Abstract
Binance, a cryptocurrency market, tried to bail out FTX, a rival crypto market,
after FTX was found to be misusing client funds. Binance backed out of the deal
after realizing how unethical FTX had been to its customers. This caused a big
crash in the crypto market and sent customers everywhere into a frenzy. FTX
then filed for bankruptcy as the SEC and DOJ started their investigations into
the company. The CEO of FTX was arrested, which shined a light on other
industry heads, specifically the CEO of Binance. Nothing incriminating has
been found yet, but customers are still untrustworthy and have been
withdrawing their balances from the marketplace. Binance put a hold on
withdrawals due to the volume. This has led to further questioning of Binance
by the public.
Ethics Case Controversy
Binance is the largest cryptocurrency market in the world. Its platform
allows users to buy, sell, and trade crypto tokens online and transact and
earn interest using their tokens. Binance has grown tremendously since
being founded in 2017, handling a total of “$34.1 trillion in trading last
year, even while wrangling with regulators.” (Fortune, 2022)
The man behind the operation is Chinese-Canadian business executive
Changpeng Zhao. Zhao, a McGill University alumn, was relatively unknown
before becoming “as rich as Mark Zuckerberg virtually overnight.”
(Fortune, 2022) He was ranked as high as 30th on the world’s richest person
list with a net worth of $30 billion, but he has since sunk to 136th with a little
over 13 billion.
Binance made headlines on November 6th when it liquidated all of its
shares of the FTT token, trading platform FTX’s primary token, sending the
crypto industry into a frenzy. Earlier in the week, on November 2nd, a leaked
report showed that the token's value might be fabricated, and Zhao wanted to
get out before losing value. On November 8th Zhao announced that a deal was
made to save rival marketplace FTX, “one of the largest exchanges for digital
currencies, seemingly on the verge of collapse.” (New York Times 2022) It
appeared as though Zhao and Binance would absorb the second-largest marketplace
and their biggest rival, FTX, and firmly cement their place at the forefront of the
crypto industry. However, not even a day had passed before Zhao put out another
statement explaining that the deal had been scrapped due to how uncomfortable
Binance was with FTX’s financial reporting and suspected them of misusing clients'
funds. On November 11th, as Sam Bankman-Fried resigned as CEO of FTX and
filed for Chapter 11 bankruptcy, Changpeng Zhao spoke to reporters about the
collapse of his rival and what it meant for the industry as a whole, “It's devastating
for the industry. A lot of consumer confidence is shaken. We’ve been set back a
few years.” (CNN, 2022) Zhao compared the collapse of FTX to the 2008 global
financial crisis, saying that FTX would not be the only player to fall, just the first.
The controversy went quiet for over a month; it was unclear what would happen
in the crypto industry or if Sam Bankman-Fried would even be arrested. However,
on December 12th, “FTX founder Sam Bankman-Fried was arrested by Bahamian
authorities Monday evening after the United States Attorney for the Southern District
of New York shared a sealed indictment with the Bahamian government, setting the
stage for extradition and U.S. trial for the onetime crypto billionaire at the heart of
the cryptocurrency exchange’s collapse.” (CNBC 2022) This arrest and extradition
was the first action from The Securities and Exchange Commission and The Department
of Justice to hold someone accountable for this whole financial catastrophe. This arrest
led to another withdrawal frenzy, just like the one FTX experienced, but this time it
was Binance and other smaller crypto marketplaces that were being withdrawn from.
In the 24 hours following Sam Bankman-Fried’s arrest, “$3 billion in net withdrawals
flowed out of Binance, according to blockchain analytics firm Nansen.” (Forbes, 2022)
This rush of withdrawals caused Binance to temporarily halt the withdrawal of USDC,
a crypto token tied directly to the value of the US dollar. This worried investors at first,
but Zhao assured everyone through a series of tweets that the halt was a part of a
“token swap” due to the increase in withdrawals outside of regular banking hours.
Standard functionality resumed shortly after. In the aftermath of the Sam Bankman-Fried
Scandal, critics have pressured Zhao to be as transparent about Binance’s financials as
he has pushed others in the industry to be. Zhao tweeted that liabilities are difficult to
audit publicly but that Binance does not owe money to anyone. Changpeng Zhao and
Binance are not being as transparent as consumers would like, especially at a time like
this, but only time will tell what will happen to them.
