As SBF sits in court, is cryptocurrency on trial too?

We’re about a week into the trial of Sam Bankman-Fried, also known as SBF. He’s the one-time cryptocurrency wunderkind, now fighting charges that he stole billions from customers of his now-defunct crypto exchange, FTX.

A lot of hopeful investors got burned by the collapse of SBF’s empire last November. FTX is currently in Chapter 11 bankruptcy protection.

Marketplace’s Lily Jamali spoke with Vicky Huang, a crypto reporter at The Wall Street Journal, about how the trial is affecting perceptions of the industry.

The following is an edited transcript of their conversation.

Vicky Huang: People definitely lost faith in crypto companies after the collapse of FTX. It was considered one of the safest places to park your money, and Sam Bankman-Fried, the founder of FTX, was the darling of the crypto industry. He was loved by Silicon Valley venture capital investors. So when FTX collapsed in November, that really hit the industry hard. Not only did customers lose faith in crypto companies, but also prices of major cryptocurrencies fell sharply and then became very stagnant. Even though this year, the price of bitcoin has rebounded a little bit.

Lily Jamali: This is what I find so fascinating: The price of bitcoin is actually higher now than it was when the FTX scandal happened.

Huang: Yes, I think that has something to do with what happened in 2023. One thing about bitcoin is that it’s sort of a symbol for people who don’t like big government and don’t want to conduct their financial transactions through a middleman like the bank. So, when the banking crisis that started with the collapse of Silicon Valley Bank happened in March, that kind of helped bitcoin from a narrative standpoint. A lot of these big bitcoins companies in the United States said, “This is why you need to own bitcoin, because you can’t trust the bank with your money.” When it collapsed, it really scared a lot of depositors.

Jamali: That’s a great point. It’s important to remember that cryptocurrency emerged from the great financial crisis 15 years ago and was a response to the fact that so many people’s faith in the traditional financial system was shaken.

Huang: Yeah, exactly. That’s exactly what a lot of these bitcoin supporters go back to again and again when they talk about the resilience of bitcoin throughout all these crises. And it’s true that a lot of crypto companies, especially crypto exchanges, have failed throughout the history of bitcoin, starting with Mt. Gox in 2014 to FTX in 2022. Bitcoin has indeed survived all of these large-scale scandals and frauds. I don’t know what that says about bitcoin exactly, but it has survived.

Jamali: We’re about a week into the trial of Sam Bankman-Fried, and as we watch that play out, does it feel to you like crypto is on trial too?

Huang: It definitely feels like crypto is on trial, even though the crypto industry really wants to move on from this. Since the collapse of FTX, regulators have waged a sweeping crackdown on the crypto industry. They have sued the largest crypto exchange in the world, Binance, and they have sued the largest crypto exchange in the U.S., Coinbase. Government officials have also cut off some services such as banking services and other products that are really vital to the crypto industry.

Jamali: But they’ve had mixed results, right? Regulators have not succeeded in all of the attempts that they’ve made to crack down on crypto.

Huang: Yes, it appears that regulators have kind of struggled to regulate the crypto industry. One of the reasons is that many crypto companies think there needs to be new regulations and new laws to help regulate the industry, whereas a lot of regulators think that there are already existing securities laws that can regulate the industry. So, there’s a lot of tension between regulators and the crypto industry in general. So far, there is no existing law that has been successfully applied to kind of regulate the industry.

Jamali: Where does Congress stand with this? The House is out of commission right now, but there seemed to have been some movement toward legislation before the speaker of the House was ousted.

Huang: Yes, there are two bills in Congress right now. One is the bill to regulate stable coins, which are crypto currencies pegged to the U.S. dollar. And another bill focused on market structure. From talking to a lot of people in the industry, I don’t think the hope of a bill being enacted into law is very high right now, just because there’s a lot of other things going on in the government, and we are in the midst of the SBF trial. So, while there’s a lot of hope, the progress on that is not very fast right now.  

Jamali: What are you hearing from people in the crypto industry now? How are they painting the SBF trial in your conversations with them?

Huang: A lot of people in the crypto industry are definitely watching the trial very closely. Because FTX was such a big part of the crypto industry, Sam Bankman-Fried was kind of omnipresent. He was everywhere, in every transaction and every deal. But now, I think for people who still believe in crypto and are working in the crypto industry, they don’t want the public to lump FTX and SBF together with crypto. Even the current CEO of FTX, John Ray, who’s this corporate turnaround expert in charge of FTX’s bankruptcy proceedings, has said that this is just old-fashioned fraud, and it could happen in crypto or in any another industry. I think that’s what a lot of people in crypto want the public to think of this as well, that this more has more to do with a bad actor committing fraud on his customers, rather than this is a crypto-unique situation.

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Vicky Huang’s colleagues at The Wall Street Journal are reporting from the court room in New York each day. The trial is expected to last around six weeks.

And as Huang mentioned, the crypto industry’s response to this legal circus is pretty negative. The phrase “bad apple” comes up a lot when they describe SBF. One crypto analyst told Wired she’s not the only one who thinks this is all just “one very big distraction” and calls the saga the “galactic embarrassment of FTX.”

SBF’s parents are also under legal scrutiny. Joseph Bankman and Barbara Fried are Stanford Law School professors and were highly respected in Silicon Valley. They both now face a civil lawsuit alleging they helped run their son’s empire and were rewarded handsomely.