FTX Goes to Zero

Molly White


Paris Marx is joined by Molly White to discuss the ongoing collapse of the crypto industry, what to make of the implosion of FTX and Alameda Research, and what happens next with Sam Bankman-Fried.


Molly White is the creator of Web3 Is Going Just Great and a fellow at the Harvard Library Innovation Lab. You can follow her on Twitter at @molly0xFFF.

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Paris Marx: Molly, welcome back to Tech Won’t Save Us!

Molly White: Thanks for having me!

PM: Of course. You’re the creator of this fantastic website that has chronicled the scams, the frauds and the decline of the crypto industry over the past couple of years 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 this year we’ve obviously been experiencing 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, 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-Fried has been shut up. But he said a lot in the past few weeks before 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?

MW: That’s a great question. I think recently people have been referring to the FTX collapse as though it was sort of an isolated incident, or 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. That was early this sprin, and that was a major stable coin that completely lost its peg and the entire ecosystem that it’s built upon Terra, the stable coin, 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 there were a handful of bankruptcies that came out of that eventually, 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 been taking loans from basically everybody, as far as far as we can tell.

PM: I feel like the boys over at Crypto Critics Corner were really in on the Three Arrows Capital, paying really close attention to that one.

MW: For sure. They did some great reporting on that. 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 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 Alameda Research, which was a Sam Bankman-Fried enterprise, may have itself been in trouble earlier this year around the time of the Three Arrows Capital blow up. But obviously, we have no transparency into them. So we had no idea until recently when obviously it became clear that FTX had been boosting Alameda Research with the use of customer funds. So I think, you can really trace this back to much earlier this year.

PM: It’s interesting that you say that as well, because one of the things that we often hear about the crypto industry from boosters is that it’s very transparent, much more transparent than the traditional financial system. So we can see whenever there are difficulties or problems with any of these companies. But as you say, 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.

MW: Right. There’s this idea that 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 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, obviously, there are all these loans that are happening. A lot of this stuff is happening behind the scenes. And so, it’s really difficult to get a sense of how an exchange or any other crypto platform is actually doing, how many assets it has under control, what its liabilities are. And that’s partly why I think we really need to be looking for audits for these companies, because otherwise, there’s really no way of knowing.

PM: I guess we’ll get some degree of audit on FTX now, after everything has actually collapsed.

MW: Sort of a post-mortem audit [laughs].

PM: Yeah, they have that dude who worked on Enron, on that bankruptcy, who is now the CEO of FTX looking into everything that is going on. I was shocked that one of the things he’s said in his testimony the other day was that this massive kind of multi-billion dollar company — it was appraised at I think something like $32 billion, I think that was the combined of FTX and Alameda — was using QuickBooks for its accounting practices. It’s like, what?

MW: But honestly, QuickBooks is actually maybe better than what I expected. I just assumed it was a bunch of post-it notes in the background with 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 math. There is just total ballpark estimates happening.

PM: We’ll get to some of those balance sheets. But before we move on to FTX, and really dig into all of that, it has been a wild year. All of last year, basically, there were all of these narratives that the line was just going to keep going up, Bitcoin was going to go to a million dollars or whatever, all of these assets, were just going to keep growing. It was like: Put your money into it, because there’s no way that you can lose. And now, we’ve seen this general decline in trading volumes, in the values of these crypto assets. NFTs, of course, have plummeted. You can’t even access a lot of NFTs now that were through FTX’s platforms, because that kind of stuff has disappeared. 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 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 turning off that ability, because they need to get more money because this whole system has been in collapse. So 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 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 is like happened in this space?

MW: 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. 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 $1, it’s obviously only got up, as if people have not bought in to Bitcoin in the last year.

PM: I think Ben McKenzie was saying in his testimony yesterday that there was a report from Genesis, I believe, in some time in 2021 that said 55% of people had bought in last year. So that means that the vast majority of Bitcoin holders would have lost money or something like that.

MW: Exactly. A lot of this sort of late comers to crypto are in the red because they bought in at all time highs or 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 a way to build generational wealth. And they’re finding that, no, it really wasn’t. And, of course, the crypto industry party line is to just keep holding, it’ll go back up, as if people don’t need access to money at any point.

