Adjacently, some are arguing EA could have vetted FTX and Sam better, and averted this situation. This reeks of hindsight bias! Probably EA could not have done better than all the investors who originally vetted FTX before giving them a buttload of money!
I’ve seen this mentioned quite a few times, most prominently by Eliezer Yudowsky . I take the point that there were sophisticated investors such as Sequioa, and BlackRock who researched the company and could not detect FTX’s possible self-dealing with Alameda. I think it’s fair to say that EA probably could not have detected this FTX situation would blow up in exactly the way it did, even with more due diligence.
I also think that it’s rational to expect that you apply due diligence to where you are investing your money than where you are receiving it from—and my understanding is that EA (on the whole) was not actually investing in FTX.
This is incredibly undiversified, especially given how volatile SBF and Moskovitz’s wealth is . I am sure that this is far more undiversified than any large investor who actually put money in FTX. EA therefore stands to lose a lot more if the funding from FTX (or Moskovitz) fell away. I don’t want this point to get lost in the debate.
Now, I’m not sure that the answer was that EA should have vetted its funding more. When people are offering you “free” money,[1] I don’t think there is too much obligation to vet it (above any legal obligations that might exist). I think the answer is probably that EA should have thought about its risk exposure more, given how undiversified and volatile its funding is. In particular:
what might happen if FTX or Moskovitz’s funding dries up for any reason; and
how any negative consequences of that situation could be mitigated.
For example, I did see somewhere that there had been a statement somewhere suggesting that EAs personally should diversify away from crypto, given how exposed EA is to it generally, but that did not seem to be a very prominent, widely-advertised piece of advice.
I know also that there is some general career advice for people to build up a decent financial runway for themselves. Perhaps there should have been greater emphasis to the community that if they rely on funding (grants, salaries) that is undiversified, they should factor that risk in and weigh it with their personal risk appetite.
I leave aside the question of whether SBF was using EA to “launder” his reputation and therefore arguably the money was not entirely “free”. I don’t have an informed view on that.
EA should absolutely be vetting its funding more. You already gave three reasons: risk of the funding drying up (diversification being a possible solution), legal obligations (as evidenced by the possibility of clawbacks), and the reputational effects of EA laundering its funders’ reputations. There are also significant reputational effects going the other way, as evidenced by the costs of SBF’s fall to EA’s reputation.
I guess it depends on what we mean by “vetting funding”. EA should definitely do more to understand and manage the nature and extent of the risks it is exposed to—i.e. general risk management. I don’t think we need to wait for much more information to make such an assessment—the way this has unfolded with so many grant recipients, etc seeming to have been caught completely unprepared is enough evidence that the EA community’s risk management and communication were lacking.
But some people also seem to suggest “vetting funding” means EA should be trying to find fraud or other malfeasance in its donors. (That is suggested by the OP’s post and is what I meant by “vetting funding” in my previous comment). I’m less sure about this claim. It’s not clear how much due diligence is required in these cases vs how much due diligence EA actually did. So this is something that, as the OP suggests, would benefit from more information before coming to a conclusion.
Edit: Put another way, I think there are two questions:
Should EA have conducted better risk management? I think the answer on this question is quite clearly “yes”.
Would that “better risk management” have detected this fraud?
I’ve seen some discussions conflating the two. Even if the answer to the second is “no “or “unclear”, EA’s risk management practices could still be improved. That’s all I’m saying.
Risk management as a field (or component of internal auditing) has ground rules where it can determine the key areas of how a certain organization should function and what are the areas where such org may fail. At its basic form, it will Risk managers are assessing inflows and outflows of cash and the policies behind those functions. They will also see how the management process is being performed and potential conflicts of interest issues.
Setting up an internal audit function that regularly assess the risk landscape of any EA org the soonest can help avert future fraud. As I have mentioned in my other posts, fraud is very hard to detect especially when collusion is in play—yet I again strongly point out that this is the best practice in traditional systems of conducting transactions when large sums of money are involved. Not following best practices will always leave possibilities for gaps to where fraudulent actors may exploit.
