Speaker 1: Hello, and welcome to another episode of the All Thoughts Podcast.
Speaker 1: I'm Tracy Alloway and I'm Joe wisn't Tracy? Obviously, the
Speaker 1: big story, which we haven't talked about yet, is the
Speaker 1: collapse of the crypto Exchange ft X and the broader empire,
Speaker 1: which was built by Sam Bankman Freed, which includes a
Speaker 1: trading shop alimeter research. That's right. It has been really
Speaker 1: a stunning two weeks for the industry, in part because
Speaker 1: Sam Bankman Freed, or SPF as he's frequently referred to,
Speaker 1: had become arguably the face of crypto. He was highly
Speaker 1: influential in d C, he was a donor to numerous
Speaker 1: nonprofits and politicians, wildly rich, and of course we have
Speaker 1: interviewed him a number of times on this very podcast, right,
Speaker 1: so the last time we interviewed him it had already
Speaker 1: become something of an infamous episode. We're joined by our
Speaker 1: colleague Matt Levine, and during that conversation that he described
Speaker 1: much of defy or at least the concept of yield
Speaker 1: farming in a matter that sounded a lot like a
Speaker 1: Ponzi scheme. And of course he didn't describe f t
Speaker 1: X or l AMDA his own business as a ponzi exactly.
Speaker 1: We're still learning details about how it all collapsed. Nonetheless,
Speaker 1: in the wake of this implosion, I don't think there's
Speaker 1: any doubt that those comments are seen as just a
Speaker 1: massive red flag, right, And as you mentioned, this is
Speaker 1: all moving very very fast. It is a gigantic, really
Speaker 1: sprawling story that ranks up there with some of the
Speaker 1: biggest corporate disasters and potentially frauds of all time. And
Speaker 1: given its size and speed, it's a little tough to
Speaker 1: do a complete overview of the story right now. There's
Speaker 1: already been a lot that's been written about it and
Speaker 1: reported on at multiple media outlets, So we're going to
Speaker 1: try to do things a little bit differently. We're going
Speaker 1: to try to break things up a bit. First, today,
Speaker 1: we are going to be speaking with a market participant
Speaker 1: who used f t X and was caught out in
Speaker 1: the scandal. And then we'll be speaking to a whistleblower
Speaker 1: who was among the first to sound the alarm at
Speaker 1: something actually being wrong at f t X and Alameda, right,
Speaker 1: And then we're going to be doing a follow up
Speaker 1: episode tomorrow with Matt Levine where we'll try to understand
Speaker 1: more about what's happened and what is currently going on
Speaker 1: right now in the wake of the collapse. But for
Speaker 1: now we want to start with the gunny guy. Avoid
Speaker 1: here's the founder and CEO of Winter Mute, which is
Speaker 1: the largest crypto market making operation. It had been very
Speaker 1: active on f t X and he's going to help
Speaker 1: us understand a little bit more about f t X
Speaker 1: and Alameda's role in crypto market structure. So if Jenny,
Speaker 1: thank you so much for coming on the Odd Lots podcast.
Speaker 1: What do you tell us? What do you do and
Speaker 1: what is Winter Mute? Yeah, Hi, thanks for having me. Um, Yeah,
Speaker 1: I guess very quickly about the Wintermute one of the
Speaker 1: largest crypto market makers. We've been at since the Southern
Speaker 1: suventeen and I think at this stage basically is the
Speaker 1: largest the native market maker after Salamat's device. It's it's
Speaker 1: an interesting way to have to grow the ranks with
Speaker 1: all the with all that's going on, but basically we
Speaker 1: our businesses across centralized exchanges, decentralized exchanges have been active
Speaker 1: and defie since two thousand nineteen, and of course or
Speaker 1: to see as well. So it's a lot of different
Speaker 1: diversified activities. We are training billions dollars per per day
Speaker 1: on all kinds of venues and in general very deeply
Speaker 1: intertwined with the crypt taker system. Can you explain that
Speaker 1: a little bit further? What does a market maker in
Speaker 1: crypto actually do? And what is your business relationship with
Speaker 1: the various exchanges like f TX. Yeah, on centralized exchanges,
Speaker 1: that's fairly similar to how it works and traditional finance.
Speaker 1: We basically provide bits and offers all great nuclear so
Speaker 1: that people get access to liquidity. When it kin comes
Speaker 1: to like how we work with different exchanges, There's are
Speaker 1: no formal contracts as such. It's basically us creating an
Speaker 1: account just like everyone else, institutional accounts of like everyone else,
Speaker 1: and and then effectively sent orders via APIs that exchanges proved,
Speaker 1: so you mentioned they. You know, you've sort of grown
Speaker 1: in market share since the collapse of Lamet, which was
Speaker 1: a competitor. Can you talk about prior to the implosion
Speaker 1: of f t X and elmet, which of course will discuss,
Speaker 1: what was your understanding and what was your view of
Speaker 1: the f t X L meter relationship. I guess yeah,
Speaker 1: I mean alla meta part was pretty shocking because basically
Speaker 1: pretty much everyone in the industry, including myself, assumes that
Speaker 1: Alometer has been writing running a pretty big and successful
Speaker 1: operation across centralized and decentralized exchanges. For example, we've seen
Speaker 1: them being very active on Serum, the Solana Native decks.
