Disclaimer: This is not another FTX post. If you’re reading this, you’re probably sick of hearing about FTX, Alameda and especially Sam. I can’t promise I won’t reference some of the events over the past few weeks, but it will be limited, I promise.
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“‘Rabbit’s clever,’ said Pooh thoughtfully.
‘Yes,’ said Piglet, ‘Rabbit’s clever.’
‘And he has Brain.’
‘Yes,’ said Piglet, ‘Rabbit has Brain.’
There was a long silence.
‘I suppose,’ said Pooh, ‘that that’s why he never understands anything.‘”
- The Tao of Pooh, by Benjamin Hoff
I am an investor, not a trader. I don’t find trading particularly stimulating, though I have plenty of friends who do. And I’m not comparing the two to say one is better than the other, the distinction is simply a matter of preference. I say this because as a very long-term investor with limited short-term liquidity needs, I spend a lot of my time thinking about human behavior — how it’s changed in the past and how it’s likely to change in the future. Some of you will no doubt roll your eyes at this but starting from this lens has served me well thus far.1
A concept that’s occupying more of my thoughts lately – and especially over the past week – is the idea of moral courage. Let’s level-set quickly:
“Moral courage is the ability to stand up for and practice that which one considers ethical, moral behavior when faced with a dilemma, even if it means going against countervailing pressure to do otherwise. Those with moral courage resolve to “do the right thing” even if it puts them at personal risk of losing employment, isolation from peers and other negative consequences.”
At first blush, this is something we all think we possess.
“Of course I’m ethical and stand up for what I believe is right!”
It would be quite a surprise if this wasn’t our immediate reaction to be honest. But let’s try to peel back how we arrive at this reaction, from ~first principles~
Tech people, and crypto people especially, love to talk about The Sovereign Individual. To be clear, most have never read it. But that’s not the point. The point is that it posits self-ownership & independence from The State will be the guiding ethos for the individual. This is all well and good, but in my view it rests on a shaky assumption. Sovereign individuals are by definition responsible for their own actions, which implies accountability. Yet everywhere I look today, I see accountability at the individual level falling off a cliff.
As the FTX debacle unfolded, I started a thread to highlight the reactions from affected parties (non-FTX/Alameda division) as a way to assess accountability.
Were people2 taking ownership for their own mistakes & blind spots in this story, or were they deflecting blame on others? Though there have been some individuals willing to accept personal ownership, most predictably used SBF as a catch-all shield3. Some pain as a result of his actions was unavoidable, but the extent of that pain for each affected party is up for debate...some examples4:
funds overly concentrated on FTX (an offshore entity) as a custodian of their LP assets
managers not properly accounting for tail-risk events like this
investors dropping the ball on diligence
slow to act when early warning signs were there
The lack of accountability I saw in the wake of this disaster just speaks to a deeper conundrum whereby we look to external parties to blame.
Our actions are not our neighbor’s responsibility, nor our government’s responsibility nor some abstract movement’s responsibility. They are ours alone. When you don’t have individual accountability, what do you expect will come from the collective inertia of that? You end up with even more exacerbated versions of it — this is how you end up with FOX & CNN5 shitting on each other and indiscriminately dunking on the other side:
“WE are trying to save YOU from THEM!”
The dirty secret is most people want to be told what to do because they want someone to blame when things don’t go their way. They want to be told what to eat, how to dress, where to travel, what opinion to have on the topic du jour, etc. Being individually accountable means wrestling with difficult thoughts. It can be draining6.
So the masses are often obliged. Disclosure theatre is a real (and growing) problem. Is every investor who purchases stock reading through company legal filings? Of course not. They just want the number to go up.
Reading the Terms of Service has become such a joke that South Park created an entire episode around the absurdity of it.
It’s insane to expect every person to read these ToS; if we all got rugged by some evil language Apple snuck in we’d have every right to be appalled. But that’s kind of the point isn’t it? The ToS is just another example of disclosure theatre.
I love the immutability of blockchain technology and crypto for this reason7: the individual must hold themselves accountable. You don’t have to rely on FTX to hold your coins, you can do that yourself. Sure it comes with a different set of risks, but those are within your control. It isn’t a black box. I’m not naïve enough to think mass adoption will come without abstracting some of this away – though @mhonkasalo recently made a counterpoint for why abstraction may be overblown. I’ve also written about what needs to be built to bring more people into the space. There’s much to do.
The FTX collapse has set our industry back from an outsider’s perspective. I think the long-term ramifications are net-positive, but I won’t cover why here. A piece I return to often includes some kernels applicable for the current moment:
“Structural change is often non-linear: Adoption curves can be unexpectedly steep, network effects can be exponential, exogenous shocks can act as catalysts. One need not know exactly when and how structural change will occur, only that it is likely to happen”
“The long-term risk for non-thematic investors is that idiosyncratic factors could ultimately outweigh the benefits of the structural thesis”
Exogenous shocks can indeed act as catalysts. The fallout of FTX may be just that. There will be rubble for sure, but the grifters are gone, the tourists have moved on and the signal-to-noise from a founder perspective is higher. The idiosyncratic factors will drive those who never developed conviction out. They will regret it as the structural thesis remains intact. These shifts alone don’t mean everyone left will win. Alas, we all aren’t going to make it. But the odds are much higher for the few who do indeed possess the rigor to wrestle with difficult thoughts.
The above still holds. It always will as career risk is at the top of most VCs biggest fears. But the next few quarters will be some of the most fruitful times for investors willing to go to the mat with founders. Those of you around during this period will likely see and hear more from me going forward. Looking forward to it.
“The play-it-safe pessimists of the world never accomplish much of anything, because they don’t look clearly and objectively at situations, they don’t recognize or believe in their own abilities to overcome even the smallest amount of risk.”
- The Tao of Pooh, by Benjamin Hoff
My dm’s are always open @0xsmac on twitter.
no guarantee it will continue to do so though!
mostly concerned with investors here because I have no expectation that large organizations will do anything other than release word-salad legalese
I am in no way defending SBF. His actions and betrayal of trust are awful and I sympathize deeply with anyone who was a victim.
I’m not suggesting all these occurred and there are arguments against some of these
pick any 2 ideologically opposed media outlets
And this takes us back to the idea of moral courage. To possess “the ability to stand up for and practice that which one considers ethical, moral behavior when faced with a dilemma” we need to have already spent the time wrestling with these difficult thoughts. If not, we risk morality creep where we justify actions through the lens of external factors rather than having an internal framework we can always return to.
among many others