PM: When you’re were a Bitcoin whale, it doesn’t matter, you can keep holding.

MW: Exactly!

PM: You’re fine. If you’re Michael Saylor, don’t worry, you can — maybe. Maybe he’ll be forced to stop holding at some point.

MW: 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 retail buyers who are discovering the hard way that the number comes down sometimes. But a lot of these projects were basically predicated on the idea that the Bitcoin prices or crypto prices in general would sort of always trend upwards. And that’s partly what led to the initial decline in the Terra Luna project, for example. We saw hits 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 a hedge against inflation or it’s supposed to be a separate from stock market trends. 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 the Terra stablecoin eventually lost its peg when it 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 these 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, and there will always be more money flowing into the system. And as soon as that begins to change, we see just devastating impacts.

PM: No, very, very well-put. And 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. 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 into 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 with nothing, especially in this economy in this society, that 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 and even doing something like that, then really, you’re left very hopeless. And these people who are at the top of this industry, who are at the top of these companies really preyed on that 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.

MW: Right. I think that’s something that is really important to notice about the recent failures, or the failures over the last year. People will broadly talk about the crypto industry as volatile, as 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 stable coin project was a stable coin. The idea was that you are not going to be exposed to the volatility in assets like Bitcoin, if you put your money into a stable coin, 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 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 a Ponzi scheme. But people were very much 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 can’t trust regular banks, but you can trust us, we’re safer than 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 bank with insurance, and that would be protected from a collapse. And then with FTX, they had these big commercials that football games, the Super Bowl that they were referring to themselves as the safe place to put your crypto.

And so for people who might have wanted to get into crypto didn’t want to be speculating on Dogecoin, and these meme coins and all these moon shots that people think of when they think of the crypto industry. There was actually a separate group of people who were looking for the returns, but understood to some extent that crypto is risky. And so they tried to find this safer way of putting money into the system, and they ended up getting burned really badly. And I think something that really offered a lot of insight into the types of people who were doing this was the letters to the judge in the Celsius and the Voyager bankruptcies. We saw individual customers writing in and saying that they had put their money into this project. They believed it was as safe as a bank account. 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 Etherem. 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 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 retirees or single parents or people who are supporting family members with medical issues. It was not the crypto moon boy stereotype of someone who was taking extra money that they probably weren’t relying on and hoping to make a outsized return with it. It was money that they could not afford to lose.

PM: It’s such an important point. And just to be clear when you’re talking about FDIC insurance, this is the insurance that people have when they set up a bank account. That’s what it’s called in the US and other countries would be called something else. Basically, it ensures that if the bank goes under, up to a certain amount of money, the government will give you your money back. 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 their into their company. And as you’re talking about with FTX, from what I have read and heard in keeping up with this, FTX was considered one of those platforms that was trustworthy. There might have been these other ones that were more risky, but FTX was put together well. It was 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 promoting crypto as something you could trust, and FTX as 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 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.

MW: I think that’s true. That was absolutely a major part of FTX is marketing strategy. They were trying to mainstream themselves as much as possible. So they bought naming rights to an arena. They had Tom Brady and Larry David do commercials for them. People, I think, believe if they see a Superbowl commercial for something think: How could it possibly be a fraud? How is that even possible? And so 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 dressed and that clearly did not turn out to be the case.

PM: Absolutely. Now, let’s dig into this larger FTX collapse. Where would you put the beginning moment of this whole saga?

MW: So 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 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. He was always pretty closely involved in Alameda. And so the discovery of this enormous relationship and reliance between the two companies really started to concern some people. And then shortly after that, there was a tweet by CZ, who’s the CEO of Binance, which is the largest crypto exchange in the world, and obviously, a huge competitor to FTX. 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 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. It’s really cagey about where is it even located. 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 realize 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 went through assets from FTX and people who held the FTT tokens 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 — 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’s 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.

