Founder of FTX, who melted, wore shorts, was worth $25 billion at age 30 and was called the knight of the market

With inflation still high, it is difficult to defend the value of central banks. But the young cryptocurrency geniuses did it.

It was said that the great benefit of cryptography was decentralization. This was accompanied by all sorts of bluster about the liberating power of money detached from the central state.

A prominent advocate of decentralized money, Sam Bankman-Fried, was famous for wearing shorts and was said to be worth $25 billion by age 30. Bankman-Fried, founder of the exchange known as FTX, was considered by many to be a safe bet that would tame the wild land of cryptocurrencies, as the great knight of this industry.

That characterization gained traction last summer after Bankman-Fried tried to bail out two failed small cryptocurrency companies, Voyager Digital and BlockFi, drawing glowing reports that compared him to JP Morgan Sr.

The Morgan analogy was repeated last week, even after FTX clients withdrew $6 billion in funds in the equivalent of a banking panic, forcing FTX to freeze operations and hold billions in potentially assets. lost from the remaining customers.

For all the obvious ways Bankman-Fried is not Pierpont Morgan — the latter, a model of discretion whose namesake company remains solvent to this day — on one point they have one thing in common: Their careers demonstrate the need for central banks.

Morgan gained his reputation as a private savior in 1907 when a bank run hit the trusts (bank-like associations) in New York City and then spread to mainstream banks. Morgan rallied the city’s top financiers to borrow emergency funds and ease the panic.

His heroism slowed the bleeding — but some banks failed, many suspended withdrawals and dozens resorted to handing out homemade certificates instead of cash. As each bank built up reserves to save itself, the stock market plummeted 40% and the country suffered a severe recession.

Morgan’s inadequacy made it clear that the United States, already an industrial power, could not depend on the benevolence of a single financier. Precisely for this reason, Neson Aldrich, a powerful senator with close ties to Morgan, led a mission to Europe in 1908 to study the workings of the central banks of England, France and Germany.

Two years later, a group of bankers, including a senior partner at Morgan, chairman of its rival National City Bank, and central bank crusader Paul Warburg, gathered at Morgan’s exclusive club on Jekyll Island, off the coast of Georgia. In a secret meeting, they outlined what Americans had shunned since the days of Andrew Jackson — a central bank. The Federal Reserve was born three years later, in 1913.

Last week, James Mackintosh of The Wall Street Journal opined, “The fundamental flaw of centralized finance is that it needs central banks to end chaotic bank runs…” That’s like saying the problem with owning a home is that the person may need the fire department.

Any monetary instrument is a form of credit, and credit will always involve risk. Bankman-Fried discovered this. Its supposed savior, a cryptocurrency exchange known as Binance, backed out 24 hours after it tentatively agreed to a ransom.

On Friday (11), FTX filed for bankruptcy. However, if the bailout deal had been completed, Binance would reportedly be hanging for up to $8 billion in claims against FTX. Who would have come to Binance’s rescue?

The point of a central reserve fund, which is what Paul Warburg and Nelson Aldrich had in mind in 1913, is that the combined resources of the nation are immeasurably greater than those of any single magnate. They provide, in times of need, an ocean of liquidity to address the inevitable fluctuations in individual, regional and sector-specific credit. Would anyone in their right mind want to entrust the nation to cryptocurrencies — and trade the flawed Fed for things like FTX and Binance?

Translated by Luiz Roberto M. Gonçalves