| Even if you don't know much about crypto, the flameout of FTX and the subsequent arrest of founder Sam Bankman-Fried, accused of orchestrating a years-long fraud that diverted billions in customer funds from FTX to Alameda, is juicy stuff. Last week, SBF was extradited to the US after spending time in jail in the Bahamas; two of his associates have pleaded guilty to fraud charges. In the long run, the FTX disaster promises to reshape the future of crypto. Unfortunately, investors aren't going to find much comfort in the immediate aftermath, as Alexis Leondis writes. They, and other crypto advocates, will have to suffer through their own stages of grief. Step 1: Denial. "That's what the venture capital and pension funds that seeded FTX surely want you to believe: That they were unwitting victims in an unfortunate and complex saga nobody could have foreseen. Don't fall for it. While we still don't yet know all the facts, they shouldn't go blameless. Without their continual funding, stamp of approval and lack of questions, FTX never would have grown as big as it did. Their carelessness means FTX customers are out billions of dollars they are unlikely to ever recover." — Robert Burgess and Chris Hughes Step 2: Anger (and blame). "The FTX debacle enshrines all the reasons a solid accounting system and well-structured internal controls are critical to a business and its investors, creditors, customers, suppliers and other stakeholders. … Raw intelligence, academic accomplishments and professed altruism are no substitutes for financial accounting systems, internal controls and materially correct financial accounting statements. Nor are they legitimate reasons to make customers, competitors and the whole industry a scapegoat for internal failures." — Michelle Hanlon and Nemit Shroff Step 3: Bargaining. "The crypto industry has suffered many booms and busts in its brief lifespan, but nothing like this. Bankman-Fried has tried to present himself as a naive 30-year-old who got out over his skis, but each day brings new reports of elaborate internal tools used to support the profits of trading firm Alameda." — Lionel Laurent - Bonus Laurent: "The ex-billionaire's confessional tweets sound so empty because … it looks more like the combination of a good old-fashioned financial bubble and, as Larry Summers points out, the murky accounting complexity of Enron, with Bankman-Fried at its heart."
Step 4: Depression. "How much real money was ever involved? … All these collapses and bankruptcy proceedings are described in dollar-equivalent values. That is highly unreliable as a measure of what kind of real cash or real value was ever involved. Crypto's attempts to masquerade as money itself is a big part of why this is all so shrouded in fog." — Paul J. Davies Step 5: Acceptance. "In retrospect, Sam Bankman-Fried and his cryptocurrency gang gave investors ample reason to steer clear of FTX. The biggest red flag may have been the first: the crypto exchange's relocation to the Bahamas. For centuries, the island nation has been defined by its close ties to dodgy, even criminal finance. Far from being an anomaly, FTX was simply the latest in a long line of sketchy enterprises." — Stephen Mihm Step 6: Finding meaning. "The question I always have in situations like this is: How did they think this would go? What was the good outcome here? Why do all this? Many financial crimes have essentially the shape of Ponzi schemes, which by their nature snowball: You take some money from new customers to pay fake returns to old customers, which requires you to take even more money from newer customers to keep paying the fake returns, etc., until the hole gets too big and you go to prison. If you start by stealing $1,000, pretty soon you need to steal $10,000, and then $100,000, and then you find yourself running a billion-dollar Ponzi. And there's rarely a way to come back from that. It is hard to make back a billion dollars at the roulette tables." — Matt Levine Notes: To contact the author of this newsletter, email Brooke Sample at bsample1@bloomberg.net. Sign up here and follow us on Instagram, TikTok, Twitter and Facebook. | 
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