PM: As you’d expect, right? It’s fascinating to see how the revelation of these kinds 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 Caroline Ellison around that time as well saying like: Yeah, sell them. It won’t make any difference to us or something like that. Clearly, that was not the case. It was a bluff.

MW: Right. 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: 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 finel we’ve got all these assets, no worries. He 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 it was all denominated in FTT, or 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 Wile E. Coyote runs off the cliff, and he’s just like running along in midair, and then he looks down, and suddenly he plummets off the cliff. And that’s sort of what happened here. It’s like suddenly, people realized that this whole thing, that there was no ground under it. And so then everything fell apart.

PM: Wild, wild. So these documents come out on November 2nd 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 “bank” run or exchange run 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, for a little while, seems like it’s going to buy FTX and then kind of pulls out of that. Can you talk us through what went on there?

MW: So Binance, there was a sudden change where first Sam Bankman-Fried was saying: We’re fine, don’t worry about it. He was suggesting maybe that CZ was trying to sabotage FTX. And then the next day, he says: All right, Binance is going to buy us; everything’s going to be great. He is a little bit apologetic, obviously, that things were falling apart. But he’s like: Thank you by Binance for all of this.

PM: And withdrawals from FTX are frozen around this time as well, right?

MW: Yes, I think they were frozen before the Binance announcement, but I don’t fully remember that off the top of my head. And CZ put out a tweet to confirming that by Nance was planning to acquire FTX I remember noticing at the time that he was very cagey in the language. He said that it was a non-binding letter of intent, that it was all contingent on due diligence, and I was like: Oh, that doesn’t seem great. And sure enough, like a day later, CZ announced: Sorry, we’re not going to do this, we looked into the financials, it’s just not going to work. I was really skeptical that CZ ever actually intended to go through the purchase. 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, and we can just buy out this huge crypto exchange, no problem. We’ll save the world; we’re the good guys. And then backing out of it had no real downside for them. They could say that: Oh, we did our due diligence — 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.

PM: It must be good for Binance though. You say Binance is this quite quite shady company but is also the largest crypto exchange in the world. FTX, I believe, was the second largest. Is that correct?

MW: It was, at the time.

PM: Of course — not anymore. But it must be really good for Binance, then to have their largest competitor have these revelations made a made about it, be able to kind of help take them down, to pretend to be helping them out and then be like: Oh, actually, sorry, 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, talking about crypto being this kind of decentralized place where power is everywhere, that it’s against centralization, but now Binance takes us even larger role, it seems within the crypto industry.

MW: Right. I think that is true to some extent that Binance definitely benefited here. They are seen as the remaining giant crypto exchange. But I think also it’s worth noting that this collapse does hurt Binance as well. And so there were some people — 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 Machiavellian, 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 I think I have some skepticism around the idea that CZ was sort of pulling all the strings here. 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’s sabotage, it wasn’t me; 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 Bankman-Fried seems to think.

PM: Of course. And so, 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. So this is a series of events that happens really quickly. What have we learned in the time since then or even as that was happening, what have we learned about what FTX was actually doing that caused this whole collapse to effectively have happened?

MW: So 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 the cardinal sin of an exchange. 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 sorts of risky bets, but they’re just 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.

PM: And I believe in FTX’s own Terms of Service it said that they would hold people’s assets there, and they would not transfer them anywhere.

MW: Absolutely. They said that your assets are not going to be used for trading, we’re not going to lend them out — nothing like that. We’re just going to 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 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. $100 million dollars 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. 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 appears as though they were coming from specific individuals rather than one individual or the company in violation of campaign finance regulations.

PM: Right. And there’s been a big focus since this has all gone down by people like Elon Musk, for example, about how Sam Bankman-Fried was donating to Democrats, and so, 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-Fried said 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 hide the Republican funds. To you, 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. It seemed like it wasn’t doing a very good job of choosing where to 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 quite inept in running these major companies? What’s your kind of take on the people who are at the top here?

It’s a great question. Because Alameda from what we’re beginning to see it, it was looking like Alameda Research was losing money at a time where it was really hard to lose money. 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 leveraged 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 that should not have been happening pretty much. Losing money earlier this spring — everyone was losing money, and especially the trading firms that were involved in these really leveraged trades. They all blew up, we saw it earlier with Three Arrows Capital, and there were a handful of others.

