead taking it as tacit criticism of his own initial profile of Bankman-Fried, which focused not on the potential fraud here, but merely on “whether he really would give his money away” (Faux 178).
Both the podcast itself and a transcript can be found here. All further cites will be listed parenthetically as “Boxcoin” followed by the time stamp.
“Companies” refers to the spending Bankman-Fried did as a venture capitalist himself, investing real dollars into crypto startups. “Naming rights” refers to “FTX Arena” in Miami. As for “politicians,” Bankman-Fried made himself famous for being an “effective altruist” who planned to give away all his money (he actually gave almost nothing to charitable causes) and he also let it be known that he gave generously to Democrats in the 2020 cycle. At the same time, and though he kept it quieter, he was giving probably just as large or larger sums to Republicans. The source for this last claim is Bankman-Fried himself, who told a YouTuber that he had to use dark pools to funnel money to the political right (McKenzie 231). These donations should be understood in the context of Bankman-Fried’s overall position on money and politics, which was marked by his incredulity that rich people didn’t spend so much more to buy politicians: “It just seems like there isn’t enough money in politics. People are underdoing it. The weird thing is that Warren Buffett isn’t giving two billion dollars a year” (Lewis 176, my emphasis).
The timing here is key: you must start a new cycle (create a new coin) before the old coin has fallen to zero and you have been “liquidated.”
I say “crypto variation” because in traditional financial markets, a “wash sale” refers to the practice of selling a security you already own at a loss, then immediately buying it back, all with the intent of claiming a tax loss on the sale. There’s no law against selling a stock and buying it back, but the tax deduction is itself ruled illegal by securities or tax regulators in most countries.
For example, as of November 2023 exchanges list dogecoin as having a market cap just under $11 billion; this despite the fact that dogecoin was intentionally created as a joke and that 10,000 new coins are mined every minute. Every minute. The current total supply of dogecoin issued is 142 billion. What is that total supply worth? Like any item listed for sale, it can only realize its value when exchanged for actual money (bank money), but we can estimate the real answer at much closer to zero than to $11 billion.
In the case of FTX, Sequoia Capital perhaps proved the biggest rube because they lost more than anyone else, $213.5 million. On the other hand, larger sums came in later: in January of 2022 FTX brought in $400 million from sources that included an investment firm owned by the Singapore government and the Ontario Teacher’s Pension Plan.
Meme stocks provide perhaps the best potential counterexample, a case where even upon closer scrutiny it truly seems that monetary value can be created by sheer force of will. Ultimately, however, “value creation” is always an illusion, often masking the underlying value transfer. As Levine emphasizes, the meme stock phenomenon depends on “the rise of Bitcoin” as its condition of possibility (Boxcoin 31:31). I would add that no crypto token has ever “created” any value: every real dollar of crypto came from outside, when customers sent deposits to exchanges. And AMC (the most potent meme stock ever) trades today at its lowest price in history. The short sellers were right in the end, even if some retail traders took money from hedge funds for a few months.