The sense that we have seen all this play out before grows stronger by the day as the implications of the spectacular collapse of crypto exchange FTX sink in. The digital age seems to follow a cycle in which grandiose claims about freedom and opportunity first create superstar disruptors and are then exposed, leaving everyone asking why the new emperor’s lack of clothes was never questioned.

Amidst all the noise that burst forth as FTX sparked what industry observers quickly labelled ‘another Lehman moment’, a report on Reuters on Friday November 11 revealed a fact that stood out because of its sheer, jaw-dropping starkness. The article said that CEO and founder Sam Bankman-Fried used bespoke software “to execute commands that could alter the company’s financial records without alerting other people, including external auditors”. So when $10bn of FTX customer assets were transferred to sister firm Alameda Research to keep it afloat, the movement did not trigger any internal accounting or compliance warnings.

Take a moment to think about that. Strip away all the talk about individual freedom and finance systems unencumbered by borders, central banks or governments and what you appear to have is the freedom of one individual to do exactly what they like.

Advert for regulation

As Alex Viall, who worked as a regulator in the City of London during the Barings scandal and is now Director of Regulatory Intelligence at our parent company Global Relay, says: “The whole saga is the best advert yet for the benefits of compliance and regulation.”

US Senator Elizabeth Warren tweeted that the FTX crisis “must be a wake-up call”.

While even Senator Brad Toomey, a critic of the Securities and Exchange Commission’s (SEC) regulatory ambitions in the crypto space, tweeted recognition of the need for “a sensible regulatory regime”.

But Coinbase CEO Brian Armstrong hit back, saying the problem was that the SEC had “failed to create regulatory clarity here in the US, so many American investors (and 95% of trading activity) went offshore”. He argued that cracking down on US companies because of the actions of offshore entities “makes no sense”.

It’s possible we have reached a pivotal moment, one in which the more expansive claims about the benefits of crypto assets and decentralized finance are revealed as libertarian fantasy. Ironically, Bankman-Fried was taking criticism for his stance on regulation, outlined in a blogged manifesto titled Possible Digital Industry Asset Standards.

The document led to a heated exchange on Twitter after crypto investor and Bankless founder Ryan Sean Adams responded bluntly “Sam. With respect. This absolutely sucks.”

The central tension again comes down to the question of whether regulatory control by definition undermines the central principle of crypto. The open source ethos is often characterized as being about access for all, but access is just a part of the equation. What happens when a user has gained access? What is the power relationship between entities with access to the same space? What protections are available and practical especially in an area whose very lack of traditional controls and leaning towards anonymity attracts bad players?

We’ve reached the stage of the digital age cycle in finance in which the detail of how the grand principles work in practice has to be grasped. There are echoes of the debate some 20 years ago about the growth of digital media. Then, there was much talk about democratizing information and rebalancing the relationship between individuals and corporations by breaking down traditional barriers to access.

We’ve reached the stage of the digital age cycle in finance in which the detail of how the grand principles work in practice has to be grasped.

It really was possible, went the theory, for creators to seize the means of production and exchange. What has transpired is that it is the means of distribution that is key, because customers need to find what you create. And the power to distribute media rests overwhelmingly in the hands of the owners of the big search engines.

Two decades on, publishers both corporate and individual are still wrestling with questions such as who is responsible for what is published and who owns information. One example of this is the debate about what constitutes a publisher and what constitutes a platform – and whether that matters – centered on Section 230 of the US Communications Decency Act.

Driven by technology

All of these changes are driven by technology, and arguably the biggest change in mass behavior was sparked in 2007 when Steve Jobs brandished an iPhone and announced “a revolution of the first order, to really bring the real internet to your phone”. It was another of the digital age’s big claims. But once again it wasn’t that simple. The iPhone ushered in the social media age and with it a whole host of new issues that have come to a head with Elon Musk’s purchase of Twitter.

If you doubt the impact of the change, check out the use of tweets in this article – the social network is the new primary source of quotes. And check out Bankman-Fried’s own use of Twitter to commentate as the crisis at FTX unfolded, something that will be a big focus for regulators and which former federal prosecutor Ken White told Coindesk was “every attorney’s nightmare of what a client might do”.

The tech journalist Charles Arthur opened his book Social Warming: How Social Media Polarised Us All: with the words “Nobody meant for this to happen. Everything was meant to get better, not worse.” It is a quote for the age. And one which should inform next steps. Technology is not inherently good or bad, it is how it is used that matters. For all the shiny newness of the tech, the FTX story is one shaped by more familiar criteria such as leverage, internal control and, just maybe, self-belief that tips into arrogance.

Just the factors a good regulation and compliance regime can deal with.