If professional investors missed this

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jefftk.com·jefftk.com/p/if-professional-investors-missed-this

Written in November 2022 following the FTX collapse, this post is relevant to discussions of EA funding concentration, institutional trust, and due diligence practices within the broader AI safety and EA funding ecosystem.

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Importance: 38/100blog postcommentary

Summary

Jeff Kaufman analyzes the FTX collapse and its implications for the effective altruism community, arguing that while professional investors missing the fraud partially excuses EA, the EA community had far more at stake and thus bore greater responsibility for due diligence. The post distinguishes between EA's situation and that of institutional investors like Sequoia, noting that EA was uniquely dependent on FTX funding and had reputational and mission-critical exposure that investors did not.

Key Points

•Dismissing FTX as 'obviously fraudulent' based on surface red flags (crypto, young founders, offshore location) is not well-supported.
•The 'professional investors missed it too' defense has merit but lets EA off too easily given EA's unique exposure.
•FTX Future Fund represented a disproportionate share of EA funding, unlike FTX's small share of any institutional investor's portfolio.
•Institutional investors can afford to lose individual bets; EA's mission-critical dependence on FTX created asymmetric risk.
•EA faced reputational and ethical risks beyond financial loss, including entanglement with a potentially fraudulent actor.

Cited by 1 page

Page	Type	Quality
FTX Future Fund	Organization	60.0

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| ### [If Professional Investors Missed This...](https://www.jefftk.com/p/if-professional-investors-missed-this) | November 16th, 2022 |
| _[ea](https://www.jefftk.com/news/ea)_, _[money](https://www.jefftk.com/news/money)_ |

One of the largest cryptocurrency exchanges, [FTX](https://en.wikipedia.org/wiki/FTX_(company)), recently
imploded after [apparently](https://www.nytimes.com/2022/11/14/technology/ftx-sam-bankman-fried-crypto-bankruptcy.html?unlocked_article_code=40IPATU-4dJKAPYsqyYO1YAmhYMmQ0od0KpjdrMgGMbY9jreAGhYxqtvL_29Xl8vrakjEfkUrvd8m4bel3RjnuSuCzaIKneM8IC2aCXuvMFlh6XLySRW_9AECwcFnrOROR6xA7dnH1zZPsO6lBrrzhEVgoVHbDM-KkN1J9u1lo6LJoI7kU4hGx2Lh_pRodhtl49CeqLc91ewCuoGsNqW0_eHE6Z8FTTBlUysszUf0Dw97F6f4IipOD-Dhgyt-W-_F--fQMBtyikXbao987xBcqtapHJsaDZ9VhO0KGd_HWkd9kPukUU7XGI5Y-dIyQbxGAizHJZ7ZLUnDDfn29mkM2pczVwd0RWW-Ccl8WmAWkjpDr9SpQ&smid=share-url)
transferring customer funds to cover losses at their affiliated hedge
fund. Matt Levine has [good\\
coverage](https://www.bloomberg.com/opinion/authors/ARbTQlRLRjE/matthew-s-levine), especially his recent post on [their\\
balance sheet](https://www.bloomberg.com/opinion/articles/2022-11-14/ftx-s-balance-sheet-was-bad). Normally a crypto exchange going bust isn't
something I'd pay that much attention to, aside from sympathy for its
customers, but its [Future\\
Fund](https://ftxfuturefund.org/) was one of the largest funders in effective altruism (EA).

One reaction I've seen in several places, mostly outside EA, is
something like, "this was obviously a fraud from the start, look at
all the red flags, how could EAs have been so credulous?" I think
this is mostly wrong: the red flags they cite (size of FTX's claimed
profits, located in the Bahamas, involved in crypto, relatively young
founders, etc.) are not actually strong indicators here. Cause for
scrutiny, sure, but short of anything obviously wrong.

The opposite reaction, which I've also seen in several places, mostly
within EA, is more like, "how could we have caught this when serious
insitutional investors with hundreds of millions of dollars on the
line missed it?" FTX had raised [about\\
$2B](https://www.institutionalinvestor.com/article/b20nnq0gxctxy5/How-Did-So-Much-Smart-Money-Get-Tangled-Up-in-FTX) in external funding, including ~$200M from [Sequoia](https://www.sequoiacap.com/), ~$100M from [SoftBank](https://visionfund.com/), and ~$100M from the [Ontario Teacher's Pension Plan](https://www.otpp.com/). I
think this argument does have some truth in it: this is part of why
I'm ok dismissing the "obvious fraud" view of the previous paragraph.
But I also think this lets EA off too easily.

The issue is, we had a lot more on the line than their investors did.

Their worst case was that th

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