MW: So, the fact that Alameda didn’t blow up at that time was also a little bit strange. 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 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 I think the question really is what was happening there? Why were they losing money? Why were they evidently making these really questionable trades, especially when these were 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. Even though Sam Bankman-Fried seems to sort of be trying to go with that story these days.

PM: I want to talk a bit about Sam Bankman-Fried and Caroline 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?

MW: I 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’s going on in Alameda. All of those loans that were happening to individuals. He was like: Oh, boy, that’s weird, I didn’t know about.

PM: This chat group we had called Wire Fraud. I knew nothing about that.

MW: Right. He didn’t think that existed. He’s like: I certainly wasn’t a part of it. Now it’s coming out that the loans had his name on them. So probably, you had some idea it 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 $8 billion in it as though it was just like change that you’ve lost in your couch cushions. So I think it’s really important to sort of notice that he’s been trying to sort of claim that he had no idea what’s going on. And just something that to keep in mind when we sort of talked about what he was directly involved in.

PM: It’d be all right to route around in the in the couch cushions and pull out a few billion dollars.

MW: 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?

PM: All the time, all the time [laughs]. So, 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, as things have been revealed about them, some of them kind of sensational and those are the things that people just love to grab on to that also, I don’t know, they seem like very weird people. So who is Sam Bankman-Fried? And who is Caroline Ellison? And what are some of the key details that we know about these people that are important to know?

MW: Sam Bankman-Fried is about 30 years old. So he’s pretty young, as far as all these things go. He graduated from MIT and people sort of view him as this boy genius, pretty smart guy. He definitely portrayed the disheveled nerd persona pretty strongly. He always had sort of untidy hair. He wears 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.

PM: Let’s just forget about the massive compound he had in the Bahamas.

MW: 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.

PM: It makes me think about the stories of Elon Musk lives in this really cheap, shitty house and it’s like, but he’s staying in his friend’s big mansion as well. What are you talking about?

MW: I 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 prestigious university background. I think she went to Stanford.

PM: Those Stanford alums.

MW: Yes, I know.

PM: Apologies to the listeners who went to Stanford, you must know the reputation your university.

MW: You can’t really avoid the fact that some not so great people went to Stanford. Although I guess some not so great people went to all kinds of universities.

PM: Totally, but we’re talking about tech here.

MW: Exactly. Storied history there.

So 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 popular among some circles, I guess, in Silicon Valley, and tech in general. There are a couple of different kinds of forms of Effective Altruism. The one that they sort of ascribe to is, 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.

PM: This is called to earn-to-give of course.

MW: 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 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 is 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 that it was a very interesting story of this guy who was making billions and then giving it all away and it was sort of this fun profile to write I think. Now 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.

PM: It’s fascinating. I spoke to Émile 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. It 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 McCaskill is one of these people who really is a big promoter of Effective Altruism, longtermism 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: 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. Because this was a moment when earn-to-give was really kind of popular really was the thing that they were really pushing.

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 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 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 longtermism or Effective Altruism or whatever. Sam Bankman-Friedwas 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 Ponzi’s 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 to kind of clean up the image of Effective Altruism because it’s been 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 altruists. He was really not buying into these sorts of things to say 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 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. So it’s really about kind of maintaining this existing power structure.

MW: 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 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, 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. This is a very common talking point in crypto. Although not all of them go into 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 that the point about effective altruists trying to sort of distance themselves from Sam Bankman-Fried, saying 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. It’s like: Oh, well, he’s not really an effective altruist, he’s not really a crypto guy. FTX wasn’t crypto. It’s very convenient for them to be able to say this isn’t our problem. This is just one guy. We’re seeing a lot of these like ‘Oh, he’s just a bad apple’ type of claims being made as though this isn’t like the millions crypto explosion that we’ve seen this year. So it’s just something to notice — the idea that he was just one particularly fraudulent dude is maybe worth questioning.

