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Comment by jmyeet | Hacker News Reader

There's a lot of finger pointing here. Luckily there's a lot of blame to go around. Let's start with the two obvious questions:

1. How did VCs give billions in funding to someone without insisting on an adult in the room? I mean having a respected CFO to report on the company's finances. Additionally, there should be regular board meetings and an audit committee who reviews such documents; and

2. Why was the SEC so toothless here? For anything connected to the US financial system or operating within US jurisdiction, the SEC should, at the very minimum, be ensuring compliance with custodial assets.

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For 1, I think the obvious answer was that the Fed, thanks to ZIRP, created an environment where investors were clamoring for investment opportunities. This gave high-growth companes, like FTX was on paper, a lot of leverage with the terms of investment.

> like FTX was on paper

FTX was high-growth in practice too. FTX was a phenomenal business. It wasn’t like most crypto projects that are scams; their business and profits were genuinely massive.

What they did was take consumer funds and loan them out without real collateral. That’s bad and dumb and illegal, but doesn’t change the fact that the growth and economics of FTX were real.

Crypto exchanges, like other platforms, grow because there is capital that wants to trade there. This means that they have the same bootstrapping problem as a competitor to Uber or Facebook.

FTX's solution to that problem was Alameda Research, which traded huge volumes on their exchange. That, in turn, made the exchange look big enough to be a serious player, which drove customers and more growth.

The "phenomenal" part of FTX's business was the fraud.

Ahhhh yes, The this was a great business if only they hadn't thrown all the money out the window argument. If a business is throwing money out the window then it doesn't matter how good the rest of the business is. The company is a bad business.

FTX was high growth but apparently 0 profit which does not make a business good. Claims that, if only they hadn't been crooks and/or incompetent, this would have been great doesn't change the fact that they were, in fact, either highly incompetent or crooks.

Yea this is almost certainly the correct answer. I think any founders that raised a round in the last 2 years can easily understand how this happened.

Especially to Sequoia, which felt like they were behind in crypto investments (while a16z was getting into all the "big winners"). Lots of pressure to deploy capital, and like the other commentor pointed out, there was a massive a amount of real revenue being made by FTX.

That likely also contributed to the lack of scrutiny. Who in their right mind would commit such massive and blatant fraud, when if they simply didn't touch client funds in any weird/illegal way, they would still be an insanely rich billionaire!

> Especially to Sequoia, which felt like they were behind in crypto investments (while a16z was getting into all the "big winners").

Sequoia had other peers that resisted this temptation, though, so the "blame ZIRP" argument isn't sufficient.

VCs have a fiduciary responsibility to their investors (technically, Limited Partners or LPs). Those investors could have a valid cause of action that the VCs were reckless and negligent in how they handled the FTX investment with no oversight.

Re: #2, as Matt Levine likes to say, everything is securities fraud. All the stuff that FTX did before was probably illegal, but it was in a grey area without a particular regulator. Once it became clear that FTX falsely claimed to investors that it had effective risk controls, didn't misuse/steal customer funds, and wasn't operating a giant Ponzi scheme, it moved squarely into the SEC's remit.

> 2. Why was the SEC so toothless here?

The head of the SEC, Gary Gensler, 's former boss happens to be the father of the CEO of Alameda-the-scam.

SBF and Caroline Ellison: these fraudsters were very well-connected.

As a sidenote early on in the scandal a US senator wrote that there were suspicion that SBF was working hand in hand with corrupted officials to engage in regulatory capture of the cryptocurrencies exchange market.

And when did the shit hit the fan for SBF? Once he got very cocky and tweeted how he was going again to DC and how CZ (from Binance) was not allowed to go there.

These were SBF's famous last words. CZ answered that SBF wasn't a team player. Then the leak on Coindesk happened and all the articles exposing the SBF/FTX/Alameda scam came out.

Ain't it "strange" that it all unfolded after a tweet were SBF was boasting about how he was going to DC while CZ wasn't welcome there?

A paper billionaire fucked with a cash billionaire and found out what happens when you try to do that.

For 2, it’s (still) not clear who the chief regulator for crypto should be. The SEC has tried at times to assert authority there with pushback all around.

The current legislative push is to make the CFTC the regulator. The CFTC both by mission and culture is more hands off. It’s also much smaller in size than the SEC so focuses on cases where the law is more obviously being broken (eg boiler rooms selling leveraged gold contracts as physical gold to senior homes).

Crypto is a cutting edge area where the laws and regulators have not kept up and where until recently most of the participants liked it that way.

> the SEC should, at the very minimum, be ensuring compliance with custodial assets.

FTX claimed that none of the things they had custody of were securities. Most crypto claims the same. Why would the SEC be able regulate them? Their case for not being securities seems reasonable.

isn’t it enough that the VCs lost money and credibility

do we need the heavy arm of the law in everything?

> How did VCs give billions in funding to someone without insisting on an adult in the room?

Don't know how the whole VC thing works but I suspect that the people who took the decision weren't risking their own money, and they probably won't face many consequences.

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