Timeline
Stakeholders
The stakeholders, in this case, include Binance, founder and CEO of Binance:
Changpeng Zhao; FTX, founder and former CEO of FTX: Sam Bankman-Fried; the
Securities and Exchange Commission, The Department of Justice, current and future customers/shareholders, and the general public. Binance would be on top of the
world following this scandal. Their biggest competitor had destroyed themselves, all
they had to do was follow the rules and be transparent, and they would have been set.
However, they made one of the same mistakes they just watched FTX make.
They needed to be more fully transparent with the public. It is not clear what will
happen to Binance in the future, but one thing is for sure, they must regain the
public’s trust. Changpeng Zhao seemed to be a beacon of hope and trustworthiness,
but people are not so sure after his information-withholding tweets about Binance’s
liabilities. Hopefully, he doesn’t follow Sam Bankman-Fried’s path. FTX is all
but dead and buried, they will never be trusted by consumers, and the only course
of action left is for the company to go away forever. Sam Bankman-Fried was a
huge scumbag, not the crypto-guru everyone thought he was. Hopefully, the
Justice Department is harsher with him than they were with the culprits behind
the 2008 financial crisis. The Securities and Exchange Commission has to wake
up and realize how much of a ticking time bomb crypto is a the moment and
adequately regulate it before more scams like this happen. The Department of
Justice has to put the fear of god in the crypto industry and prosecute
Sam Bankman-Fried to the fullest extent of the law. Current/future customers,
shareholders, and the general public have to look at what happened with FTX
and what has already started to get out about Binance and make informed
decisions about whether or not crypto is a wise venture for them. All the
information is laid before them, and they need to put the lust for money on
the back burner and be wise.
Individualism
From an individualist perspective, Changpeng Zhao was ethically incorrect.
He tried to sink money into a failing company to bail out his rival and save
people’s investments. This does not line up with the individualist belief that
“Business actions should maximize profits for the owners of a business, but
do so within the law.” (Salazar, 17) Buying out FTX was not a decision that
would maximize profit, and even after backing out of the deal, he still did
nothing to capitalize on the situation. He also would not give up information
about Binance’s financials when asked, which is between lawful and unlawful,
because he is deceptive. He could have offered consumers a transfer deal from
FTX to Binance to bring in new customers and increase profits. He could have
been transparent about finances to guarantee he says within the law. In the eyes
of an individualist, Changpeng Zhao was unethical; he was deceptive and did
not act to maximize profits.
Utilitarianism
From a utilitarian’s perspective, Changpeng Zhao’s actions were ethically
beneficial and maximized “happiness in the long run for all conscious beings that
are affected by the business action.” (Salazar, 17) Zhao offered to put his bottom
line “on the line” to buy out FTX and help the affected customers. He may have
been motivated by future profit, but his actions were maximizing happiness
nonetheless. Binance’s actions would be lumped in with Zhao’s and seen as
ethically beneficial. FTX’s actions would be seen as unethical.
Sam Bankman-Fried’s actions would be seen as unethical and minimizing happiness.
The SEC and DOJ would maximize happiness for customers/shareholders and
the general public but minimize happiness for FTX, Sam Bankman-Fried, and
arguably the rest of the crypto industry. I believe they would still be viewed as
ethical. The current/future customers, shareholders, and the general public would
come away from the situation feeling net positive about the whole ordeal because
of more awareness and better regulation of the crypto industry.
Kantianism
Kantianism, developed by Immanuel Kant, an 18th-century philosopher
from Prussia, is a philosophy focused on “the moral permissibility of the action,
as well as the moral worth in the motivation of the action.”(Salazar, 21) The
categorical imperative is the central concept of Kantianism, a test used to evaluate
if an action is morally acceptable. The most basic version of the categorical
imperative is the “formulation of humanity,” which states that actions are morally
unacceptable if people are used as a means to an end. A Kantian would view
Changpeng Zhao as ethically correct because he did not use people as a means
to an end. Sure he has not been as transparent as people would like, but as far
as we can tell, he has not been malicious or used people as a means to an end.
A Kantian would have no issue with Changpeng Zhao’s actions and consider
him ethical.
Virtue Theory
Virtue theory, developed by the Greek philosopher Aristotle, is a philosophical
tool used to determine “a person’s character and assesses whether a person is virtuous
or not. Is the person getting better in life, flourishing, and fulfilling his or her purpose
in life, or not?” (Salazar, 23). Examine the actions of the person in question and
determine if they match up with particular positive ‘virtues’ or harmful ‘vices.’
