Bankman-Fried’s conviction raises questions

Crypto-currency or digital currency is still on the margins of financial reality. It exists in a parallel universe as it were. It is connected with the real world of investments, trading in an indirect way because people were using the recognised currency of the central banks in buying the crypto-currency and trading in it.

This is done in the hope that soon digital currency would be the standard currency. It is a bet and a risky one at that because central banks are seriously considering to make digital currency as real as possible in the real world.

Meanwhile, a young man, Sam Bankman-Fried, co-founded FTX, a crypto-currency exchange, and Almeda Research, which adopted the role of a hedge fund and speculated on the crypto-currency. When Almeda began to lose money, he has been accused of transferring the money he got from depositors in crypto-currency, and soon FTX bankrupted. All this had happened in a short span of three years, from 2019 to 2022. He has now been found guilty of several counts, and sentenced to 25 years and four days.

Thirty-two-year-old Bankman-Fried wants to go in appeal against the conviction. It can be said that the meteoric rise and fall of Bankman-Fried had happened much too quickly, and the conclusion would be drawn that crypto-currency is indeed dangerous terrain, and that things could go wrong and turn into a tornado within a very short time.

That would indeed be an exaggeration. Things did not go wrong because of the unpredictable nature of crypto-currency. Bankman-Fried tried the cheating method practiced in the old type of financial world, and when it got out of hand and it was caught in a tailspin, the FTX and Almeda fell to pieces.

The FTX became a popular exchange for crypto-currency and there is no evidence in its fall that it was due to the inherent instability of crypto-currency. It only shows that any attempt to shortchange boomerangs, and it did in the case of FTX and Almeda. Bankman-Fried as the architect of the fraud has received his just desserts.

Bankman-Fried’s lawyers have been arguing that their client did not intend to defraud his clients, and what went wrong was a genuine mistake in the world of speculation. There is however no denying the fact that he did funnel the money from FTX into Almeda, which was not part of the deal made by the buyers of crypto-currency with FTX.

The defence lawyers have argued that their client should be sent to prison for only five years because there was no criminal intention to cheat. That is indeed a legal question, where motive does indeed come into play, but it does not take away from the crime.

Will Bankman-Fried’s case give a bad name to crypto-currency, and will it make the concept of crypto-currency unacceptable, and even unfeasible. This is not likely to happen. The idea of crypto-currency is indeed a radical idea, but it is the fallout of the increasingly digital world. Indeed, some of the central banks are considering creating the digital form of their national currency. If that were to happen, then there would be greater stability and acceptance of the idea of digital currency.

But crypto-currencies like Bitcoin would still pose a challenge to the national digital currencies because Bitcoin wants to emerge as a universal currency, which lies outside the ambit of the central banks and other international financial institutions. With no regulations by national governments and international financial institutions, crypto-currency would remain in the hands of a few maverick moneychangers. And that does pose a challenge to the idea of a credible and stable currency for transactions.