The Platform

Photo illustration by John Lyman

The financial collapse of FTX and its effect on many retail investors has yet to be fully understood. One thing it clearly proves at this point is that digital hucksters are thriving. They are preying on those who trusted the sales pitches they were given for “investing into next-generation financial services using secure blockchain technology” within its platform.

The breakdown of any cryptocurrency’s ownership can be seen in these four levels of investment:

Founders start the cryptocurrency with an ICO (initial coin offering) and own a significant amount. It has been speculated that in 2018, the founder(s) of Bitcoin owned 1,000,000 coins.

Whales own a significant amount of coins. These are the “big investors.” In 2018, 40% of Bitcoins were owned by 1,000 people.

The miners are constantly “mining” for new coins by trying to solve complex problems with computer power.

The end users are the retail investors who may have a coin or two.

When it comes to the software the cryptocurrency is based on, there are several hundred algorithms providing the blockchain technology algorithm to create a coin. One, of course, is the Bitcoin algorithm. Others include the Ethereum and Solana algorithms. All of the coins are based on one of these algorithms or modified versions of them.

What they do not tell you is that the software can be modified, and you can add or subtract certain features. Back in 2018, I had heard that in some coin offerings, for every coin mined by a miner, the founders would get a coin added to their stack. This was to ensure the founders would always stay ahead of everyone else when it came to ownership. Their “percentage of the coin” would never be diluted.

Sam Bankman-Fried started out with Alameda Research and had some great claims as to their investing techniques and accomplishments to try to entice the “whales” to their offered investments. Unfortunately, Alameda paralleled the exact culture as Bernie Madoff did in his firm. An article that was published in November postulates: “The performance of Bernie Madoff’s Fairfield Sentry Ltd for nearly two decades operated quite similarly to what Alameda was promoting via their pitch deck (presentation) in 2019.”

It is clear that “blockchain technology” does not protect transactions as well as some financial and technology pundits hyped it up to be. Their whole banter about “blockchain technology” is becoming less and less relevant as huge financial scams and billion-dollar rip-offs appear in an area which was deemed “super safe and exponentially more secure, due to the utilization of blockchain technology.”

Using that techno “buzz phrase” to somehow convince people that it is safe to invest their money into an unregulated “investment instrument” like a crypto platform has become almost 100% laughable.

My empathy goes out to those who bought off on the enthusiastic “get in on the ground level of this investment strategy” pitch by so many who were mesmerized by the promise of a new “get rich quick” scheme. Little did they know the reality of that pitch was supposed to include: “Get in on the ground level of this investment strategy, so that when the whole business collapses, you’ll feel the full brunt of it as it crashes, and you’ll lose everything.”

The repeated hype of “it is backed by blockchain technology” has run its course when it comes to cryptocurrencies, their market, and potential investors. People who lost their money are all screaming, “Hey, I thought it was protected by the blockchain technology in it?” Well, it wasn’t and the use of blockchain technology as some virtual, all-encompassing, auditable safeguard did not add the protection that those who hyped it promised it would.

Further forensic accounting investigations need to be initiated because one of the basic foundations of blockchain technology was its fail-safe audit trail capability. If there was such a fool-proof audit trail foundation and framework, why isn’t it being used to find out exactly where the lost money went? If the audit trail was based on real transactions, all the money should be accounted for.

If fraudulent or non-existent transactions were somehow injected into the process, there should be a way to find out exactly who, when and where those pseudo-transactions were pumped into the process.

In the case of the FTX collapse, they compromised the whole audit trail capability in order to get funds out of the FTX platform. Sebastian Sinclair writes: “Bankman-Fried is said to have built a ‘backdoor’ into FTX’s accounting system which allowed the disgraced founder to change FTX’s financial records without alerting external parties, including auditors.”

That “building of a backdoor into the exchange” does not match up with the promise of the “security of blockchain technology.” Backdoors are for scammers and hackers. By putting this in, they totally destroyed the “audit trail” capability of the supposed “bulletproof” blockchain technology security and compromised the integrity of the process the blockchain algorithm was supposed to provide for all transactions.

Remember when Shell was a better gasoline because it had platformate? Do you even remember what platformate was? Well, I don’t. It was a gimmick and that was about it. If platformate was something which made gasoline a better-quality product, everyone would have been adding it to their brand by now.

The same goes for so many other products and their sales pitches which pointed out something that really did not add more quality to the product. Remember the Sham Wow guy on TV selling those clean-up rags? They “had to be good because they were made in Germany!” And as for the Sham Wow guy, he was actually arrested in Florida of all places for beating up a prostitute in 2009 after she bit him.

Whatever intrinsic value “blockchain technology” had in the fintech markets, at this point, it’s become more of a punchline than some type of warranty or guarantee against any security breach.

The next big scam will be buying “digital real estate” and non-fungible tokens in the Metaverse. The more I review the current endeavors in that area, the more I believe it will be the next big virtual platform in facilitating large, financial scams.

Oh yes, some people will make money initially and the others who come in later to “get rich quick” will be “taken,” and the same thing will happen to them as the people who trusted FTX.

The success of the scams in the cryptocurrency market will spawn more digital hucksters in the emerging Metaverse. At this point with the Metaverse, it’s anyone’s guess when it comes to what real safeguards are needed to protect digital assets and virtual properties. Too much has happened recently, and some future investors are taking a step back and saying, “Whoa! We cannot have financial chaos come down on us in the Metaverse as it just happened in the cryptocurrency market.”

If they are serious, they will avoid accepting the hype of “blockchain technology” as some foundation, or guarantee, for security.

One thing we can be sure of: digital hucksters are thriving. Especially when we are talking about a market capitalization in the Metaverse predicted to be in the trillions of dollars in the next decade.

As to bringing Bankman-Fried back into the United States from the Bahamas to be investigated, we’ll see how the SEC and other government agencies handle this case.

Heaven help him if he conned money from the wrong people. There might be swifter justice because he is right there around the Bermuda Triangle. So many things get lost down there and I heard the sharks are pretty well-fed as well.

James Carlini is a strategist for mission critical networks, technology, and intelligent infrastructure. Since 1986, he has been president of Carlini and Associates. Besides being an author, keynote speaker, and strategic consultant on large mission critical networks including the planning and design for the Chicago 911 center, the Chicago Mercantile Exchange trading floor networks, and the international network for GLOBEX, he has served as an adjunct faculty member at Northwestern University.