This can give you much helpful information about them. There are four main or
‘cardinal’ virtues; courage, temperance, justice/fairness, and honesty. Courage focuses
on standing up for the right things. Changpeng Zhao stood up for the people when
he offered to buy out FTX, so he would be considered virtuous. Temperance focuses
on moderation in action and being realistic. Changpeng Zhao knew it was too risky
to follow through with the buyout and could jeopardize his own company; therefore,
he would be considered virtuous. Justice focuses on suitable products and good practices.
Binance was the most prominent crypto marketplace and offered all the features
a customer could ask for; Zhao would be considered virtuous. Honesty focuses on
being truthful with the general public, your customers, employees, and other
businesses. Changpeng Zhao has not been as open and transparent as the public
would like him to be and would not be considered virtuous. The Virtue Theory
would consider Changpeng Zhao as virtuous overall.
Justified Ethics Evaluation
After studying the FTX and Binance sides of this case, I am ashamed to have
been so naive when I did my paper on FTX and Sam Bankman-Fried. It is clear
now that he was highly unethical, and I was too scared to condemn him then.
I can’t believe I was against jail time for SBF and the other executives involved.
Regarding Changpeng Zhao, I agree with the ethics evaluation and believe
him to be an ethical person. He is on a slippery slope, though. If he doesn’t
become more transparent and be proactive in conforming to new regulations, he
will get burned as well. Watching this situation unfold in real time as I completed
these reports was unbelievable. I never thought Sam Bankman-Fried would be
brought to justice while I was still working. I hope I am not wrong about
Changpeng Zhao, like I was wrong about SBF. He should be investigated
thoroughly due to his involvement and clean up his act so that consumers
are better protected. I am sure that the proper regulations will be created due
to this fiasco.
Conclusion
The public can rest easier tonight knowing there was justice in this case;
Sam Bankman-Fried will be punished for his actions. It is unclear who will join
him or what his punishment will be, but the crypto industry will be better regulated;
as a result, further protecting future customers. Unfortunately, only some people are
walking away from this scandal better off than before, but there will be correct laws
going forward. As far as we can tell, the head of the crypto industry still standing
is ethical and a much better person than SBF; hopefully, it stays that way.
References
Walt, Vivienne. “He Became as Rich as Mark Zuckerberg Virtually Overnight. How Binance Founder 'C.Z.' Zhao
Became a $74 Billion Man While Moving Fast and Breaking Things in Crypto.” Fortune, Fortune, 30 Mar. 2022, https://fortune.com/longform/binance-changpeng-cz-zhao-net-worth-crypto-exchange-trading/.
Yaffe-bellany, David, and Erin Griffith. “Crypto World Is Rocked as World's Largest Exchange Rescues Rival.”
The New York Times, The New York Times, 8 Nov. 2022,
https://www.nytimes.com/2022/11/08/technology/binance-ftx-deal-crypto.html.
Egan, Matt. “Crypto CEO Warns His Industry Faces 2008-Style Crisis, Calls Regulator Scrutiny 'a Good Thing' |
CNN Business.” CNN, Cable News Network, 11 Nov. 2022,
https://www.cnn.com/2022/11/11/business/cz-crypto-crisis/index.html.
MacKenzie Sigalos, Rohan Goswami. “FTX Founder Sam Bankman-Fried Arrested in the Bahamas after
U.S. Files Criminal Charges.” CNBC, CNBC, 14 Dec. 2022,
Ashmore, Dan. “Is Binance in Trouble?” Forbes, Forbes Magazine, 15 Dec. 2022, https://www.forbes.com/advisor/investing/cryptocurrency/binance-crypto-crisis/.
“Changpeng Zhao: Tech Chief in the Eye of the Cryptocurrency Storm.” The Guardian, Guardian News
and Media, 25 June 2022, https://www.theguardian.com/technology/2022/jun/25/changpeng-zhao-tech-
chief-in-the-eye-of-the-cryptocurrency-storm.
“Binance Blog Articles.” Binance Blog, https://www.binance.com/en/blog.
“SBF Arrested in Bahamas, Set to Be Extradited to Us.” The Crypto Times, 13 Dec. 2022,
https://www.cryptotimes.io/sam-bankman-fried-arrested-in-bahamas-set-to-be-extradited-to-us/.
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