Never in business history has there been a more abrupt heel turn than the one we saw from Sam Bankman-Fried — or SBF, as he's universally known — over the past week.

Why it matters: The crypto world has seen large financial losses before, and will see them again; it's notoriously rife with ponzis, frauds and rug-pulls. If the collapse of SBF's crypto exchange, FTX, caused nothing but financial losses, that would be bad but not unprecedented.

• FTX is much more systemically important to the crypto ecosystem, however, than its size alone would suggest.

The big picture: The story of SBF and FTX is a story of how all financial systems — even one built on a bedrock of mistrust — end up creating trusted centralized counterparties.

• It now looks likely that SBF — arguably the most trusted man in crypto — will turn out to have been a crook who was embezzling his own customers' funds.
• If that's the case, then lawmakers will have every reason to ignore industry pleas for special regulatory treatment. It might be many years, if ever, before crypto entrepreneurs have any hope they'll be treated as though they're responsible and law-abiding.

The bottom line: SBF's stated dream — and that of most other crypto entrepreneurs — was for the industry to improve upon and supplant the world's existing financial infrastructure.

• That dream is now dead.

State of play: There's still a lot we don't know about what happened at FTX and at SBF's hedge fund, Alameda Research. But the big picture seems to be that Alameda was not nearly as consistently profitable as it had suggested.

• Alameda did substantially all of its trading on FTX. If it consistently lost money on those trades, then everybody else on the exchange, in aggregate, would have considered themselves to be making money.

💭 Felix's thought bubble: Since traders flock to where the profit opportunities are best, that could drive a huge amount of volume to FTX (read more on this theory). Those volumes, in turn, underpinned the mathematics that ended up with the exchange being valued at $32 billion by Silicon Valley venture capitalists.

• When that happened, the valuation of FTX — not to mention the market value of its associated exchange token, FTT — was rising much more quickly than any hole in Alameda's balance sheet.

The catch: The hole in Alameda's balance sheet still needed to be filled somehow, and it reportedly ended up being filled with client funds from FTX. So when those clients started asking for their money back, they discovered it wasn't there.

• And an exchange that won't give clients their money back is worthless.