Finance's lawyers basically said that if you do this, it will ruin the crypto industry, which is kind of hilarious to me. You know, it's just like, oh no, don't stop our fraud, it'll ruin the fraud industry.
SPEAKER_01It's coming to an end. But one of the biggest stories of the year has been the ongoing crypto crash as more and more crypto companies and projects have imploded or exploded, caused, you know, ripple effects across the industry, the prices of some of these tokens and cryptocurrencies, so to speak, continue to collapse. The NFT market has dried up, and all of the hype of 2021 in that kind of central period of the pandemic has been shown to be absolute bullshit. You know, this notion that we were headed toward this decentralized future that was going to be more empowering, where we were all going to be gaining wealth, has proven to be complete bullshit, pushed by people at A16Z and these other crypto companies that were just looking to profit by selling people a false bill of goods based on speculative assets that they could use to pull money from people's pockets, make profits for themselves, and leave the average person holding the bag at the end of the day. And no explosion has been more notable, has received more press than the recent scandal involving FTX and its founder, Sam Bankman-Fried. Now, obviously, this is something that began in November, and I could have done an episode on it back then. I was on the road, so that didn't work out. But I think it was also better to let this play out a bit so we could get some more details before really digging into the meat of it. So this week, my guest is a returning friend of the show, Molly White, the creator of Web3 is going just great, a website that I'm sure many of you will be very familiar with as it has chronicled the scams and failures of the crypto industry. And she's also a fellow at the Harvard Library Innovation Lab. Molly was on earlier this year where we already started to discuss the implosion that was happening in the crypto market as it entered a crypto winter, so to speak. But I thought as this year is coming to a close, and because of all of the fantastic work that Molly has been doing in digging into the FTX case, in following everything that has been happening, I just had to have her back on the show to dig into, you know, the broader collapse, but also the specifics of FTX and Sam Bankman-Fried. As you'll see by the runtime of this episode, this is probably the longest episode that I have ever published. And so for that reason, I am going to keep my introduction short. I just want to say that I think that this is a really fantastic and in-depth conversation. We get to many different aspects, not just of the broader crypto collapse and many of these companies that have imploded over the past year, but we dig specifically into the FTX case, in what happened to cause this company to go into bankruptcy, and what we have learned in the weeks since that has happened, as more details have come out, and as Sam Bankman Freed has seemingly been unable to keep his mouth shut and has talked to a lot of people to try to frame the narrative around what actually happened here. Now, before we get started, I just want to note that this interview was recorded on Thursday, December 15th. So some things may have changed, may have developed in that time period. But I wanted to chat with Molly after some key hearings in the US Congress discussing the FTX case and the broader crypto market and potential future regulation. So I hope you enjoy this conversation. If you do, make sure to leave a five-star review on Apple Podcasts and Spotify. Make sure to share it on social media or with any friends or colleagues who you think would learn from the show. And of course, if you want to support the work that goes into making the show every week so I can have these conversations digging into critical issues with people like Molly, you can join supporters like Ruth from Ireland, Rodrigo from Chile, and Mark Schauer in Brooklyn by going to patreon.com slash TechWon't Save Us and becoming a supporter. Thanks so much and enjoy this week's conversation. Molly, welcome back to Tech Won't Save Us.
SPEAKER_00Thanks for having me.
SPEAKER_01Of course. You know, you're the creator of this fantastic website that has chronicled the uh scams, the frauds, and the decline of the crypto industry over the past, you know, couple of years, I guess now. It's been fantastic to pay attention to that site, to use it as a resource to see what's going on with the industry. But now, you know, this year we've obviously been experiencing kind of a progressive decline of this industry as more and more players have collapsed, as more and more frauds and scams have been revealed. And of course, you know, we all turn to your website to get the updates on that. I want to start with a general question before we get to the obvious FTX catastrophe that is ongoing. Finally, Sam Bankman Freed has been shut up, but he's said a lot in the past few weeks uh before uh he was arrested. But before we get to that, obviously we've seen a number of other companies collapse, a number of other things come to light throughout this year. What has stood out to you as kind of the main milestones in this collapse of the crypto industry throughout 2022?
SPEAKER_00That's a great question. I think recently, you know, people have been referring to the FTX collapse as though it was sort of an isolated incident or, you know, something that has only just started a big contagion effect. But I think we really need to look back to earlier this year when Terra Luna collapsed. You know, that was early this spring. And, you know, that was a major stable coin that completely lost its peg. And, you know, the entire ecosystem that it's built upon, Terra, the stablecoin, and then Luna, which was a different token, plummeted and took down a lot of other projects with it. That itself kicked off other contagion events earlier this year. And, you know, there were a handful of bankruptcies that came out of that eventually. Um, you know, the Celsius and Voyager bankruptcies being the primary ones. There was the collapse of a huge crypto hedge fund called Three Arrows Capital, which itself had, you know, been taking loans from basically everybody as far as, you know, as far as we can tell.
SPEAKER_01I feel like the boys over at Crypto Critics Corner were really in on the three arrows capital, paying really close attention to that one.
SPEAKER_00Yeah, for sure. They did some great reporting on that. Yeah. So with three arrows capital, we saw a bunch of contagion. And, you know, this summer was sort of the lingering effects of that. And then FTX collapsed. And I don't think you can really separate the FTX collapse from what happened earlier this year, because um, you know, it seems like the bailouts that FTX was doing of companies like BlockFi may have been to sort of boost their own position. And it looks like, you know, Alameda Research, which was a Sam Bankman-free enterprise, may have itself been in trouble earlier this year around the time of the Three Arrows Capital Blowup. But obviously, we have no, you know, transparency into that. And so we had no idea until recently when, you know, it obviously became clear that FTX had been boosting Alameda Research with the use of customer funds. So I think, you know, you can really trace this back to much earlier this year.
SPEAKER_01Yeah, it's interesting that you say that as well, right? Because one of the things that we often hear about the crypto industry from boosters is that, you know, it's very transparent, much more transparent than the traditional financial system. So we can see whenever there are, you know, difficulties or problems with any of these companies. But as you say, you know, if Alameda Research was in trouble earlier this year, we couldn't really see those sorts of things and many of the other problems with many of these other companies until they really came to light and kind of blew up.
SPEAKER_00Right. Yeah. I mean, there's this idea that, you know, you can see all these transactions that are happening on the blockchain, but a lot of what's happening with these large centralized companies is not really recorded to the chain, or it's in a way that it's really difficult to actually untangle. We don't necessarily even know all the wallets that, you know, are connected to FTX, for example. So you can't just be like, look up all the FTX wallets and see what's coming in and out because you don't necessarily know whose wallets they are. And then, you know, obviously there are all these loans that are happening. A lot of this stuff is is happening kind of behind the scenes. And so, you know, it's it's really difficult to get a sense of how an exchange or any other crypto platform is actually doing, you know, how many assets it has under control, what its liabilities are. And that's partly why I think, you know, we really need to be looking for audits for these companies because otherwise there's there's really no way of knowing.
SPEAKER_01Yeah. I I guess we'll get some degree of audit on FTX now after everything has actually collapsed and uh post-mortem audit, I guess. Exactly. Yeah, they have that dude who uh worked on and on Enron on that bankruptcy, who is now like the CEO of FTX, kind of looking into everything that is going on. Yeah, I was shocked that one of the things he said in his testimony the other day was that uh, you know, this massive kind of multi-billion dollar company, it was appraised that I think something like 32 billion, I think that was the combined of FTX and Alameda, um, was using QuickBooks like for its accounting practices. And it's like, what?
SPEAKER_00Yeah, but honestly, like QuickBooks is actually maybe better than what I expected. I I just assumed it was a bunch of like post-it notes in the background, you know, with like random estimates scribbled on them because they had been doing very, very little as far as accounting. And some of the leaked balance sheets that the Financial Times was able to publish, it was like napkin bath. I mean, you know, there was just total ballpark estimates happening.
SPEAKER_01Yeah, and we'll get to some of those balance sheets. But before we move on to FTX and really dig into all of that, um, you know, it it has been a wild year, right? Like all of last year, basically, there were all of these narratives that the line was just going to keep going up, Bitcoin was gonna go to a million dollars or whatever, all of these assets were just gonna keep growing. It was like put your money into it because there's no way that you can lose. And now, you know, we've seen this general decline in trading volumes, in the values of these crypto assets. NFTs, of course, have plummeted. You know, you can't even access a lot of NFTs now that were through FTX's platforms because that kind of stuff has like disappeared, you know, and the blockchain was supposed to be how you kind of ensure that you always have access to these sorts of things. I was even reading the other day that, you know, one of the things that were promoted as this system being able to allow to benefit artists was that once you sold something, because it was registered on the blockchain and you had the smart contract, that then every time it was sold afterward, you could take a piece of that transaction. But apparently a lot of the exchanges are kind of turning off that ability because they need to like get more money because this whole system has been in collapse. So, like, I guess just what have you made of like how quickly this all turned this year, of course, starting November last year, really, is when the decline began, but also like just some of the wild things that we saw this year from like the Axie hack to the whole RazzleCon thing to everything else that has like happened in this space.
