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The case that foreshadowed the lessons of the FTX meltdown

The case that foreshadowed the lessons of the FTX meltdown

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For the past three seemingly glorious years, 30-year-old boy prodigy Sam Bankman-Fried, or SBF, who was crowned “King of Cryptography,” bore an uncanny resemblance to the legendary character Robin Hood. Using his quant and programming skills instead of a bow and arrow, he built a $32 billion empire at breakneck speed: cryptocurrency exchange FTX and trading company Alameda Research. But it was all ostensibly for the cause of giving to the poor (via the fashionable new movement, effective altruism) — with former Alameda co-CEO Caroline Ellison serving as his maid Marian, and a staggering list of A- Listeners (from top Democrats to star athletes) his Merry Men. But since being escorted in handcuffs from his home in the Caribbean on December 12, he has come across as a far less cheerful outlaw.

So how did our self-proclaimed modern-day Robin Hood, who agreed to be extradited to the US earlier this week, ended up in chains?

The answer is hinted at by another “ethical crusader” who experimented with his own philanthropic imagination on the other side of the globe just over a decade ago: Vikram Akula and his microfinance initiative. Microfinance refers to institutions that provide financial services, particularly small (“micro”) loans, to people who do not normally have access to credit from traditional banks – typically poor women, often in rural areas. The concept of microfinance and the first microfinance institution, Grameen Bank, had been founded in Bangladesh in the 1970s by economist Muhammad Yunus and had gradually reached millions of borrowers in the country and around the world – winning Yunus and his -for -profit Bank received the Nobel Peace Prize in 2006 for contributions to global poverty reduction.

Raised in the US, Akula wanted to import the business acumen he picked up as a management consultant at McKinsey — his equivalent of Robin Hood’s archery — into the microfinance model of his ancestral homeland, India, by accelerating the process and bringing in the logic of rapidly scaling consumer brands like Coca-Cola or McDonald’s come into play. For this purpose he founded his own company SKS Microfinance in 1997. Driven by the idea that the faster Akula’s company expanded, the more good it could do. SKS quickly became one of the fastest-growing institutions in the history of the sector and Akula the bold new global face of microfinance, spawning, for example, The Time magazine’s list of the 100 most influential people of 2006. By 2010, an SKS IPO was seen as obvious evidence of oversubscribed the profit-with-purpose pudding 14 times.

The similarities between FTX and SKS go beyond the personal paths of their founders. Like Robin Hood and his followers’ noble game of cat-and-mouse with the tyrannical sheriff, both men operated on the fringes of the law in the borderline space between legal and non-legal, with SBF in the unregulated crypto industry and Akula in the mostly unregulated South Asian microfinance sector. (In 2010, an arrest warrant was also issued for Akula, although he was never arrested, as India has “sheriffs”, what they are.) And both were fictionally motivated – much like “man of the people” Robin Hood – by the democratizing zeal to empower the people.

In fact, the original models of crypto and microfinance had a lot in common. Crypto is a decentralized digital currency (including, for example, Bitcoin, Ethereum, Tether, Binance Coin, and Dogecoin) traded on crypto exchanges (such as Coinbase, Kraken, Gemini, and until recently FTX, as well as some brokerage platforms such as Bitcoin Robinhood, Webull and eToro). Unlike traditional “fiat currencies” issued by governments, crypto is not backed by physical assets: its value is invoked entirely by common consent. Because transactions (“blocks”) are verified and recorded (in a continuous connection or “chain”) in a code called a blockchain—the equivalent of a checkbook spread across an infinity of computers around the world—applies he as open, diffuse, and consensus-oriented: the ultimate chapbook or opportunity for millions of ordinary people to co-author their own collective financial history.

The microfinance model, on the other hand, is characterized by lending without contracts or collateral, but instead through “group lending” or the organization of borrowers into supportive peer groups, usually of five, greatly expanding the funding radius by allowing virtually everyone (including those without legal or financial assets) to access credit, making them the quintessential Volksbank. Despite the absence of the usual punitive mechanisms and lending backed by physical assets (collateral), microfinance institutions achieve and maintain remarkably high repayment rates — reportedly regularly exceeding 95 percent — through borrower consensus or joint consent. Central to both are peer-to-peer relationships and dynamics that replace the traditional hierarchies of finance, similar to Robin Hood’s commitment to redistribution as financial justice.

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