The collapse of FTX shattered the crypto monopoly alliance

Written by: Jacob Silverman

Compiled by: Block unicorn

Despite claiming to be "decentralized," the cryptocurrency industry is actually controlled by a small group of elites who, over time, have incorporated many institutions related to the existing centralized financial system that they originally claimed to replace.

------Jackson Palmer, co-founder of Dogecoin

At the beginning of 2021, when I started reporting on the dirty schemes of the cryptocurrency industry, I encountered an anonymous Twitter user named Bitfinex'ed. If you spend any time in the "space" of cryptocurrency, especially as a critical voice, you will undoubtedly come across Bitfinex'ed. Or more likely, he will find you. He is best known for his relentless, years-long attacks on Tether, a cryptocurrency company whose dollar-pegged tokens effectively serve as the reserve currency for the entire cryptocurrency economy. But his criticisms extend beyond Tether to the widespread fraud, market manipulation, and self-dealing that permeate the industry.

Tether is a well-known shadowy operator based overseas, whose CEO rarely appears in public. It has created shell companies and forged documents, leading to numerous lawsuits, settlements with regulators exceeding $60 million, ongoing criminal investigations, accusations of money laundering for terrorists, and bans on operating in New York State, among other issues. For Bitfinex'ed—and for many skeptics, journalists, amateur sleuths, some disgruntled crypto traders, and even some who actually hold power—Tether is both the most important company in cryptocurrency and the most corrupt. The collapse of a small group of elite companies like Tether seems inevitable if the cryptocurrency industry wants to mature further and get back on track; it must break free from the dominance of companies like Tether that exploit tax havens and return to a positive business model, which is an important ethical requirement for the development of the cryptocurrency industry.

However, despite the ongoing tension, the dramatic collapse of FTX last fall and many other bankruptcies within the industry, Tether continues to grow, with its token circulation exceeding $82 billion. Despite numerous reports, including those from the New York Attorney General, confirming doubts about Tether, this has become such an overused talking point that critics of the company are sometimes mocked as paranoid or obsessed. In the eyes of the company's defenders, we are derisively referred to as the Tether truthers. They ask, how much longer will we continue to hold on to this?

Bitfinex'ed is a self-proclaimed whistleblower who challenges his detractors with relentless and righteous anger. He frequently posts, and even some industry insiders have begun to praise him and offer him prophetic gifts, as his accusations often prove true over the long term—he was an early critic of FTX founder Sam Bankman-Fried, who was a major business partner of Tether. He has amassed a large collection of screenshots, recorded interviews, legal documents, leaked emails, and other documents revealing Tether's mysterious behavior, from refusing to audit its accounts to allegations of bank fraud and apparent criminal statements from former executives. These documents and digital gossip are often shocking and serve as a valuable education for a journalist exploring the world of cryptocurrency.

Some view Bitfinex'ed as an outsider, but his relentless criticism has had an impact. Tether has countered his lengthy posts on Medium with blog articles, and Bitfinex'ed claims there is a campaign of intimidation and bot-driven misinformation against him. As early as 2017, The New York Times cited Bitfinex'ed's research, particularly his core claim that Tether issued tokens without real dollar backing.

Bitfinex'ed told me something I found difficult to ascertain. In his narrative, cryptocurrency is not just a loosely regulated industry filled with bad actors profiting from developing a parallel, mostly anonymous financial system. It is more structured and identifiable: a cartel. As Bitfinex'ed and other sources have told me over the years, the cryptocurrency industry may be dominated by fewer than twenty-four individuals who frequently collude to manipulate markets, share insider information, prey on everyday retail customers, and openly break the law—if the law can be said to apply to some of these businesses. They primarily operate through group chat platforms on apps like Signal, Discord, and Telegram. Some of these manipulators are well-known; others are less so. But this has been the basic pattern for at least the past decade.

This is a classic economic and business cartel—similar to OPEC, rather than Sinaloa—where a small group of closely connected individuals work together to dominate the market they have recently helped to create. For cryptocurrency, the currency is fake, the value is purely based on speculation, and new tokens can be conjured out of thin air; it makes perfect sense that new tokens can be hyped from nothing. It is a small industry, valued at $3 trillion at its peak in November 2021, but now hovers around $1 trillion. Many of the prominent figures leading cryptocurrency know each other, interact through social media, trade with one another, and meet at the Satoshi Roundtable, an annual insiders' meeting that only invites select participants. Last spring, I confirmed through some participants that the mysterious Tether CEO, Jean-Louis van der Velde, was invited to the FTX conference in the Bahamas, where prominent figures like former U.S. President Bill Clinton and former British Prime Minister Tony Blair were also present. In a public Twitter exchange, SBF claimed that his Alameda hedge fund had purchased at least $36 billion worth of Tether in just a few years—saying he didn't know if van der Velde was there, but I don't believe him.