SPEAKER_00Yeah, I mean, it's kind of weird that there was this sort of shared belief that the number would go up forever, because you can look back at the history of Bitcoin and see that that's not true. Uh, Bitcoin advocates, of course, love to pick sort of convenient times on the chart and say, well, if you go back to the very beginning of Bitcoin when it was worth a dollar, it's it's obviously only gone up, as if people have not bought in to Bitcoin in the last year.
SPEAKER_01Yeah. I think I think Ben McKenzie was saying in his testimony yesterday that there was a report from Genesis, I believe, in sometime in 2021 that said 55% of people had like bought in last year. So that means that you know the vast majority of Bitcoin holders would have lost money or something like that.
SPEAKER_00Right, exactly. I mean, a lot of the sort of latecomers uh to crypto are in the red because they bought in at all-time highs or you know, near it, and then the prices have only come down since then. So some people are in pretty bad positions at this point, and they were told that this was a store of value or this was, you know, a way to build generational wealth, and they're finding that no, it really wasn't. And of course, you know, the crypto industry party line is we'll just keep holding, it'll go back up, you know, as if people don't need access to money at any point.
SPEAKER_01Yeah, you know, when you're a Bitcoin whale, it doesn't matter. You can keep holding, like you're fine. If you're Michael Saylor, don't worry. You could, you know, maybe, maybe he'll uh be forced to stop holding at some point. But yeah.
SPEAKER_00Yeah, who knows? Right. So, but I think what we've really seen over the past year is what happens when the number doesn't keep going up, because it wasn't just individual, you know, retail buyers who were discovering the hard way that the number comes down sometimes, but a lot of these projects were basically predicated on the idea that the, you know, Bitcoin prices or crypto prices in general would sort of always trend upwards. And that's partly sort of what led to the initial decline in, you know, the Terra Luna project, for example, is we saw you know hit to crypto prices earlier this year, especially with inflation in the US and the decline of the US stock market and just sort of a general economic retraction. That was reflected in the crypto prices, despite the general argument that crypto is supposed to be, you know, a hedge against inflation or it's supposed to be a separate from stock market trends. Uh, that is very much not the case as we've seen over the past year. And so when the crypto prices began to decline, Terra Luna also found itself in kind of a difficult position. And, you know, the Terra stablecoin eventually lost its peg, Luna came crashing down, and then we sort of saw this very long protracted domino effect throughout the rest of the year. And it's just interesting that, you know, these crypto projects themselves were based on this idea. But I think it's also somewhat telling because I think all of the crypto industry really is predicated on the idea that there will always be new buyers, there will always be more money flowing into the system. And as soon as that begins to change, we see just devastating impacts.
SPEAKER_01Yeah, no, very well put. And, you know, the other key thing to note about that, whether it's with the Terra Luna collapse or whether it's with the FTX collapse that we're seeing now, is that there are a whole ton of people who were sold a false bill of goods around what crypto was and what it would deliver to them that are now being affected as these projects go under, right? Like there were stories when Terra Luna collapsed earlier this year, particularly out of South Korea, about what that meant for the people who are being impacted, who are losing a lot of money, people going to places that were known as kind of suicide hotspots, searches for information about suicide, kind of skyrocketing. And these are the sorts of things that we're seeing when these things happen, when people have been told that they should just put their money into these projects, the money will keep going up, they won't lose their money. It's the way for them to build wealth, then that all collapses, they lose all their money, and they're left like with nothing, especially in this economy, in this society, that leaves people that like you know doesn't have very much security kind of built in for people. So when you lose that little bit of a cushion that you've been able to build up, despite all of the kind of difficulties in even doing something like that, then really you're you're left very hopeless, right? And these people who are at the top of this industry, who are at the top of these companies, really preyed on that kind of vulnerability that a lot of people had to profit for themselves. And now a lot of those people, I believe it's over a million in the case of FTX, are really left in a difficult situation.
SPEAKER_00Right. I think that's something that is really important to notice about the recent failures or the failures of the last year. People will broadly talk about the crypto industry as volatile, it's risky, and that's very true. But a lot of the projects that collapsed in the past year were the projects that were promising people that they were the safe alternatives. So the Terra Luna stablecoin project was a stable coin. The idea was that you were not going to be exposed to the volatility in assets like Bitcoin if you put your money into a stablecoin because it's pegged to the US dollar. And so you sort of retain that stable value. And people were often putting their assets into that stable coin and then using sort of yield farming to try to earn returns that they might not be able to get in the traditional financial system. Of course, it turned out to be kind of a Ponzi scheme, but you know, people were very much, you know, enticed by promises of like 19 or 20% returns for just holding a stable coin. I mean, how could you not be? And then we saw the collapses of Celsius and Voyager this summer, and those were projects that were describing themselves like banks. Celsius, their CEO, would tell customers that, you know, you can't trust regular banks, but you can trust us. We're safer than, you know, traditional banks and registered financial institutions. In the case of Voyager, they were suggesting that they were FDIC insured as though they were a real, you know, bank with insurance and that would be protected from a collapse. And then with FTX, they had these big commercials at football games, the Super Bowl, that they were referring to themselves as the safe place to put your crypto. And so for people who, you know, might have wanted to get into crypto, didn't want to be speculating on, you know, Dogecoin and these meme coins and all these moonshots that people sort of think of when they think of the crypto industry, there was actually sort of a separate group of people who were looking for the returns, but understood to some extent that crypto was risky. And so they tried to find sort of this safer way of putting money into the system and they ended up getting burned really badly. And I think, you know, something that really offered a lot of insight into the types of people who were doing this was the letters to the judge and the Celsius and the Voyager bankruptcies. We saw individual customers writing in and saying that they had put their money into this project. You know, they believed it was as safe as a bank account. They were, a lot of them were just holding on to, in some cases, it was stable coins like Tether or USDC. In some cases, they were holding often like major cryptos like Bitcoin or Ethereum. And they had no idea that maybe they would just lose access to that. They thought it was like their bank account. And they thought maybe, you know, if they were holding Bitcoin, of course, maybe the Bitcoin price would go up or down, but they didn't expect that they might just not be able to access the assets at all. And some of these people were, you know, retirees or single parents or people who were supporting family members with medical issues. It was not, you know, the crypto moon boy stereotype of someone who was taking extra money, but that they probably weren't relying on and hoping to make a outsized return with it. It was, it was money that they could not afford to lose.
SPEAKER_01Yeah, it's such an important point, right? And and just to be clear, when you're talking about FDIC insurance, you know, this is the insurance that people have when they set up a bank account, right? That's what it's called in the US. In other countries, it'd be called something else. But basically, it ensures that if the bank goes under up to a certain amount of money, the government will give you your money back, right? You you're protected in that case. That does not exist for the crypto industry, but some of these crypto companies were suggesting that something equivalent did exist if you put your money in there into their company, right? And and as you're talking about with FTX, from what I have read and heard in kind of keeping up with this, FTX was considered one of those platforms that was trustworthy, right? You know, there might have been these other ones that were more risky, but FTX was put together well. It was, you know, somewhere where you could trust to put your money, it wasn't going to collapse like some of these other companies. And then when it actually went under, I think it was a really big shock to some of these people who were really kind of promoting crypto as something you could trust, and as FTX as kind of the legitimate place where you could go to kind of make your crypto investments, hold your crypto and stuff like that. Because as we know, even though there's this narrative around decentralization and you know you can have your own wallet and stuff like that, most people who are engaging with this crypto are going to be using centralized exchanges and things like that in order to make these transactions and to store their crypto and whatnot. And so FTX was seen as like a reliable, safe place to do those sorts of things. And then when that collapses, I think that really sucks a lot of what trust or what belief really remains out of the system in a really significant way. I don't know if you feel the same way about that.
SPEAKER_00I think that's true. That was absolutely a major part of FTX's marketing strategy. You know, they were trying to mainstream themselves as much as possible. So they bought naming rights to an arena. They had Tom Brady and, you know, Larry David do commercials for them. People, I think, believe if they see a Super Bowl commercial for something, how could it possibly be a fraud? How is that even possible? And so, yeah, people absolutely saw FTX as one of the legit crypto companies. And they may have realized that a lot of crypto companies are not legit, but they saw FTX as one that you know they could trust. And that clearly did not turn out to be the case.