PM: Of course and Kelsey Piper at Vox, of course has been has been pushing this narrative a lot. She did an interview where she went right into Sam Bankman-Fried’s DMs and 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 responses. And then she published this as a story and he kind of came out and said: I didn’t know that this was going to be a story. I thought it was just like kind of talking to someone that I knew. Okay, no empathy for Sam Bankman-Fried here, but it did feel a little kind of not cool.

MW: I do sort of question Sam’s judgment there because he was talking to someone he knew was a journalist, and he had given to her in the past. But he was clearly talking in a very unguarded way. And Kelsey Piper, I think is an effective altruist herself. And so, it definitely came off as a little bit self-serving to be able to publish these DMs, where he was claiming that it was all just an act. I’m not really as into Effective Altruism, as I claim to be it was just for press, because then, you know, the effective altruists could say, look at these, you know, he was just using our good name, and oh, look what’s he’s done.

PM: And of course, Kelsey Piper is an effective altruists, 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. Caroline Ellison — I feel like we don’t need to talk so much about her. There was a story that was published in Forbes, I believe, that really went into some of her history, basically saying that she really liked Harry Potter, she was into polyamory and dabbled in race science as well.

MW: Just a little race science [sarcastically].

PM: Just to give the few little notes there. But, since this all happened, Sam Bankman-Fried hasn’t been able to shut up, as we were saying until very recently, when he was finally arrested. You even got to ask him some questions on Twitter Space recently. What did you make of the narrative that he was trying to spin about all of this in all the interviews that he was doing?

MW: He 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 he couldn’t even get access to some of his own bank accounts or his own online accounts. And that was just so mean of them.

PM: So mean of them! [laughs].

MW: And 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. This was very much the story he was telling. And he was saying: Oh, I fucked up. I clearly wasn’t as on top of what was happening at FTX, as I should have been, at Alameda as I should have been. He kept saying that I became less grounded. And he started talking about how he would 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. There was clear involvement from FTX, or from SBF directly in a lot of the things that were happening. He was very involved in the day-to-day operations of FTX and of Alameda. He was the CEO, he clearly should have had knowledge of what was happening, and did. He set up these companies and was the one who implemented some of the systems that led to the frauds that were happening. But it was very much in his interest to try to spin this narrative that it was just a big oops. And he’s so very sorry. And if you 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 — 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 pretty big interviews. He went on Good Morning America, he did New York Times DealBook. And so he was speaking to people but he was carefully choosing, I think interviewers who could ask questions and who appeared to be 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 really trace some of the very circuitous answers that he gives on things and say: Wait a second, 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 he’s just league smarter than you are, of course, but also B., that he had no idea what’s going on. And so when it came to interviews with CoinDesk, for example, I think he was dodging. In some of these Twitter spaces, he would get ambushed by various experts.

There’s a researcher named Coffeezilla — that’s his pseudonymn of course — and Coffeezilla ambushed him three times on different Twitter spaces. In 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 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. And he was also dodging anyone in 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 a House hearing. He declined to go to the Senate hearing. Ultimately, he did eventually agreed to testify in front of the House. 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.

PM: I’m sure they could have brought in a little laptop and some internet to let him.

MW: That’s what I thought, come on!

PM: Put him in one of those rooms.

MW: Some of the Congress people were actually quite annoyed that he had been arrested because 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 Bankman-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 I think a lot of these interviews really need to be taken with a grain of salt because he was saying things are out that were very self-serving and may have been just complete lies.

PM: There was a headline in Vice’s Motherboard that I thought really captured it for me. And they wrotel, Sam Bankman-Fried is trying to find the guy who did this,” as though he is not the guy who did this.

MW: I don’t know who writes the headlines over at Vice Motherboard, but they are some of the funniest headlines. And they’re so good.

PM: They’re fantastic. So as you said Sam Bankman-Fried has obviously been arrested now. He is in a Bahamanian jail, at least as we record this when it goes live, maybe something else will have happened. The US court in New York Southern District has filed charges against him. I believe that the SEC is also planning to file charges against him.

MW: The SEC and the CFTC both filed charges yesterday, actually, yes.