Many key players in cryptocurrency have histories with poker, online gambling, offshore finance, and/or other gray market economies. Most of them conduct business through so-called over-the-counter (OTC) trading: these person-to-person transactions may not leave a trace on the blockchain, which is supposed to be a public and transparent ledger. Over time, this industry, including its black market participants, has developed its own protocols, social norms, and possibly a silent rule as interests align. What is beneficial for one member is often beneficial for others.

As a framework for explaining what cryptocurrency is and how its main participants operate, the cartel theory seems cohesive. The more one observes this industry, clarifying the fog of hype and misinformation, the clearer this outline becomes. While reporting on the influential centralized exchanges in this industry, the murky flow of funds, and the close relationships with domestic and foreign regulators, others have raised claims about private group chats and internal coordination. But no one has been able to provide the kind of documentary evidence or recorded testimony that would allow me to verify through an editorial inbox.

Thus, I have persisted with the idea of a cryptocurrency cartel for two years, occasionally making it public on Twitter. Its explanatory power has grown stronger, especially before many companies began to collapse last spring. I have documented the relationships and shared histories among major industry players, noting the frequently overlapping financial interests, consistent incentives, and the strange tendency of large cryptocurrency exchanges to collaborate, sharing investors and key personnel, and sometimes seemingly using the same pool of money. (Last year, when the exchange Crypto.com "accidentally" sent $416 million worth of Ethereum to Gate.io, Gate.io returned most of the funds but also sent millions to another unidentified entity.)

Hard evidence seems elusive, and many things can be easily explained away when people's bank funds are threatened. Even when the government takes enforcement actions against cryptocurrency Ponzi schemes or reaches settlements with Tether over its violations of banking laws, the industry seems unconcerned. It is simply a matter of money, with everyone profiting from this market, which lacks actual currency backing, relying only on cryptocurrency. This issue became apparent when FTX experienced a bank run in November 2022, ultimately forcing the company to reveal that billions in deposits were missing. That money had been funneled through backdoors to SBF—his hedge fund and his friends.

The collapse of FTX triggered further scrutiny of cryptocurrency banking. Prior to this, most of them had placed their business with a few crypto-friendly banks, allowing the cartel to operate stably, as these banks provided specialized services with extreme risk tolerance.

In the U.S., thousands of cryptocurrency companies, including top firms like FTX and Binance, opened accounts at Silvergate Bank and Signature Bank. If these two names are disturbingly similar, the products they offered to the cryptocurrency industry were essentially the same. Both banks had what are known as private settlement platforms—essentially an internal market within the bank where clients could trade funds with each other in real-time and without fees, most importantly, without any funds leaving the bank and without corresponding regulatory scrutiny or record-keeping. In the non-compliant cryptocurrency industry, these settlement platforms are extremely useful. Signature has Signet, Silvergate has SEN; together they cover most of the industry. Companies like Binance and FTX would open accounts at U.S. banks through some nominal shell companies, making it easy to access the U.S. banking system, accept deposits from U.S. retail customers, and do business with peers. The ultimate benefit is that potentially criminal money can enter U.S.-registered banks, be mixed on these settlement platforms, and then ultimately be cleaned and sent to other U.S. banks in the normal course of business.

Note: SEN refers to the Silvergate Exchange Network, a private settlement system provided by Silvergate Bank that allows clients to conduct real-time, fee-free currency exchanges. Access to the U.S. banking system and obtaining real dollars from customers are crucial to the cartel's business model. So, all of this will eventually collapse; it is inevitable.

Maintaining a Frenemy Relationship

The most compelling evidence ultimately came from SBF himself. On December 13, 2022, after a month of turmoil, SBF's crypto empire plummeted from $32 billion to zero in just days, and Forbes published the testimony he planned to submit to Congress while holed up in a mansion in the Bahamas. He never got that chance; he was arrested the next day and extradited to the U.S. to face now thirteen felony charges.

This is a cartel in the classic economic and business sense—OPEC, rather than Sinaloa—where a small group of connected participants work together to control the market they helped create.

As a document published by a person accused of historic fraud, this testimony is captivating. Much of the document is self-defense—claiming that SBF could still turn things around, denying criminal activity, criticizing FTX's new leadership, and displaying an overly dogmatic, exaggerated personal performance. At times, the text reads like a confession. He expresses regret for signing the bankruptcy filing at 4:30 a.m., at which point the accused fraudster promised that a rescue plan was imminent. He becomes sentimental, discussing the antidepressants he was taking, trying to counter rumors about his drug addiction. "I am, and have been for most of my adult life, very sad," he laments.