SPEAKER_01Absolutely. Now let's dig into this larger FTX. Collapse, right? Where would you put the beginning moment of this whole saga?
SPEAKER_00So I usually mark the beginning at the Coindesk publication of an Alameda balance sheet. So Coindesk got access to a balance sheet from Alameda that showed that a lot of their assets were actually the FTT token, which is the token that FTX itself issues. And so people started to realize that a lot of the supposed value that this company was built upon was closely, closely tied to its sister company FTX. And, you know, it had been no secret that those two companies were very closely tied. They're both led by Sam Bankman-Fried, who retains ownership in both companies. He's claimed over the past year or two to have stepped away a little bit from Alameda and given control over to Caroline Ellison, who is the CEO. But I don't think anyone actually really believed that. And CZ basically said that they were going to be dumping the FTT tokens that they held. And so Binance had invested in FTX a while ago. And FTX ultimately ended up buying them out of that investment, largely because they've realized that they were not going to be able to get regulatory approval for something that they wanted if they had Binance listed as an investor, because Binance is so shady about, you know, and it's really cagey about like where is it even located? You know, so they ended up buying them out for that reason. And so when CZ threatened basically to dump a huge number of FTT tokens on the market, which people, you know, people realized that that meant that the FTT token would lose value and that FTX and Alameda might suddenly be on shaky ground. People started getting nervous. And so they withdrew assets from FTX. And people who held the FTT token started selling it off, realizing that the value might go down. And it started this sort of death spiral for FTX, where there was this huge, I mean, people say run on the bank. It wasn't a bank. So I guess run on the exchange, maybe, where people were withdrawing. I mean, it was billions of dollars in like a day or two days or something like that. And when FTX did not have sufficient assets to cover those withdrawals, things went south.
SPEAKER_01As you'd expect, right? It's fascinating to see how you know the revelation of these kind of internal documents really revealed the fundamental flaws in the accounting or in the holdings of this company and allowed it so quickly to be kind of taken apart and kind of driven down by Binance in particular by threatening to sell these tokens. I believe there was a tweet by Carolyn Ellison around that time as well, saying, like, yeah, sell them, like it won't make any difference to us, or something like that. Clearly, that was not the case. It was a bluff, right?
SPEAKER_00Right. And it's interesting, you see that practically every time something like this happens, you see executives coming out and being very confident about the state of the world. Caroline Ellison said, you know, sure, sell them. We'll buy them from you if you want. Obviously, they would not have been able to do that. We saw Sam Bankman-Fried himself make a tweet at one point saying FTX is fine, you know, we've got all these assets, no worries, deleted that one a little bit later. But it's really because the whole system is based on belief. And that was what kept FTX and Alameda afloat for months and months and months when it was clearly based on a house of cards. But because people didn't realize that, you know, it was all denominated in FTT or it was, you know, enormously denominated in FTT, they didn't question the value of that too much. Things were able to keep going for a very long time. It reminds me a lot of like when Wiley Coyote runs off the cliff and he's just like running along in mid-air and then he looks down and suddenly he plummets off the cliff. And that's sort of what happened here is like suddenly people realized that this whole thing was not, there was no ground under it. And so then everything fell apart.
SPEAKER_01Wild. Wild. And so, you know, these documents come out on November 2nd, you know, when Coindesk publishes them. Then obviously Binance is the one that really kind of precipitates the push to cause these companies to collapse, basically, by threatening to sell these tokens and then causing the quote-unquote bank runner or exchange runner or whatever you want to call it, where everyone is kind of taking their money out of FTX because they see how fundamentally flawed it is and how it's probably going to go under. And so then Binance kind of for a little while seems like it's gonna buy FTX and then kind of pulls out of that. Can you talk us through what went on there?
SPEAKER_00Yeah, so Binance, there was a sudden change where first Sam Mingman-Fried was saying, we're fine, don't worry about it, suggesting maybe that CZ was trying to sabotage FTX. And then the next day he says, All right, Binance is gonna buy us, everything's gonna be great. He is uh a little bit apologetic, obviously, that things were falling apart, but he's like, Thank you, Binance, for all of this.
SPEAKER_01And withdrawals from FTX are frozen around this time as well, right?
SPEAKER_00Yes. I I think they were frozen before the Binance announcement, but I I don't fully remember that off the top of my head. And yeah, and CZ put out a tweet too, confirming that Binance was planning to acquire FTX. I remember noticing at the time that he was very cagey in the language. You know, he said that it was a non-binding letter of intent, that it was all contingent on due diligence. And I was like, that doesn't seem great. Uh and sure enough, like a day later, CZ announced, sorry, we're not gonna do this. We looked into the financials, it's just not gonna work. I was really skeptical that CZ ever actually intended to go through with the purchase. You know, I think it was great marketing for Binance to be able to say that, like, oh, we're the big boy in the crypto exchange world. We can just buy out this huge crypto exchange, no problem. We'll save the world. We're the good guys. And then, you know, backing out of it had no real downside for them. You know, they could say that, oh, we did our due diligence, you know, we're responsible enough to determine that this has too much risk. It was pretty much free marketing for Binance. So I'm pretty skeptical of that whole thing. But it felt pretty cruel, I think, to the actual customers who were like, oh, great, everything's gonna be fine. I can get my money out. And then a day later, sure enough, they were back where they were.
SPEAKER_01Yeah, it must be good for Binance, though. You know, you say Binance is this like quite shady company, but is also the largest crypto exchange in the world. FTX, I believe, was the second largest. Is that correct?
SPEAKER_00It was, yeah, at the time.
SPEAKER_01Yeah, at the of course, of course. Not anymore. But it must be really good for Binance then to have their largest competitor, you know, have these revelations made up made about it, be able to kind of help take them down, to pretend to be helping them out, and then be like, oh, you know, actually, sorry, we we couldn't follow through on this because everything was just so bad we couldn't do it. That must set Binance up to, again, promoters talk about crypto being this kind of decentralized place where power is everywhere, you know, it's against centralization, but now Binance takes this even larger role, it seems, within the crypto industry.
SPEAKER_00Right. I think that is true to some extent, that Binance definitely benefited here. You know, they are seen as the remaining giants crypto exchange. But I think also it's it's worth noting that this collapse does hurt Binance as well. So there were some people, there's there's definitely still are people who believe that CZ sort of was Machiavelli here, masterminding this whole scheme to bring down FTX. And who knows, maybe he is. It definitely seems like there would have been a lot of damage to Binance. And I don't know if CZ would have chosen to make that play. If he is Machiavelli and he is five steps ahead of everyone, then presumably he would have also been able to predict the damage to Binance by basically crashing crypto prices, reducing overall trust in the crypto industry. Binance now has been experiencing enormous withdrawals, partly, I think, just due to the concern about centralized exchanges in general, partly also due to some concerns about Binance. But so, you know, I think I have some skepticism around the idea that CZ was sort of pulling all the strings here. I and Sam Bankman-Fried has absolutely been trying to pin a lot of this on CZ, I think, although he has come short of explicitly saying it, but he has strongly implied it that CZ basically was the demise of FTX. And I think that's very convenient for Sam Bankman-Fried. It helps him offload a lot of the responsibility that he clearly has for the clear fraud that was happening by saying that, oh, it was a competitor, it was sabotage, it wasn't me. You know, it had nothing to do with all these customer funds that I was siphoning off to my hedge fund. And we can't really know what would happen in an alternate universe where the CoinDesk report was published, but CZ never made the tweet about selling off all his FTT tokens. My suspicion is that things may not have just continued to be hunky-dory like Sam Bankmanfried seems to think.
SPEAKER_01Yeah, no, of course. And so, you know, the CoinDesk leak is November 2nd, the Binance offer to buy FTX or the letter saying that they were going to is November 8th. That all falls apart within a day. And I believe it's November 10th that FTX finally enters kind of bankruptcy or liquidation, right? So this is you know a series of events that happens really quickly. What have we learned in the time since then, or or you know, even as that was happening, what have we learned about what FTX was actually doing that caused this whole collapse to effectively happen?
SPEAKER_00So ultimately, a lot of customer funds that were deposited into FTX were being transferred to Alameda for them to be using in their trading activities. And that is like the cardinal sin of an exchange. You know, when you're in a crypto exchange, especially if your customers are just holding balances on the exchange and they're not doing margin trading, they're not involved in those sort of risky bets, but they're just, you know, swapping assets around or holding balances. The crypto exchange is supposed to have those assets stored somewhere so that if you have a Bitcoin represented in your FTX wallet, that at any point you can just go and say, I want my Bitcoin back and they can hand it to you.