PM: Cool. Thanks for the update. 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 Sam Bankman-Fried is being held in the Bahamas, obviously, the US will seek to extradite him. What do you see happening with all of that?

MW: So 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. And 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, I think their complaint is like 40 pages long and it is very detailed. So anyway, there’s criminal charges from the US Attorney and then there’s several 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 Sam Bankman-Fried is currentl, as of recording at least in Bahamian jail. He and his lawyers requested that he be released on bail. They were like: Yeah, just $250,000 cash bail and an ankle monitor, and he will absolutely not go anywhere. They basically argued 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 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.

PM: Didn’t he say that to you directly?

MW: Yes, he did. 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. He is not involved at all. So I don’t know what he is so desperately needed for in the Bahamas. He also said he was overbooked. And so he might not be able to appear at the Senate, even though his bookings are Twitter space interviews and playing his video games.

PM: I also read last night that his team is likely going to try to fight the extradition request when it does come.

MW: So that’s another thing. So anyway, bail was denied. Obviously, I think no one was super surprised when that happened. But he has also said that he plans to fight extradition, which should be extremely interesting. It could drag on for a really long time. We’ve seen people try to fight extradition from the Bahamas before. And it’s taken a year. 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 nice retirement home or something. 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 so, you know, the Bloomberg piece was sort of suggesting that you might feel a little bit differently about the possibility of extradition after spending some time there.

PM: What do you make of the stories that have been reported in recent days that Caroline Ellison was spotted in Manhattan? And I 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 might have turned on him.

MW: Yes, I’ve seen the same speculation on crypto Twitter. The New York Post may actually be more reliable than crypto Twitter, which is really say anything. Someone was able to get 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 that 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 the speculation, you know, someone sort of pulled up Google Maps and just 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. Sam Bankman-Fried has been trying to throw her under the bus. not explicitly. 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 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 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 100% her but they definitely seem a lot like her. She had sort of a Tumblr blog that was active and various other online accounts. She does come off as very individualist. 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 some sort of preferential treatment does that seem entirely far fetched to me.

PM: The entire polycule will have knives at each other’s throats by the time this is all over.

MW: In 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 preference or whatever. So like the idea that she might just be cutthroat and throw the rest of the polycule under the bus, there is some reason to believe she might.

PM: That fits. She’s fighting to be at the job. Fair enough!

MW: She’s going to oust Sam Bankman-Fried for the polycule primary.

PM: Oh, 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 I haven’t thought to ask you about?

MW: Yes, 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 solvent and that 100% of withdrawals could be processed today, if they just flipped the switch. Basically, he’s been saying that ever since the bankruptcy was filed. And it’s not a believable claim to make. He has been arguing that: Oh, funds were completely segregated; everything was above board and FTX US, 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, FTX US is not solvent. The customer funds were comingled. They are still trying to untangle how many connections there were between FTX US and Alameda. 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 the ire 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 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 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 as important to note.

PM: Meanwhile, it seemed like he was also cutting deals to make sure that clients in the Bahamas were kind of protected.

MW: 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. 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 the fact that he is currently in custody in the Bahamas is probably concerning to a lot of US authorities, because they would really rather have him here in the US where 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 to 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.

PM: Absolutely. And so we started by talking about the broader crypto collapse that has been going on for the past year, basically. I feel like November 2021 is kind of the marker for when this all kind of takes off and starts to go south. You talked earlier as well about how some of these other collapses also created contagion effects. 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?

MW: So FTX is — I would call it an explosion rather than an implosion because it is absolutely generated a lot of shrapnel. It has been pretty devastating on the crypto industry and a lot of companies either had exposure to FTX or had holdings that they were keeping on FTX for various reasons. There were lending firms. There’s specifically Genesis that is a large crypto platform that had exposure to FTX and there are 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. 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 Three Arrows Capital, and the earlier sort of catastrophes of this year, there is a very long tail on that where usually the company blows up, there’s a couple of companies that we’re 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, just trying to cut deals, they’re trying to get loans, they’re just sort of desperately trying to keep things going. And eventually, they find themselves unable to do so. And I think we’re gonna see that same long tail here, where companies are currently trying to sort out deals, they’re trying to get those loans, and it’s not going to happen, and they, too, have to shut down go bankrupt, whatever it might be — run away with all the money. And so, 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, and now we’re fine. This is the bottom. 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 predict the market. But I think this could keep going for a pretty long time.