But when SBF begins to attack his former business partners—ultimately breaking the secret agreement—he provides concrete evidence of the cryptocurrency cartel's existence. There, in a screenshot of a crypto signal group chat called "trade coordination," the name almost begs for a RICO (Racketeer Influenced and Corrupt Organizations Act) charge. In his testimony submitted to Congress—SBF included screenshots of conversations involving himself, Binance CEO Changpeng Zhao (also known as CZ), industry executive Zane Tackett, and several unnamed individuals. (Tackett is one of those who told me in public Twitter posts that Tether's CEO was at the FTX Bahamas meeting.) More leaks and reports about these chats revealed the involvement of then-Kraken CEO Jesse Powell and Justin Sun, a notorious scammer who somehow amassed billions in cryptocurrency and at least received a diplomatic title from the island nation of Grenada. This is the legendary group chat where major decisions were made.

In the exchange that SBF particularly emphasized, while defending himself, CZ accused him of trying to unpeg Tether—that is, letting it drop below its $1 value, which could jeopardize the market or represent a profitable arbitrage opportunity for an aggressive trader. The financial details and trading mechanics are relatively unimportant, except that CZ seems concerned about a series of $250,000 short bets that SBF's company appears to be making. CZ's concern over such relatively small trades indicates just how small and interconnected the cryptocurrency economy actually is. CZ attached a text screenshot from Tether's CTO and public face, Paolo Ardoino, urging him to take action regarding SBF's trades.

In the November 2022 chat, CZ wrote: "Stop trying to unpeg the stablecoin, stop doing anything. Pause TORN trading now (@Justin Sun), don't cause more harm, let the rest play out." (TRON is a blockchain and token managed by Justin Sun, who controls multiple exchanges, tokens, and other crypto projects; it is also one of the main blockchains using Tether tokens.)

"What?" SBF replied.

"The more harm you cause now, the longer you'll be in jail," CZ said.

SBF asked CZ if he really thought a $250,000 trade would unpeg Tether, which has a market cap in the billions. CZ replied: "It won't succeed, but it's causing some small issues and creating more work for market makers—those trading firms that provide liquidity for cryptocurrency exchanges." (In addition to his role at Binance, the world's largest cryptocurrency exchange, CZ also owns at least one market-making firm that is under investigation by U.S. authorities.)

CZ wrote: "My honest advice is: stop all activities, put on a suit, go back to Washington, and start answering questions from the judge."

Then he asked: "Is anyone against removing SBF from the group chat? I think we should coordinate a bit and see how we can best work together to help stabilize and restore market confidence. Qatar still has business to do, and SBF is no longer a reputable member."

The screenshots do not tell the whole story. CZ may genuinely be concerned about SBF's trades, but the growing rift between the two—Binance was an early investor in FTX—actually runs deeper than this conversation. The two titans found themselves increasingly competitive, with SBF beginning to publicly criticize CZ and Binance. At one point, he even joked on Twitter with FTX executive Ryan Salame that CZ might not be allowed into the U.S., a jab at the civil and criminal investigations reported against Binance and CZ himself. Later, Binance would accuse SBF of smearing CZ to U.S. politicians and regulators, clearly making him a target.

As for why a fallen billionaire cryptocurrency CEO would publicly release screenshots showing he might be involved in market manipulation and other secret collaborations, my theory is that despite SBF's insistence on his innocence and his display of Silicon Valley's power-driven arrogance, he knew he was about to collapse and wanted to ensure his enemies were buried with him. These "trade coordination" screenshots suggest a level of secret collaboration among the industry's most powerful figures. For any investigator, they would automatically subpoena the complete chat records (these messages seem set to delete after a few weeks). These screenshots are like a grenade; as long as CZ is within the blast radius, SBF is very willing to light the fuse.

Rumors Abound

The day after Forbes published his testimony, SBF was arrested, and the silence rule officially broke. The floodgates of public opinion opened, but what poured out was not a cleansing tide, but rather a murky sludge. The political and rhetorical positioning playing out on social media, cable news, and legal documents exuded a nauseating atmosphere of desperation. Former business partners began publicly denouncing SBF as the industry's primary villain, and he was finally ousted. Blame was cast in all directions, though mostly outward; the SEC, the Biden administration, cryptocurrency critics, and SBF's father all apparently had much to answer for. New scammers emerged, promising to help you recover your cryptocurrency, offering the highest rates for bankruptcy filings, and they began targeting those who had previously been scammed. These scam platforms proliferated: they leveraged the drama of FTX to launch their own media ventures or to initiate and dump schemes (often, they were running in parallel).

Because cryptocurrency is not a viable alternative to the traditional financial order, it can be manipulated by insiders colluding in group chats.

