FTX founder accidentally described Ponzi scheme months before crash

Months before the cryptocurrency market crisis that followed the liquidity crunch at the crypto trading platform FTX, its now-former CEO had unintentionally described crypto staking or yield farming as essentially a Ponzi scheme.

As it happens, Coffeezilla, a YouTuber who investigates online scams, published a video on April 27, 2022, in which he drew attention to Sam Bankman-Fried’s (SBF) controversial remarks during his interview with Bloomberg financial columnist Matt Levine and the Odd Lots podcast.

‘A box’ that does nothing

During the interview, SBF tried to describe what yield farming is but ended up accidentally describing a Ponzi scheme that starts “with a company that builds a box.” As he explained:

“They probably dress it up to look like a life-changing, world-altering protocol that’s gonna replace all the big banks in 38 days or whatever. Maybe for now, actually, ignore what it does or pretend it does literally nothing. It’s just a box.”

As he continued, Bankman-Fried highlighted that “then this protocol issues a token, we’ll call it an ‘X’ token, and ‘X’ token promises that anything cool that happens because of this box is going to ultimately be usable by governance vote of holders of the ‘X’ tokens.”

Creating the hype

Going forward, the former FTX CEO said that “in five minutes, with an internet connection, you could create such a box and such a token, and that should be worth like $180 or something market cap for the effort you put into it. In the world we’re in, everyone’s going to be like, ‘ooh, box token, maybe it’s cool.’ If you buy it, it’s going to appear on Twitter, and it’ll have a $20 million market cap.”

“So ‘X’ tokens are given out each day, all these sophisticated firms are like ‘huh, that’s interesting.’ If the total amount of money in the box is $100 million, then it’s going to yield $16 million this year in ‘X’ tokens. That’s a 16% return. That’s pretty good. We’ll put a little bit more in. And maybe that happens until there’s $200 million in the box.”

Describing the hype that might follow, SBF said that “all of a sudden, everyone’s like ‘wow people just decide to put $200 million in the box, that is a pretty cool box,’ right? (…) And who are we to say that they’re wrong about that?”

“What happens now, all of a sudden, is people are kind of recalibrating like, well, $20 million, that’s it? Like, that market cap for this box, and it’s been like 48 hours and it already is $200 million, flowing from sophisticated players in it.”

How long can Ponzi scheme continue?

Upon the hosts noticing that what he was describing was basically a Ponzi scheme, SBF didn’t seem to mind and took it even further:

“And it is real monetizable stuff and if the world never decides that we’re wrong about this in a coordinated way, like you’re kind of guy calling bull****, saying this thing’s actually worthless, but in what sense are you right? (…) If you’re like, ‘that’s dumb and it has no cash flow, I’m going to short-sell it,’ you lose all your money.”

Recently, Coffezilla went back to his old video and commented that it has “aged like a fine wine,” referring to the scandal surrounding the crypto exchange and the damage spilling over to the entire crypto market, sinking its total capitalisation back to pre-2021 levels,

Meanwhile, the crisis has earned SBF comparisons with Bernie Madoff, a Wall Street financier who ran the largest Ponzi scheme in history, by both the “Rich Dad, Poor Dad,” author Robert Kiyosaki and podcaster Joe Rogan.