I’ve seen this mentioned quite a few times, most prominently by Eliezer Yudowsky . I take the point that there were sophisticated investors such as Sequioa, and BlackRock who researched the company and could not detect FTX’s possible self-dealing with Alameda. I think it’s fair to say that EA probably could not have detected this FTX situation would blow up in exactly the way it did, even with more due diligence.
I also think that it’s rational to expect that you apply due diligence to where you are investing your money than where you are receiving it from—and my understanding is that EA (on the whole) was not actually investing in FTX.
However, what I think should not be lost sight of is that FTX funding made up a very significant amount of EA’s funding as a whole: in 2021, it was estimated FTX team’s funding made up $16.5 billion of $46.1 billion (roughly 36%). (Moskovitz’s funding was even larger—roughly 49%.)
This is incredibly undiversified, especially given how volatile SBF and Moskovitz’s wealth is . I am sure that this is far more undiversified than any large investor who actually put money in FTX. EA therefore stands to lose a lot more if the funding from FTX (or Moskovitz) fell away. I don’t want this point to get lost in the debate.
Now, I’m not sure that the answer was that EA should have vetted its funding more. When people are offering you “free” money,[1] I don’t think there is too much obligation to vet it (above any legal obligations that might exist). I think the answer is probably that EA should have thought about its risk exposure more, given how undiversified and volatile its funding is. In particular:
what might happen if FTX or Moskovitz’s funding dries up for any reason; and
how any negative consequences of that situation could be mitigated.
For example, I did see somewhere that there had been a statement somewhere suggesting that EAs personally should diversify away from crypto, given how exposed EA is to it generally, but that did not seem to be a very prominent, widely-advertised piece of advice.
I know also that there is some general career advice for people to build up a decent financial runway for themselves. Perhaps there should have been greater emphasis to the community that if they rely on funding (grants, salaries) that is undiversified, they should factor that risk in and weigh it with their personal risk appetite.
I leave aside the question of whether SBF was using EA to “launder” his reputation and therefore arguably the money was not entirely “free”. I don’t have an informed view on that.
EA should absolutely be vetting its funding more. You already gave three reasons: risk of the funding drying up (diversification being a possible solution), legal obligations (as evidenced by the possibility of clawbacks), and the reputational effects of EA laundering its funders’ reputations. There are also significant reputational effects going the other way, as evidenced by the costs of SBF’s fall to EA’s reputation.
I guess it depends on what we mean by “vetting funding”. EA should definitely do more to understand and manage the nature and extent of the risks it is exposed to—i.e. general risk management. I don’t think we need to wait for much more information to make such an assessment—the way this has unfolded with so many grant recipients, etc seeming to have been caught completely unprepared is enough evidence that the EA community’s risk management and communication were lacking.
But some people also seem to suggest “vetting funding” means EA should be trying to find fraud or other malfeasance in its donors. (That is suggested by the OP’s post and is what I meant by “vetting funding” in my previous comment). I’m less sure about this claim. It’s not clear how much due diligence is required in these cases vs how much due diligence EA actually did. So this is something that, as the OP suggests, would benefit from more information before coming to a conclusion.
Edit: Put another way, I think there are two questions:
Should EA have conducted better risk management? I think the answer on this question is quite clearly “yes”.
Would that “better risk management” have detected this fraud?
I’ve seen some discussions conflating the two. Even if the answer to the second is “no “or “unclear”, EA’s risk management practices could still be improved. That’s all I’m saying.
Hi Trish,
Risk management as a field (or component of internal auditing) has ground rules where it can determine the key areas of how a certain organization should function and what are the areas where such org may fail. At its basic form, it will Risk managers are assessing inflows and outflows of cash and the policies behind those functions. They will also see how the management process is being performed and potential conflicts of interest issues.
Setting up an internal audit function that regularly assess the risk landscape of any EA org the soonest can help avert future fraud. As I have mentioned in my other posts, fraud is very hard to detect especially when collusion is in play—yet I again strongly point out that this is the best practice in traditional systems of conducting transactions when large sums of money are involved. Not following best practices will always leave possibilities for gaps to where fraudulent actors may exploit.
All the best,
Miguel