SPEAKER_01And I believe in FTX's own terms of service, it said that they would hold people's assets. They are not transfer them anywhere, right?
SPEAKER_00Absolutely. They said that your assets are not going to be used for trading, we're not gonna lend them out, nothing like that. We're just gonna hang on to them. And people were like, awesome, sounds great. But sure enough, behind the scenes, there was this basically unlimited line of credit open to Alameda, and there were billions of dollars being sent over to Alameda for them to use in their hedge fund. And they were taking out, you know, they were making pretty risky trades. They lost a lot of money on those trades, it looks like at this point. And in addition to that, there were billions of dollars in personal loans being made to executives at the group of companies, including Sam Bankman-Fried himself, but also a couple of other top names there. And they're still sort of unwinding what happened with the money that was loaned. Some of it was used for real estate in the Bahamas, like $100 million plus worth of real estate in the Bahamas was purchased with this money. But now it's also looking like these loans were sort of a way for the money to be laundered, to be used in various investments where there was very little diligence done. You know, these were investments with very little or no valuation estimates being made. There was no pro forma. And so a lot of these investments were hugely overvalued. And then also some of these loans were being used to make political donations and to obfuscate the source of those donations to make it appear as though they were coming from specific individuals rather than one individual or the company in violation of campaign finance regulations.
SPEAKER_01Right. And, you know, there's been a big focus since this has all gone down, you know, by people like Elon Musk, for example, about how Sam Bankman-Fried was donating to Democrats. And so, you know, the Democrats won't be investigating him. Of course, he's now been arrested and he's clearly being investigated. But what has also come out is that Sam Bankman Freed said, yeah, he was also giving a ton of money to Republicans. He was just doing it through dark money channels so that it was kind of hidden away because you get a better kind of public reputation if you're giving money to Democrats and you kind of hide the uh Republican funds and kind of where that is going. To you, you know, as you're watching this, one of the stories that I read as well was that Alameda Research, obviously, we have had all this reporting over the past couple of years about how crypto was going to keep inflating, how the line was going to keep going up, how you could make all this money. The story that I read suggested that Alameda Research was actually losing money on a lot of its trades. Like it seemed like it wasn't doing a very good job of choosing where to kind of put this money. From what you have been learning as you've been looking into this company and what has been being revealed about it, does it seem like there was kind of maliciousness with these people? Does it seem like they were just like quite inept in running these major companies? Like, what's your kind of take on the people who are at the top here?
SPEAKER_00Yeah, it's a great question because Alameda, you know, from what we're beginning to see, it was looking like Alameda Research was losing money at a time where it was really hard to lose money. You know, like it was during the crypto bull run where prices were going through the roof. These various hedge funds that were making these same sort of risky leverage trades were just making out like bandits. And Alameda Research was sort of inexplicably losing money. And so the question really now is like, okay, so were they just really bad at trading? Or was there some benefit that was happening? They were basically taking the bad side of a trade for somebody else's benefit. I don't think we know at this point what was happening there and why that was all happening, but it's definitely a good question because, you know, that should not have been happening pretty much. Uh, you know, losing money earlier this spring, everyone was losing money, you know, and the especially the trading firms that were involved in these really leveraged trades, you know, they all blew up. We saw it earlier with three Euros Capital and there were a handful of others. So, you know, the fact that Alameda didn't blow up at that time was also a little bit strange. Like, well, they're doing the same kinds of trades as these other hedge funds that just totally went under. Why are they still fine? And why are they in fact lending money out and trying to, you know, keep afloat other crypto lending platforms and things like that? I think we've we got our answer to that question now with the FTX bailout coming to light. But yeah, I mean, I think the question really is, you know, what was happening there? Why were they losing money? Why were they evidently making these really questionable trades, especially when these were, you know, people who were supposed to be fairly qualified traders. Both Sam Bankman-Fried and Caroline Ellison have backgrounds on Jane Street. They were sort of traditional traders before they went into crypto. And they were young, obviously, and they didn't have a ton of crypto experience before they jumped into crypto. But I don't think they were dumb, you know, even though Sam Bankman-Fried seems to sort of be trying to go with that story these days.
SPEAKER_01Yeah. I want to talk a bit about Sam Bankman-Fried and Carolyn Ellison. But before we do that, is there anything else in this kind of early period of this collapse before Sam Bankman-Fried gets arrested that we haven't touched on that you think is important for listeners to know about this whole case, I guess?
SPEAKER_00I think the biggest thing to point out, and this might be something that we would touch upon, is Sam Bankman-Fried's claims around being uninvolved with Alameda. That's something he's been really heavily relying upon recently, is that he had no idea what was going on at Alameda. All of those loans that were happening to individuals, he was like, ah, boy, that's weird. I didn't know about that.
SPEAKER_01This chat group we had called wire fraud. I knew nothing about that.
SPEAKER_00Right. Yeah, exactly. He didn't think that existed. He's like, I certainly wasn't a part of it. Um you know, now it's coming out that the loans had his name on them. So probably, you know, you had some idea what was happening there. Initially, he was claiming that the funds that were being transferred to Alameda were sort of this legacy system and it was just a bad accounting problem. They had lost track of a bank account that had eight billion dollars in it, as though it was just like change that you've lost in your couch cushions. So I think you know, it's it's really important to sort of notice that he is he's been trying to sort of claim that he had no idea what was going on. And, you know, just something that to keep in mind when we sort of talk about what he was directly involved in.
SPEAKER_01It'd be all right to, you know, root around in the in the couch cushions and pull out a few billion dollars. That'd be a good thing.
SPEAKER_00Yeah, who among us has not found a billion dollars in the pocket of the winter coat that you pull out after it's been in storage for the summer.
SPEAKER_01Yeah, all the time. All the time, you know. Um so I I want to talk about these people. Maybe we should have talked about them earlier, but I feel like people have been kind of fascinated as more information has come out about these folks over the past month or so, you know, as things have been revealed about them, some of them kind of sensational, and like, you know, those are the things that people just love to grab onto. But also, like, I don't know, they seem like very weird people. Um, so so who is Sam Bankman-Fried and who is Carolyn Ellison? And what are some of the key details that we know about these people that are important to know?
SPEAKER_00Sam Bankman Freed is he's about 30 years old, so he's pretty young as far as all these things go. Uh, he graduated from MIT, and people sort of view him as this boy genius, pretty smart guy. Definitely portrayed the disheveled nerd persona pretty strongly. You know, he always had sort of untidy hair. He wore shorts all the time. There were all these stories about how he slept in beanbag chairs in the office and didn't really have an apartment that he stayed in. Yeah, let's just forget about the massive compound he had in uh Yeah, as though he didn't have this huge luxury penthouse in the Bahamas that people definitely knew about, but they were just, I guess, ignoring because of the beanbag chair next to his desk.
SPEAKER_01Makes me think about the stories uh like uh Elon Musk lives in this like really cheap, shitty house. And it's like, but he's staying in his friend's big mansion as well. Like, what are you talking about?
SPEAKER_00Right, I know. Yeah. You know, after graduating from MIT, Sam Bankman-Fried went to Jane Street and spent a couple years trading there, and then ultimately decided to leave to start Alameda Research. And he brought along with him Caroline Ellison, who was also at Jane Street. She also came from sort of a prestigious university background. I think she went to Stanford.
SPEAKER_01Ah, those Stanford alums.
SPEAKER_00Yes, I know.
SPEAKER_01Uh apologies to the listeners who went to Stanford. But you must know the reputation your university.
SPEAKER_00Yeah, I mean you can't really avoid the fact that some not so great people went to Stanford. Uh, although I guess some not so great people went to all kinds of universities.
SPEAKER_01But totally, totally. But we're talking about tech here.
SPEAKER_00So yeah, exactly. Storied history there.
SPEAKER_01Yeah.
SPEAKER_00So they joined forces, they started Alameda Research, and then a couple years later they started FTX. They were both effective altruists. So they had adopted this idea that is kind of popular among some circles, I guess, in Silicon Valley and tech in general, where you should try. Well, and there are a couple of different kinds of forms of effective altruism. The one that they sort of ascribe to was, I think, particularly extreme, where the idea was that you should try to make as much money as possible, basically by any means possible, because then you can take that money eventually and donate it to the most effective charities and various initiatives to make everyone's lives better. The idea being that you are somehow more qualified to choose those charities than the people who otherwise might have held on to the money that you have now acquired for yourself.
SPEAKER_01Yeah, it's called earn to give, of course.