PM: And on that point, I saw a story the other day that said that 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 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?

MW: 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 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, then binance. But the ones that could also probably have pretty strong exposure to Binance and so a Binance explosion would be I mean, it won’t be a sight to see. But we’re starting to see in recent days and weeks, some sort of signs of uncertainty at Binance. So there’s, like I mentioned earlier, there’s been a 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 isn’t open. So they’re clearly having to drum up some liquidity there to process those withdrawals. It’s important to remember that the “bank run” is what has precipitated a number of insolvencies in crypto. 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 finance executives, including CZ.

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 with 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 right now and others think that they should keep going through the evidence for longer. And it’s noticeable. That is not like some people think they should prosecute, and some people think they shouldn’t. It was like a question of when. But you’re right. Yeah. Yeah, exactly. Like it didn’t sound like there was much question there. But you’re right, that finances lawyers basically said that if you do this, it will ruin the crypto industry, which is kind of hilarious to me. 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 if we’ve not already been in a major downturn in crypto.

Binance also came up a couple of times at the recent hearings. So that the Senate hearing yesterday, there were questions around finance 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’s adamant that he is Canadian and not Chinese, even though he spent a substantial amount of his youth in China and his adult life in China. Binance was 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 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, and I think some Congress people as well. So who knows what might come up those types of inquiries. But clearly Binance is under the magnifying glass at this point.

PM: Obviously, 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 Hilary Allen was one of the people who was who was on the panel. I believe it was Kyrsten Sinema, known corporate shill, who 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 getting into this space and losing even more money. So, 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 Hilary Allen would tell them to?

MW: So I think even Hilary 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 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. Her area of expertise is basically financial stability. And so when she sees crypto, she sees a threat to the stability of the traditional financial system. Obviously, with FTX, 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. It’s not like the stock market crashed because crypto went unde. There’s not going to be some sort of government bailout, like we saw in 2008. Average people are 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 and how they can gain exposure to crypto. And so her big push is that we should actually strengthen banking regulations to enforce that firewall.

She’s seeing banks beginning to dip their toes into crypto into in various ways. We’ve seen large financial institutions like Fidelity and others come out saying that they’re experimenting with crypto and 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 that’s 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 regulator — 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 DCPA, 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 promising regulation that I think might be passed in the near term. It’s just a matter of what we’ll see people draft in the not too distant future. But I think 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.

PM: I believe one of the things that she was saying at the hearing was like: 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 geared toward carving and kind of letting them do what they do with legal protections, effectively.

MW: 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 umbrella, it’s like: No, no, no, no, that would kill the crypto industry! It would quash innovation! And that’s because, I think, most crypto companies could not comply with the SEC 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, which is definitely been a major push by the crypto industry in recent years.

PM: Absolutely. I wonder if the charges against Sam Bankman-Fried on campaign finance might put any kind of chill on that? Probably not.

MW: We’ll see!

PM: We’ll see! So this has been a fantastic conversation. Sorry, I kept you so long. I did want to close with one final question. You talked about CZ, saying that he’s a Canadian, Vitalik Buterin, and 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 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 capitol, 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’s always terrible to see your own local goul go international and really blow off in this way. But he was at this hearing — 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 in particular, his participation in this hearing where he was sitting next to Hilary Allen, a Cato executive person and Ben McKenzie?

MW: I think Kevin O’Leary can be pretty cheaply bought. That’s kind of my impression of him just in general. 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 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 the various crypto critical senators because he did a pretty great job of exposing some of the really unpleasant sides of crypto. 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 to 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. It just made it 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 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 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.

PM: 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 Trump using media to craft that image of himself as well. 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 this was just such a wild topic, so much to get into. Great to discuss it with you. Thank you so much!

MW: Thanks for having me.