Do Kwon—the fugitive founder of the failed Terra stablecoin who triggered the latest economic crisis in cryptocurrency—appeared in a livestream with the two founders of Three Arrows Capital, another failed cryptocurrency hedge fund. Representing the overconfident, reckless cryptocurrency brothers, the 3AC guys fled their Singapore company base after their multi-billion dollar fund collapsed. It turns out they are now in Indonesia and Dubai—both of which do not have formal extradition treaties with the U.S.—and are preparing to reflect. These two joined the chorus of harsh critics, celebrating their once-strong peers now turned scapegoats for the industry's failures, SBF's downfall. The loathsome pharmaceutical profiteer Martin Shkreli, now released from prison and attempting to pivot to cryptocurrency, chimed in. He said, "Tell Do Kwon that prison isn't so bad." He was later arrested in Montenegro while evading U.S. and South Korean authorities. This is what self-examination looks like in the cryptocurrency industry after SBF received his just punishment.

As more companies went bankrupt in the winter and the new year, with more accusations and lawsuits emerging, regulators began trying to clean up the chaos that had formed under their watch. Despite the cryptocurrency industry losing billions of consumer dollars, the anger and humility they displayed were minimal. They expressed resentment towards regulatory intervention from the administrative state, which had been overrun by the worst fraudsters in cryptocurrency—their former colleagues—and as part of a massive political action, donated to at least a third of Congress, leading to allegations of campaign finance violations (many other crypto companies are also engaged in influence peddling, but less conspicuously and less successfully than FTX).

By the end of 2022, signs of cracks began to appear in the cryptocurrency alliance. Once members began blasting each other's projects as useless, initiating lawsuits, and swearing vows of revenge. People published DM screenshots, hidden camera videos, and incomprehensible betrayal stories driven by greed for Dogecoin. Stock prices plummeted, various crypto banks, exchanges, and lending institutions, along with Bitcoin miners, filed for bankruptcy, leaving millions of customers' assets in limbo. On Twitter, the Winklevoss twins, who had shifted from battling Mark Zuckerberg to becoming major cryptocurrency players, began accusing their business partners while facing their own fraud allegations. Everything was chaotic and dramatic; frankly, the current state of confusion is highly entertaining.

Perhaps most importantly, cryptocurrency began to lose access to the U.S. banking system. Faced with renewed scrutiny from the government, some banks decided to shed their crypto business. Silvergate went bankrupt in March. Later that month, after the Federal Deposit Insurance Corporation intervened to save depositors at Silicon Valley Bank, New York regulators seized Signature Bank—this infuriated crypto investors and former Congressman Barney Frank, who held a lucrative position on Signature's board. The channels connecting cryptocurrency to the actual dollar system (which cryptocurrency relies on but is not keen on) began to close.

But this did not end; this year, digital asset prices experienced a somewhat surprising rebound, bringing a glimmer of hope that consumers' cryptocurrency might still have a chance of recovery. For instance, large venture capital funds like Paradigm and Andreessen Horowitz still have money to buy up the remnants of tokens they can later sell to the retail crypto market. Those still in executive positions often emphasize ignoring FUD—fear, uncertainty, and doubt. Despite increasing legal resistance, including thirteen charges from the U.S. Securities and Exchange Commission, Binance remains the largest cryptocurrency exchange, and CZ has developed a succinct way of expressing himself—simply writing a 4 (referring to not believing the media's lies and not panicking), reminding his fans and the bots that reply to every one of his statements to disregard FUD. These are old clichés in the cryptocurrency industry, but they provide encouragement and momentum to this beleaguered sector. Forget SBF, forget the journalists, forget the haters, forget SEC Chairman Gary Gensler. Demand "regulatory clarity," fight for the right to innovate, and keep moving forward; the next bull market should be coming soon.

As long as cryptocurrency is operated by overseas operators and this parallel financial system is only partially visible to regulators, law enforcement, and the public, insiders will always have the motivation to collude, exchange privileged information, and benefit one another. Even though the most well-known faces in this industry are now accused of a range of serious crimes, there are still profits to be made. It is precisely because cryptocurrency is not an effective alternative—let alone a challenge to the traditional financial order—that it can be manipulated by insiders colluding in group chats.

Of course, there are many people in the cryptocurrency industry, perhaps even a majority of participants, who are involved for honest reasons: they love the technology, they appreciate the novelty, they have libertarian ideas about the separation of state and money, or they simply want to take a gamble in hopes of getting rich. But these individuals, those who are genuinely bringing much-needed fiat currency into the system, are playing a different game. They are at a severe disadvantage, buying tokens at artificially inflated prices from venture capitalists and exchange CEOs, who receive discounts from peers. As critics of cryptocurrency like to say, these retail traders are used as exit liquidity by the tech billionaires who promise economic liberation. They are the tools used by those operating this cartel to cash out. They are the targets of the scheme, and we cannot let them escape legal consequences.