SPEAKER_00Right. Yes. And so that was definitely a major part of their backstory, I think. And it's something that is important to hold on to. And it became a major part of Sam Bankman Fried's sort of personal branding as well. So he would, you know, there were all these sort of glowing profiles on him as he began to become more prominent as a figure. The Media was very interested in him as someone who was, you know, a young billionaire, obviously. But also because he began to make large political contributions. He was donating to various causes involving pandemic prevention and things like that. And, you know, it was a very interesting story of this guy who was making billions and then giving it all away. And, you know, it was sort of this fun profile to write, I think. Now, you know, with the benefit of hindsight and with some statements of his own, it definitely seems like that was an intentional play on his part to really talk up the personal altruism and benevolence to try to earn a reputation that was quite positive.
SPEAKER_01It's fascinating. Obviously, I spoke to Emile Torres about effective altruism recently as well. So if listeners want to learn a bit more about that, they can go back to that episode. But one piece of that kind of history that Sam Bankman Fried has is that apparently early on, he was kind of motivated by these ideas of effective altruism and was really focused on animal abuse and wanting to help animals. Of course, he's known to be a vegan. His family is now trying to get vegan meals into the prison in the Bahamas for him, and we'll see if that'll happen. But anyway, so early on when he was trying to figure out what he was going to do, he had a meeting with William McCaskill. William McCaskell is one of these people who really is a big promoter of effective altruism, long-termism in particular. He wrote a book called What We Owe the Future recently, which Emile and I talked about on that podcast episode that we did. And apparently, in this meeting that he had with Sam Bankman-Fried, where they kind of had these discussions, he steered Sam Bankman-Fried away from working on animal activism toward earn to give, saying, you know, if you just work on this stuff around animals, you're not going to make the type of impact that you could make if you went into finance or some other kind of high-paying industry, sure did some shitty stuff, but made a lot of money, so that then you can direct kind of the flow of that money to address these causes that you care about, right? Because this was a moment when earn to give was really kind of popular, really was the thing that they were really pushing, right? They would, of course, argue that right now they have learned that earn to give is not as good of a thing to do. They they don't promote it as much. This is the type of thing that they say. It's fascinating to me that in McCaskill's book, when he's actually recommending, you know, the types of things that people can do to make a difference in the world, everything is kind of oriented around how you can further promote the idea of long-termism or effective altruism or whatever. You know, Sam Bankman Free was really motivated by these ideas. There was this particular figure who pushed him in this direction, which led him to work at Jane Street, later found Alameda Research, FTX, move in this whole direction, where he's basically building Ponzies to make a lot of money off of regular people so that then he can direct them to these causes that he says he cares about. And just a final point on this is to say that the effective altruists right now are kind of working overtime, you know, to kind of clean up the image of effective altruism because it's being so tarnished by everything that's happening with Sam Bankman-Fried right now. And they really want you to believe that Sam Bankman-Fried was not really an effective altruist, right? Was really not buying into these sorts of things, to say, you know, s effective altruism is still good. It was just Sam Bankman-Fried, that was bad. But actually, I think that we should be looking really deeply at effective altruism as well, and how it really promotes this idea that, you know, billionaires and really rich people are okay as long as they donate their money in a way that is effective and doing good things in the world, right? So it's really about kind of maintaining this existing power structure.
SPEAKER_00No, I think, I mean, I think that's a really important point. And there are actually a lot of these people in crypto specifically who have basically decided that it's fine for them to become just like disgustingly wealthy because they're going to probably at some point maybe donate all of their money or a substantial amount of their money to charitable causes. Many of them have done very few donations to date, you know, and you just sort of have to take them at their word that they will eventually at some point make these donations. But I think it's really worth pointing out that this is not like just Sam Bankman-Fried, the weird guy who is big into charity. Like this is a very common talking point in crypto, although not all of them go into, you know, as deeply into effective altruism. It's just sort of their way of explaining why they have billions of dollars just kicking around, or at least on paper. The other thing I would say is the point about effective altruists trying to sort of distance themselves from Sam Bankman-Fried, say that he wasn't really an effective altruist is definitely a key point to notice. And it's something that we're seeing in the crypto industry also, where it's sort of the no true Scotsman thing. You know, it's like, oh, well, he's not really an effective altruist. He's not really a crypto guy. You know, FTX wasn't crypto. It's very convenient for them to be able to say, this isn't our problem. This was just one guy. We're seeing a lot of these, like, oh, he's just a bad apple, you know, type of claims being made as though this isn't like the millionth crypto explosion that we've seen this year. So it's just something to notice is just that like the idea that he was just one particularly fraudulent dude is maybe worth questioning.
SPEAKER_01Yeah, no, of course. And Kelsey Piper at Box, of course, has been has been pushing this narrative a lot. Did an interview where she went right into Sam Bankenfried's DMs and was like, she posted screenshots of this conversation, and like it did appear kind of very much like two friends talking, where she was even responding with emojis to his like responses, and then she published this as a story, and he kind of came out and said, I didn't know that this was gonna be a story. I thought I was just like kind of talking to someone that I knew. Felt a little like, yes, okay, you know, no kind of uh empathy for Sam Bankman Freed here, but it did feel a little kind of not cool.
SPEAKER_00Yeah, I mean, I I do sort of question Sam's judgment there because he was talking to someone he knew was a journalist and he had given interviews to her in the past. But yeah, I mean he definitely was talking, he was clearly talking in a very unguarded way. And I think, I mean, Kelsey Piper, I think, is an effective altruist herself, right? And so, you know, it definitely came off as a little bit self-serving to be able to publish these DMs where, you know, she he was claiming that, oh, it was all just an act. I'm not really as into effective altruism as, you know, I claim to be. It was just for press. Because then, you know, the effective altruist could say, look at these, you know, he was just using our good name, and oh, look what he's done.
SPEAKER_01And and of course, Kelsey Piper is an effective altruist who has been involved in effective altruism for a long time, who kind of runs this effective altruist vertical at Vox, explicitly effective altruist, and that was even going to get a grant from Sam Bankman-Fried's foundation starting next year, that of course is not going to happen anymore because he doesn't have the money to provide. You know, Carolyn Ellison, I feel like we don't need to talk so much about her. There was this story that was published in Forbes, I believe, that really kind of went into some of her history, basically saying that, you know, she really liked Harry Potter, she was into polyamory, and you know, kind of dabbled in race science as well. Like, you know, just to give Just a little light race science. Yeah, yeah, just to give the few little notes there, right? But, you know, since this all happened, Sam Bank and Fried hasn't been able to shut up, as we were saying, until very recently when he was finally arrested. You know, you even got to ask him some questions on a Twitter space recently. What did you make of the narrative that he was trying to spin about all of this in all of the interviews that he was doing?
SPEAKER_00He was very much trying to portray that he was just so torn apart by all that happened. He wanted nothing more in the world than to make right by his customers, and he was going to do that by any means possible. He was trying to claim that he had been shut out from FTX's systems, and not only that, but they had some, you know, he couldn't even get access to some of his own bank accounts or his own like online accounts, and that was just so mean of them.
SPEAKER_01And if only so mean of them.
unknownYeah.
