Rijksmuseum
Tulips, Paper Money, Limited Liability and Financial Crime
By Simon Constable
Financial innovations often get overheated. Frequently there seems to be a mania, then a crash, which is followed first by state prosecutions and then acceptance of a new way of doing things. And, true to form, it has happened again seemingly in the form of cryptocurrency, which has fast become a cause célèbre.
Cryptocurrency began in January 2009 with the invention of Bitcoin; it built on the related blockchain technology introduced in 1991. One innovation was that the historical blockchain coding couldn’ t be retrospectively altered. It was like a ledger where the prior entries could not be changed. Another distinctive characteristic was there would only ever be a fixed number of Bitcoins available. Once they’ d
Dutch satire of the Mississippi Bubble: A roosterlegged John Law sells Mississippi Company shares to eager investors, while King Midas distributes the proceeds to other men. all been discovered, or mined, there could be no more. This differentiated cryptocurrency from dollars, which get devalued as more and more bills get printed. For more than a few people, these two attributes were enough to embrace Bitcoin and blockchain.
Over the last 15 years through September 2024, the number of cryptocurrencies had grown to 9,844. However, it took a while before Wall Street got in on the game by introducing a crypto exchange-traded fund, making it tradable like a stock. The first such effort from the Winklevoss brothers failed to attain SEC approval in 2013. It took until 2021 for the SEC to approve a crypto exchange-traded fund based on features and until 2023 for the regulator to approve one based on spot prices, rather than futures contracts.
In 2019, as Wall Street was trying and failing to get in on the act, a young man named Sam Bankman-Fried decided to develop a crypto exchange named FTX. It quickly grew, reaching a million users by July 2021 and gaining a valuation of $ 18 billion. From there, it went downhill.
On November 6, 2022, the head of competing crypto exchange Binance said it would withdraw billions of dollars of holdings from FTX. That, in turn, prompted something like a bank run as other people with crypto holdings at FTX decided to cash out as well. One commentator likened it to the now defunct investment bank Lehman Brothers, which quickly submerged from megastar status into nothing during the financial crisis of 2007 to 2009.
By November 11, FTX filed for Chapter 11 bankruptcy protection. A month later, on December 11, 2022, Bankman-Fried was arrested for“ wire fraud, wire fraud conspiracy, securities fraud, securities fraud conspiracy and money laundering,” and he was extradited to the United States from his base in the Bahamas.
He was found guilty, and in March 2024 was sentenced to 25 years in prison. It sounds disastrous, but as of October 7, 2024, FTX was set to pay its former customers back in full plus interest, with payments beginning in January 2025. That’ s no small feat.
32 FINANCIAL HISTORY | Spring 2025 | www. MoAF. org