How magical thinking made it possible to rise from FTX - and led to his case

A few months ago I got into conversation with some crypto evangelists at a noisy tech conference in Toronto who absolutely wanted to advertise the joys of the decentralized finances or, as they would like to call it.

With an awesome fervor, they explained that they love digital assets because there are no hierarchies: everyone could act with Bitcoin, for example, without having to rely on central gatekeepers like banks.

What about the stock exchanges, I asked and pointed out that there are many crypto activities on these centralized hubs. Economic sociologist Koray çalışkan notes that more than 90 percent of the bitcoins traded in 2021 were kept in crypto exchanges.

seemed to me that this has created more and no less power concentrations than in mainstream finance. The collapsed cryptocurrency exchange FTX, for example, was not only a broker, but also released its own currency, offered the custody of customer assets and was connected to a retail company called Alameda.

Wasn't this centralization a contradiction to the defect belief? Not for the crypto kids in Toronto who wiped my question aside.

I smiled at the irony at the time, but the situation is not a laugh. Since FTX imploded this month, it has become clear that the concentration of power, paired with a lack of supervision, has led to massive customer losses because funds were passed around without an accountability.

How the British central banker Sir Jon Cunliffe found in a speech this week: "The crypto institutions at the center of a large part of the system exist in a largely unregulated space and are very susceptible to the risks that should avoid regulation in the conventional financial sector."

If we look at the debris, we not only have to ask ourselves how FTX created an 8 billion dollar hole in its balance sheet, but also why these dangerous contradictions were ignored for so long. Why did so many had a blind spot?

An answer is that people, as anthropologists often emphasize, are predisposed to accept magical thinking or mystical explanations for things that we do not understand; We need hope in a frightening world. Digitization has not changed anything. For most of us, the functioning of the cyberspace is as confusing as everything we encounter in the real world.

The creation mythology of the technology was full of contradictions that were largely ignored

We are also quite clever to ignore things that could undermine the beliefs with which we shape our world. "It is difficult to get a man to understand something when his salary depends on not understanding it," remarked the US writer Upton Sinclair. The same applies to social status, religion or other parts of our identity.

decades ago I was witnessing when I worked as a reporter on the capital markets, where financiers had invented a new method of transferring debts like mortgages into complex new instruments that are known as Collateralized DeBt bonds (CDOS). When I asked why bankers were doing this, they told me that they would create a "liquid" (manageable) free market that would make the financial system safer through risk diversification.

It sounded seductive. And they probably believed it in part. But as in Cryptoland there were some great contradictions. On the one hand, the CDOs were so complex that they could not simply be traded on a "free" (liquid) market. And the CDO sector was so opaque that it even increased the risk in the name of financial security. Magical thinking ruled.

So in the Silicon Valley. During my first visit in 2010, despite the latest global financial crisis, I met an evangelization with hints to the CDO sphere. There were people like the Facebook founder Mark Zuckerberg, who insisted that stronger networking of the world was good because this would promote equality, democracy and freedom. No matter that the sector seemed to be ripe for exploitation, since only a tiny minority understood the core algorithms used by groups like Facebook. The creation mythology of the technology was, as in the financial sector, full of contradictions that were largely ignored.

I do not say that technology or finances were unusually bad in this regard. There are contradictory creation myths in most professions, also in the media. I also do not say that the mere existence of self -deception makes all of these innovations wrong. Far from it. The Internet is an amazing invention, even with its mistakes. And some forms of debt change are useful if they are supervised. Innovations in digital assets can also be valuable: Decentralized main books could, for example, improve the storage of real estate records.

But the FTX saga shows how double thinking, when it is driven to the top, can have extremely harmful effects.

Follow Gillian on Twitter @Gilliantt gillian.tet@ft.com

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