SPEAKER_00And if only he had access to all this data, then he could tell you exactly what happened at FTX and he could explain it all. You know, this was very much the story he was telling. And he was saying, Oh, I fucked up, you know, I clearly wasn't as on top of what was happening at FTX as I should have been and at Alameda as I should have been. He kept saying that I became less grounded and he started talking about how he would, you know, go to Washington and speak to policymakers. He was looking at the long-term future of FTX rather than the day-to-day operations. And so he just lost track of what was happening at the company. All of this, I think, is hard to believe. You know, there was clear involvement from FTX or from SBF directly in a lot of the things that were happening. You know, he was very involved in the day-to-day operations of FTX and of Alameda. You know, he was the CEO. He clearly should have had knowledge of what was happening and did. You know, he set up these companies and was the one who implemented some of the systems that led to the frauds that were happening. But, you know, it was very much in his interest to try to spin this narrative that it was just a big oops and, you know, he is so very sorry. And if you would just let him try again, it might go better. Despite the fact that he was at a glance talking to anyone and everyone that would listen, he was actually sort of carefully dodging some people. So he started out, you know, he talked to Kelsey Piper in those DMs. Then he was doing Twitter spaces and talking to various crypto personalities in these sort of online spaces. He did some interviews with some pretty big interviews. He went on like Good Morning America, he did New York Times Deal Book. And so he was speaking to people, but he was sort of carefully choosing, I think, interviewers who could ask questions and who appeared to be, you know, fairly competent. It's not like he was only going to the most friendly people he could find, although he was going to some friendly people. But he was sort of dodging industry experts, people who could really understand some of, you know, really trace some of the very circuitous answers that he gives on things and say, wait a second, that's that's not quite right, who really understood things like derivatives exchanges. And so he was able to sort of give these really long, rambling, complicated responses to what should have been very simple questions and make it sound like A, he's a very smart guy who can speak in all this jargon and you know, he's just league smarter than you are, of course. But also B, you know, that he had no idea what's going on. And so, you know, when it came to interviews with Coindesk, for example, I think he was dodging in some of these Twitter spaces, he would get sort of ambushed by various experts. There's a researcher named CoffeeZilla, that's his uh pseudonym, of course. And CoffeeZilla ambushed him three times on different Twitter spaces. Yeah, yeah, it's like three different Twitter spaces. Coffeezilla was like, it's me again, and would ask great questions of Sam Bankman-Fried and did get him to admit some things that he probably should not have admitted in recorded conversations. And by the end of it, by the third one, Sam Bankman-Fried actually got pretty angry at CoffeeZilla and was like, You're grandstanding, you're taking up too much time, as though he had not just spent, you know, hours talking to individuals other than him. But so it was a very careful play, I think, on his part to sort of avoid talking to people who might actually be able to really pick out the details and also identify when he was going into bullshit territory. He was also dodging anyone in sort of an official capacity. So he was asked to testify in front of the house at a hearing that happened earlier this week. He was also asked to testify in front of the Senate at a different hearing this week. And he initially dodged the House hearing. He throughout declined to go to the Senate hearing. Ultimately, he did eventually agree to testify in front of the House. Uh, that never actually came to be because he was arrested the night before he was supposed to testify. And so he was in a Bahamian jail at the time of the House hearing.
SPEAKER_01I'm sure they could have brought in a little uh, you know, laptop and some internet to let him uh Yeah, that's what I thought.
SPEAKER_00I mean, come on.
SPEAKER_01And actually some of the one of those rooms, you know.
SPEAKER_00Yeah. Some of the Congress people were actually quite annoyed that he had been arrested because, you know, having him testify for hours under oath in front of Congress is kind of like a dream. And you would think that prosecutors might be very interested in that. But anyway, all that to say, Sam Bigman Fried was clearly on sort of a media tour to try to burnish his reputation a little bit, at least in the public eye. And so, you know, I think a lot of these interviews really need to be taken with a grain of salt because he was saying things throughout that were very self-serving and may have been just complete lies.
SPEAKER_01Yeah. Uh there was a uh headline in Vice's motherboard that I thought really captured it for me. And they wrote, Sam Bankman Freed is trying to find the guy who did this, you know, as though he is not the guy who did this.
SPEAKER_00I don't know who writes the headlines over at Vice Motherboard, but they are some of the funniest headlines. They're so good.
SPEAKER_01They're fantastic, yeah. So as you said, you know, Sam Bankman Freed has obviously been arrested now. Um, he is in a Bahamanian jail. At least as we record this when it goes live, maybe something else will have happened. You know, the U.S. uh Court in New York Southern District has filed charges against him. I believe that the SEC is also planning to file charges against him.
SPEAKER_00The SEC and the CFTC both filed charges yesterday, actually, yes.
SPEAKER_01Oh, okay, cool. Thanks for the update. Um, I'll include a link in the show notes where people can learn more about that. What do you make of the charges that have been filed? And where do you think this goes next? You know, Sam Bank McFried is being held in the Bahamas. Obviously, the US will seek to extradite him. What do you see happening with all of that?
SPEAKER_00So the charges that were filed from the SDNY were interesting to me. They were sort of the standard slate of crypto crime charges in the sense that there was wire fraud, there was money laundering. Those typically are what you see when people do big crypto crimes. But there was also charges around campaign finance that you would not necessarily see. And I think those will be interesting to follow. I'll be very curious to see what happens there. And then we saw charges come out of the SEC and the CFTC. So the SEC was mostly looking at how he had lied to institutional investors around the operations at FTX and Alameda. The CFTC went a little more into the harm to consumers and what he was doing with consumer funds. They published a, I think their complaint is like 40 pages long and it is very detailed. Yeah. So anyway, that you know, so there's criminal charges from the US attorney, and then there's civil charges from the SEC and the CFTC. Both the Southern District of New York and this SEC have heavily implied that these are not the only charges that they plan to bring, and not necessarily the only person they intend to charge. So I think that will be really interesting to follow. As far as the extradition question, so Sammy McBreed is currently, as of recording at least, in a Bahamian jail. He and his lawyers requested that he be released on bail. Um, they were like, yeah, just $250,000 cash bail and an ankle monitor, and he will absolutely not go anywhere. They basically argue that because he had not yet run from the authorities, then he would not run, which I think maybe is a little bit hard to believe given that just before he was arrested, he said he didn't think he was going to be arrested. So, like, why would he even bother running at that point? Although you have to take him at his word that he truly didn't think about that possibility.
SPEAKER_01Didn't he say that to you directly?
SPEAKER_00Yes, he did. Yeah, in one of the Twitter spaces, I was trying to get from him why he was refusing to go to the Senate hearing and why he would not appear in person in front of the House. He was planning to appear virtually. And he, of course, gave this long answer about how they need me here in the Bahamas, even though he's not active at FTX. He has no access to the systems there, and the current executives at FTX are not even speaking to him. Like he is not involved at all. So I don't know what he is so desperately needed for in the Bahamas. Uh, he also said he was overbooked, and so he might not be able to appear at the Senate, even though his bookings are, you know, Twitter space interviews and playing his video games.
SPEAKER_01So I also read last night that his team is likely going to try to fight the extradition request when it does come.
SPEAKER_00Yeah, so that's that's another thing. So anyway, bail was denied, obviously. I think no one was super surprised when that happened. But yes, he has also said that he plans to fight extradition, which should be extremely interesting. It could drag on for a really long time. I mean, we've seen people try to fight extradition from the Bahamas before, and it's taken a year, you know. But Bloomberg did also just report on the conditions at the jail that he's in right now. So he's at this Bahamian jail called Fox Hill, which sounds like some sort of nice retirement home or something. You know, the name sort of sounds a little bit pleasant, but apparently it is not a great place to be. Not that any jail is a great place to be, but it is overcrowded and dirty and you know, things like that. And so, you know, the Bloomberg piece was sort of suggesting that he might feel a little bit differently about, you know, the possibility of extradition after spending some time there.
SPEAKER_01What do you make of the stories that have been reported in recent days that Carolyn Ellison was spotted in Manhattan? And I've also saw a story. Now it was the New York Post, so it might be full of shit, that she might have been cooperating with people against Sam Bankman Fried and had might have turned on him.
SPEAKER_00Yeah, so I've seen the same speculation on Crypto Twitter, which is the New York Post may actually be more reliable than Crypto Twitter, which is really saying something. Someone was able to get, you know, sort of a paparazzi photo of Caroline Ellison at a coffee shop in New York, and there was a dog at her feet who looked kind of like this dog that was in the office at FTX a lot. And so maybe that was her. And it does, in fact, look a lot like her, and she is fairly distinctive looking. And so, you know, the the speculation, you know, someone sort of pulled up Google Maps and was like, oh, this coffee shop is a 20-minute walk from the attorney's office in the Southern District of New York or something like that. I honestly think it is fairly likely that she would be cooperating. I mean, Sam Bakeman-Fried has been trying to throw her under the bus, not explicitly. You know, he's not saying it's her fault and he is sort of hand-waved at like, oh, I don't think she was doing anything malicious. You know, she had a very hard job. But, you know, he does keep saying basically that all of this malfeasance was happening at Alameda and he had no involvement with Alameda. And so the obvious next step in that line of thinking is that, well, then it would be Caroline Ellison who was running the show at Alameda. So, you know, she might be trying to get out in front of that. I will say, in her various online posts that have been discovered, some of which are not a hundred percent her, but they definitely seem a lot like her. She had sort of a Tumblr blog that was active and various other, you know, uh online accounts. She does come off as very individualist, you know, she seems to have her own interests at heart and maybe at the expense of others. That is sort of the impression that I have gotten of her. And so the idea that she might be willing to basically give them Sam in exchange for a lesser sentence or, you know, some sort of preferential treatment does not seem entirely far-fetched to me.
SPEAKER_01The entire polycule will have uh knives at each other's throats by the time this is all over.
SPEAKER_00In one of her alleged Tumblr posts, she made some long argument for how romantic relationships should be operated like Chinese harems, where all members of the polycule are ruthlessly fighting for top placement, like top priority, and that the polycule should be like ranked in order of you know preference or whatever. So, like the idea that she might just be cutthroat and throw the rest of the polycule under the bus, it's like, well, there is some reason to believe she might.
