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SBF’s jailing marks the end of an era of cryptocurrency fraud – so what happens next?

A federal judge on Thursday sentenced former FTX CEO Sam Bankman-Fried to 25 years in prison after being convicted of seven counts of wire fraud and money laundering.

His scam was quite simple: he and his partners created an exchange, FTX, to use customer deposits to invest and trade cryptocurrencies. Some of those deposits were secretly transferred to another of his companies, the hedge fund Alameda Research, which he originally created to arbitrage differences in cryptocurrency prices across countries. According to the case the government won, Alameda used the money for a variety of things he shouldn’t have done, like investing in other crypto startups, buying some really nice real estate, supporting political campaigns, and — most importantly — for fraud Purpose — To support FTX’s proprietary crypto token FTT.

Some document leaks and some clever work by Coindesk reporters, combined with a timely tweet from Changpeng “CZ” Zhao, who runs rival cryptocurrency exchange Binance, triggered a run on FTX. The scheme was unmasked within days, costing billions of customers’ funds (although, apparently, they might have gotten a fair chunk of their money back). Changpeng Zhao himself is no longer responsible for Binance operations, and he admitted to committing money laundering violations due to insufficient controls.

The verdict brings an end to the recent cryptocurrency era, which has been characterized by an ever-evolving slew of silly get-rich-quick schemes — from digital watermark images to simple interest, with investors lured by promises of incredibly high returns. This week saw a drop in token payments – as well as fraud investigations and prosecutions.

Cryptocurrency optimists like Andreessen-Horowitz’s Chris Dixon believe we are now entering a more sober phase in crypto, with software developers finally taking advantage of the numerous blocks that have appeared since the birth of the original blockchain (which underpins Bitcoin). Build useful applications on one of the chains. Originally proposed by the pseudonym Satoshi Nakamoto and released on Halloween 2008.

The problem with this view is that developers have been building various applications on top of Ethereum, Solana, and other layer 1 blockchains for years, and the only economically viable purpose in them was speculation. Yes, it is possible to create a digitally authenticated piece of art, but the value of that piece of art lies not in the aesthetic pleasure it brings but in the likelihood that others will spend more money to buy it later.

Almost everything else being built or powered by blockchain is replacing something that was already doing a pretty good job. Self-executing smart contracts replace regular contracts. They weren’t perfect, but they weren’t so inefficient that they brought the economy to a standstill. A Decentralized Autonomous Organization (DAO), in which decision-making power is shared equally among all participants, replaces other decentralized organizational schemes that are characterized by long debates and few concrete decisions, such as Holacracy or San Francisco Board of Supervisors meetings. Jokes aside, what are the obvious killer applications for blockchain? Where are the escape success stories?

Forget runaway success: Not even a single blockchain-based startup has enough cash flow or profitability to go public. Yes, there are Bitcoin mining companies like Riot. Yes, there are companies that facilitate cryptocurrency trading, such as Coinbase and Block (formerly Square). But no real company is developing economic value by doing something new or better on the blockchain.

I’m open to persuasion – blockchain geniuses pitch me incredible value-creating startups! – But my view now is that cryptocurrencies will restore Bitcoin’s original function as an alternative to national currencies for storing and exchanging value. Its volatility may not make sense to people living in relatively stable economies, but in countries with runaway inflation, corrupt governance, civil unrest, or war, convert collapsing local currencies to Bitcoin, stablecoins, and more An approach to a stable national currency such as the U.S. dollar will remain a reasonable and popular approach for those who can afford to preserve the means. It can also be used to send money without having to pay high fees to international money changers, and sometimes serves as a digital replacement for cash suitcases in various underground economic activities.

Why choose Bitcoin over one of the newer coins? Because those other coins are almost universally based on faith, trust, and fairy dust; their primary value is the value ascribed to them by those who hold and trade them. You can use the popular college sophomore argument that all money is like that, but in reality, the dollar is backed by the vast economic and military power of the United States: actual control over real resources that people really want and need .

Bitcoin is also backed by something real and tangible: energy. Due to its proof-of-work model, the only way to create and verify new Bitcoins is to consume energy, whether burning natural gas or connecting to a nearby nuclear power plant. Energy drives real-world economies, and unless Sam Altman or someone else succeeds in unlocking fusion and providing truly “too cheap to meter” energy, it will remain of real value for some time actual assets. If demand for Bitcoin stabilizes, prices should theoretically track electricity prices. In fact, I wouldn’t be surprised at all if Satoshi Nakamoto had some connection to the energy industry.

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