SPEAKER_01That fits, yeah, yeah. She's fighting to be at the top. Fair enough.
SPEAKER_00Yeah, she's gonna oust Sam Bankman-Fried for like the polycule primary.
SPEAKER_01Oh my god. So I guess before we close it off, in talking about what it looks like for the broader crypto industry, any final thoughts on the whole FTX thing that we haven't gotten to that, you know, I haven't thought to ask you about?
SPEAKER_00Yes, I think the one really important thing also to note, and Sam Bankman-Fried was really pushing on this, is he has been claiming that FTX US is solvents and that 100% of withdrawals could be processed today if they just flip the switch, basically. He's been saying that ever since the bankruptcy was filed. And I mean, it's not a believable claim to make. You know, he has been arguing that, oh, they were, you know, funds were completely segregated, everything was above board at FTXUS, which is like, how could you believe that given that funds were not even close to segregated at other portions of the business? And sure enough, during the congressional testimony with John J. Ray, the new CEO, FTXUS is not solvent. The customer funds were commingled, they are still trying to. Untangle how many connections there were between FTX US and Alameda. You know, so US customers at this point should be very concerned, I think, about their holdings. But it was a very convenient thing to be arguing because he was able to escape sort of the ire, I think, of some US-based customers who now should be wondering if they will ever see their money again, or if they do, how much of it and when. And so, you know, I think that's really something to note is that he was trying to claim that anyone in the US would be fine. I think sort of at the expense of other people outside of the US, it's like, well, if I don't, you know, make the Americans too angry, maybe they'll ignore the fact that I totally fleeced a bunch of people outside of the US. But anyway, I think the fact that that has now been exposed to be false is important to note.
SPEAKER_01Meanwhile, it seemed like he was also cutting deals to make sure that clients in the Bahamas were kind of protected, right?
SPEAKER_00Yeah, there's a lot of questions about what's happening over with the Bahamian regulators. During the congressional testimony, John J. Ray was saying that, you know, during these bankruptcies, they regularly have to collaborate with outside jurisdictions. And usually it's a pretty smooth process. People tend to be pretty cooperative. You know, everyone just wants the best for their specific citizens. And that in this case, he is having a lot of trouble with Bahamian regulators who seem to be uncooperative and maybe shady. And he is, I think, very concerned that Sam Bankman-Fried may have been operating in concert with Bahamian regulators to get preferential treatment for Bahamian citizens or for others who were withdrawing money briefly during a period where he re-enabled withdrawals. And so I think, you know, the fact that he is currently in custody in the Bahamas is probably concerning to a lot of US authorities because, you know, they would really rather have him here in the US where, you know, they are not having to worry about what is or is not happening in the Bahamas. So I think that will be very interesting to follow too. There's clearly a lot of political games happening where people are trying not to directly accuse Bahamas authorities of wrongdoing, but you can definitely see them implying it pretty heavily.
SPEAKER_01Yeah, no, absolutely. And so, you know, we started by talking about the broader crypto collapse that has been going on for the past year, basically, you know, that really, you know, I feel like November 2021 is kind of the marker for when this all kind of takes off and starts to go south. You know, you talked earlier as well about how some of these other collapses also created contagion effects, right? They affected other companies as well. So, what do you see happening with this crypto collapse going forward? But also, does FTX's particular kind of implosion also have consequences for other companies that are operating within the industry?
SPEAKER_00So FTX is, I would call it an explosion rather than an implosion because it has absolutely generated a lot of shrapnel. It has been pretty devastating on the crypto industry. Um, a lot of companies either had exposure to FTX or had holdings that they were sort of keeping on FTX for various reasons. There were lending firms, you know, there was specifically Genesis is a large crypto platform that had exposure to FTX. And there were a lot of crypto lenders who use Genesis as a counterparty in their lending programs. And so they are all facing major issues right now. There's questions around whether Genesis may have to declare bankruptcy, things like that. The contagion has been pretty extreme in the FTX case. And one thing that I think is important to note is if we look back at contagion from the Ray Euros Capital and the earlier sort of catastrophes of this year, there is a very long tail on that, where, you know, usually the company blows up. There's a couple of companies that were like on pretty thin ice and they sort of immediately have to declare bankruptcy, pause withdrawals, whatever it might be. But then there's sort of this trickle for a long time of companies that are able to keep things going for a little while, a couple of weeks, a couple of months, maybe. Meanwhile, in the background, you know, just trying to cut deals, they're trying to get loans, they're just sort of desperately trying to keep things going and eventually, you know, find themselves unable to do so. And I think we're gonna see that same long tail here where companies are currently, you know, trying to sort out deals, they're trying to get those loans, and it's not gonna happen. And they too have to shut down, go bankrupt, whatever it might be, run away with all the money. And so, you know, I think that's something to notice is that there are definitely people who are like, okay, FTX collapsed, a couple other things went under, now we're fine. This is the bottom, you know, everything is good now. We've weeded out all the fraud in the industry and we can rebuild. And it's like, oof, I would not be calling the bottom quite yet. Not that I try to, you know, predict the market, but I think this could keep going for a pretty long time.
SPEAKER_01Yeah, and and on that point, um, you know, I saw a story the other day that said that if if regulators or authorities go after Binance, then that could have consequences for the entire crypto industry. I believe it was someone from Binance saying that. So, you know, they're probably trying to stop action from happening. But do you think that's accurate? And do you think that seeing FTX explode, as you say, that there might be an attempt to go after Binance now as well?
SPEAKER_00Yeah, so a couple of things on that. So FTX was a huge player in the crypto industry, and you really can't overstate the impact that a company like that exploding has on the industry. But FTX was an order of magnitude smaller than Binance. And so Binance going under would be, I mean, unprecedented. It would be enormously detrimental to the crypto industry. There are sort of few companies that could explode and have more of an impact on the crypto industry than Binance, but the ones that could also probably have pretty strong exposure to Binance. And so a Binance explosion would be, I mean, it would be a sight to see. But, you know, we're starting to see in recent days and weeks some sort of signs of uncertainty at Binance, I guess. So there's like I mentioned earlier, there's been a uh pretty substantial number of withdrawals happening from Binance in the billions. They recently, yesterday, I think, had to pause withdrawals of USDC because they were like, our bank didn't, you know, isn't open. So they're clearly having to drum up some liquidity there to process those withdrawals. You know, it's important to remember that the bank run, quote unquote, is what has precipitated a number of insolvencies in crypto. You know, that is that can really cause a lot of things to come to the surface. But then there's the question of actual like investigations into Binance. So you're referring, I think, to the Reuters report about potential criminal charges against Binance executives, including CZ. Uh, there was a report that basically we've known for a little while that there's been an investigation into Binance and its executives around both money laundering and sanctions evasion. And the report said basically that there's a split at the DOJ and that some prosecutors think we should prosecute right now, we should file charges uh right now. And others think that they should keep going through the evidence for longer. Uh it is noticeable that it's not like some people think they should prosecute and some people think they shouldn't. It was like a question of when. Uh, but you're right.
SPEAKER_01Maybe not if, yeah.
SPEAKER_00Yeah, exactly. Like it didn't sound like there was much question there. But you're right that Binance's lawyers basically said that if you do this, it will ruin the crypto industry, which is kind of hilarious to me. You know, it's just like, oh no, don't stop our fraud because you'll ruin the fraud industry. But that was the argument that they're making. And they're not totally off base in the fact that some major action, like criminal charges from the US against Binance executives, could really kick off a major downturn in crypto, as though we've not already been in a major downturn in crypto. Binance also came up a couple of times at the recent hearings. Uh, so at the Senate hearing yesterday, there were questions around Binance, their involvement in the FTX collapse. And some senators are very concerned about Binance's potential ties to the CCP. That's something that CZ is very sensitive about. He is adamant that he is Canadian and not Chinese, even though he spent, you know, a substantial amount of his youth in China and his adult life in China. Binance was fine founded in China and then ultimately left the country for regulatory reasons. But he does not like it when anyone refers to Binance as a Chinese company or questions him about, you know, an employee who is listed on a lot of Binance's company documents, who is just some random low-level employee who is also Chinese. And he has basically come out and accused a journalist of xenophobia for asking questions about an employee who is Chinese. So, anyway, he very much denies that Binance is a Chinese company. It has any ties to the CCP, but there are some senators who are obviously very concerned about that. Uh, and I think some Congress people as well. So who knows what might come of those types of inquiries? But clearly Binance is under the magnifying glass at this point.
SPEAKER_01Obviously, I would love to see these Binance executives charged as soon as possible, and especially if that has broader consequences for the crypto industry. I think it was interesting in the House hearing, I believe it was yesterday as we're talking, where Hillary Allen was, you know, one of the people who was who was on the panel. I believe it was Kristen Cinema, you know, known corporate shill, was kind of going after her and saying, I heard that you want to ban cryptocurrencies. This would mean a lot more people would lose money, a lot more people who are investing in cryptocurrencies would lose money. And her response was kind of like, Yes, unfortunately, but I also need to think about the non-investors and trying to stop more people from from getting into this space and losing even more money, right? So, you know, obviously you were saying that these hearings have been ongoing for the past couple of days, that lawmakers seem to be taking a more active interest in cryptocurrency as all of these collapses have been happening over the past year. Do you think that the United States moves toward regulation in the near future? And if so, what do you think that looks like? Will they ban cryptocurrency as Hillary Allen would tell them to?
SPEAKER_00Yeah, so I mean, I think even Hillary Allen, who would love to see crypto banned, acknowledges that it's not likely that that would ever happen. That would be extremely politically controversial and also extremely difficult, I think, to actually implement. But, you know, that is sort of her general feeling. But she acknowledges that there are other steps that we could take as a country as far as keeping crypto really out of the traditional financial system, which is her major concern. She's very her area of expertise is basically financial stability. And so when she sees crypto, she sees a threat to, you know, the stability of the traditional financial system. Obviously, with FTX, you know, FTX exploded in a pretty incredible fashion. But people who are not involved in crypto, who don't have any exposure to crypto, are not noticing any difference. You know, it's not like the stock market crashed because crypto went under. There's not going to be some sort of government bailout like we saw in 2008. Average people are kind of just going about their lives with no real impact. They might see a headline or two, but that's kind of it. And she really credits banking regulations for that because banks are pretty limited in how they can gain exposure to crypto. And so her big push is that we should actually strengthen banking regulations to enforce that firewall. You know, she's seeing banks beginning to dip their toes into crypto in various ways. You know, we've seen large financial institutions like Fidelity and others come out sort of saying that they're experimenting with crypto in in various different products. And so she's really worried about that. And then she's also argued that all cryptocurrencies should be classed as securities and should be carefully regulated by the SEC, who she thinks needs to be given more resources. So, you know, that's kind of her argument for maybe a more feasible and achievable regulatory approach. I'll be curious to see how things play out over the next year or two in terms of that. It's been very difficult for crypto regulation, I mean any regulation, but for crypto regulation to pass any sort of stage of legislation at this point. The ones that have been put forward have been pretty poorly implemented or poorly written, I think, and not likely to gain that much support. Perhaps the most promising piece of regulation in the US that was put forward was the DCCPA, which was kind of Sam Bankman-Fried's pet piece of regulation. And so I think that maybe the popularity of that specific bill has probably tanked a little bit in recent months. And so there's not much out there as far as like promising regulation that I think might be passed in the near term. It's I think just a matter of what we'll see people draft in the not too distant future. But I think, you know, a big change would really just be to allow regulators or to encourage regulators to enforce existing regulations. And that's that's kind of what Hillary Allen suggested. And I largely agree with that.
SPEAKER_01Yeah, I believe one of the things that she was saying at the hearing was like, you know, you'll hear a lot from crypto executives talking about regulation these days, but usually what they're looking for is bespoke regulation that is, you know, kind of geared toward carving and kind of letting them do what they do with, you know, kind of legal protections effectively.
SPEAKER_00Yeah, there's kind of this refrain from the crypto industry that's like, we want regulatory clarity. Just give us clarity. If we just knew which regulations we needed to comply with, then all would be fine. But as soon as anyone suggests that maybe they should be regulated under the SEC's umbrella, it's like, no, no, no, no, no. You know, that would kill the crypto industry, it would quash innovation. And that's because they I think most crypto companies could not comply with the SEC uh requirements. And so that's exactly right. They want this very carefully tailored regulation that would require very little of them. Whether or not that's something they get, I think will really depend on how many crypto-friendly politicians they can acquire, uh, which has definitely been a major push by the crypto industry in recent years.
SPEAKER_01Absolutely. I wonder if you know the charges against Sam Bankman-Fried on campaign finance might uh put any kind of chill on that. Probably not, but we'll see.
SPEAKER_00Yeah.
SPEAKER_01We'll see. Yeah. So this has been a fantastic conversation. Sorry I kept you so long. I did want to close with one final question. You know, you talked about CZ saying that he's a Canadian. Vitalik, Buterin, of course, Ethereum, also Russian Canadian. A lot of Canadians involved in this industry and kind of pushing these ideas, unfortunately. And another one is Kevin O'Leary, who was also at that hearing the other day. You know, it's been kind of shocking for me to see how much Kevin O'Leary has really blown up in the United States, because, of course, before he was a media sensation down in the US, before he was a crypto shill and a paid spokesperson for FTX, he was up here in Canada, where he was on Dragon's Den, which is our version of Shark Tank, which preceded Shark Tank, of course. And he was also uh very close with the public broadcaster and even had a show on CBC News Network for a while called the Lang and O'Leary Exchange, where there was a business journalist and him commenting on business stories, and he was always giving the perspective of capital, why you need to crack down on workers, all these sorts of things, and every episode would end with a disclosure saying that his views did not represent the views of the public broadcaster, just to show how extreme they were. But for some reason they felt they needed to be connected with this guy. And then when he got on Shark Tank, he really started to blow up in the United States and get all this attention down there. And so it, you know, it's always kind of terrible to see your own local ghoul kind of go international and really blow up in this way. But he was at this hearing, you know, he's obviously been pushing a lot of kind of bullshit crypto narratives. What do you make of Kevin O'Leary? What do you make of his participation in this whole kind of crypto industry, the ideas that he's pushing, and it in particular his participation in this hearing where he was sitting next to Hillary Allen, a Cato executive person, and Ben McKenzie?
SPEAKER_00I think Kevin O'Leary can be pretty cheaply bought. That's kind of my impression of him, just in general. You know, he used to say that crypto was a big scam and he wanted nothing to do with it. And he changed his tune when $15 million was dangled in front of him by FTX. And suddenly he was very bullish on crypto, and crypto is the next big thing, and everyone should be putting money into it. Even yesterday at the Senate hearing, he was shilling his other investments in various crypto exchanges like WonderFi, which is a Canadian crypto exchange. He was like advertising for them at a Senate hearing, which is really gross. But honestly, I think that his appearance at the Senate hearing did not go very well. I assume he was invited by someone who is friendly to crypto, but he might as well have been invited by, you know, the various crypto-critical senators because he did a pretty great job of exposing some of the really unpleasant sides of crypto. You know, he was shilling the whole time. He tried to argue with Senator Warren on some point about how you shouldn't be angry at crypto because the US dollar is used for crime too, which she very reasonably refuted by saying, shouldn't that mean that crypto should be regulated like the US dollar and you know all these financial industries? And he was like, no, no, no, no. You know, it's just made him look silly. So my opinion really is that he got $15 million and that was enough to really change his tune. I also think that he likes to be in headlines as much as possible. And so the FTX collapse has been wonderful for him in that sense, even though he did presumably lose, you know, a couple million dollars. But I don't know, the whole time it felt like he was trying to sort of paint himself as the victim of the FTX collapse, which is just not a very attractive narrative for like anyone normal who lost money in FTX. Because like when a company like FTX explodes, most people are not feeling sympathy towards people like Kevin O'Leary, who have millions of dollars and can very much afford to lose a couple of those million.
SPEAKER_01Yeah, it's been a wonderful moment for Mr. Wonderful because he's got so much media attention and headlines, which is exactly what he craves, and which is the kind of thing that allows him to keep building his wealth and his reputation to make him seem like the great businessman in a similar way to, you know, Trump using media to craft that image of himself as well, right? Yeah, I hate the dude. I hate that he has had the success he's had in Canada and then kind of turned that into success in the States. Molly, it's been fantastic to chat. Again, sorry I kept you so long, but you know, this was just such a wild topic, so much to get into. Great to discuss it with you. Thank you so much.
SPEAKER_00Thanks for having me.
SPEAKER_01Molly White is the creator of Web3 is going just great, and a fellow at the Harvard Library Innovation Lab. You can follow Molly on Twitter at at MollyZeroxFFF. You can follow me at at ParisMarks, and you can follow the show at at TechWon't Save Us. Tech Won's Save Us is produced by Eric Wickham and is part of the Harbinger Media Network. And if you want to support the work that goes into making the show every week, you can go to patreon.com slash tech won't save us and become a supporter. Thanks for listening.