Speaker 1: We suspected that they have a pretty decent market share
Speaker 1: on ft act itself, despite actually not being able to
Speaker 1: confirm it or denied, simply because one of the great
Speaker 1: things that was about FC access that they had a
Speaker 1: leaderboards for volumes and they were pretty public being there
Speaker 1: and saying that they have InterMute is whatever number it
Speaker 1: or number three or like whatever depends on the months,
Speaker 1: but you will would never see lamed in there, which
Speaker 1: was kind of annoying. But yeah, we kind of got that,
Speaker 1: and not everyone wants to show the presence his publicly
Speaker 1: is with it. And now I'm thinking, okay, probably the
Speaker 1: market chair was either very big or maybe potentially very small,
Speaker 1: but more likely very big because like one of the
Speaker 1: main because like I guess the main question is given
Speaker 1: the size of the whole that f t X faces
Speaker 1: and that they lend money to al Ameter, somehow they
Speaker 1: managed to lose those those billions, and one of the
Speaker 1: one of the ideas that's traveling around crypto Twitter is
Speaker 1: basically they were just very bad market maker, I guess
Speaker 1: because they were kind of forced to probably quit it
Speaker 1: an f t X and they basically lost of money
Speaker 1: over the years supporting that liquity. What was your experience
Speaker 1: of last week, Like when did you first think, oh,
Speaker 1: something is happening here. I saw you were quite early
Speaker 1: about pulling your money out of FTX dot US, but
Speaker 1: some of it is stuck in f t X, the
Speaker 1: international exchange. Like what exactly was your experience of the
Speaker 1: past ten days or so? Yeah, I guess when it
Speaker 1: all started with the z twits and when like the
Speaker 1: first withdrawals started in f t X, we basically withdrew
Speaker 1: roughly half of our capital simply because we basically our
Speaker 1: initial assessment was exchange is going to be fine, but
Speaker 1: it might be struggling with withdrawals for sometimes. So it's
Speaker 1: just not smart to look so much so much of
Speaker 1: our capital over there, because like the way we operate,
Speaker 1: we have a number of exchanges that we consider to
Speaker 1: be safe. That's where like we basically have a pool
Speaker 1: of capitals that we keep rebalancing across different exchanges. And
Speaker 1: also decentralized exchanges, so block chains, and we have a
Speaker 1: number of exchanges which considered safe and we basically park
Speaker 1: excess capital there every nouncer because it's quite easy, like
Speaker 1: an fc X was one of them, like great things
Speaker 1: that was about. Another great thing that was about fc
Speaker 1: access that you could actually like very different stable coins
Speaker 1: again versus each other. So it was it was a
Speaker 1: very neat exchange to park the cash on. But once
Speaker 1: we realized that, yeah, it might be that they may
Speaker 1: be close withdrawals for a bit, maybe maybe they just
Speaker 1: be super swamped with withdrawal requests, so it's just not
Speaker 1: great to have our capital on it. So we kind
Speaker 1: of stopped doing that and we decreased it. But the
Speaker 1: initial assessment was, yeah, we want to keep some capital
Speaker 1: on because it's going to be great, great trading with
Speaker 1: all this moilutility, Yeah, which turned out to be not
Speaker 1: not very great. I want to go back to something
Speaker 1: you said about maybe l meter or just bad market makers,
Speaker 1: or maybe they were bad market makers because they were
Speaker 1: the official or the unofficial in house, like did the
Speaker 1: provider at f t X. I believe and correct me
Speaker 1: if I'm wrong. I believe that prior to all of this,
Speaker 1: say like prior to this month or whatever, there was
Speaker 1: a perception that LAMA had an unfair advantage in its
Speaker 1: trading by dint of its relationship with f t X.
Speaker 1: In other words, that it was very profitable but only
Speaker 1: because it had some sort of relationship with f t X.
Speaker 1: Did you have that perception beforehand that it gave an advantage,
Speaker 1: and now do you sort of view this other side
Speaker 1: that essentially the relationship actually made it harder for ELMA
Speaker 1: to make money. I guess my perception was that Alameda
Speaker 1: was not really market making an f t X to
Speaker 1: make the liquid it's bigger simply because like, there's enough
Speaker 1: market makers and ft X like. It was probably the
Speaker 1: second biggest exchange in primitives at some point, and honestly,
Speaker 1: there was no need for somebody to well, some for
Speaker 1: some internal market making desk to provide this liquidity too.
Speaker 1: So I was always thinking, okay, if they would be
Speaker 1: losing money and that they would just pull off and
Speaker 1: let others do their job, because yes, there is there
Speaker 1: are enough crypto market makers to fill in, and so
Speaker 1: my assumption was barely the advantage that would be getting
Speaker 1: would be from basically realizing some synergies between like ft
Speaker 1: X listings for example, like especially I think it was
Speaker 1: especially apparent on Slana where alamido ft X with investing
Speaker 1: the protocols and then protocol would pretty much immediately get
Speaker 1: listed an f t X and basically, since Alameda would
Speaker 1: have well hising inventory of tokens or barely better knowledge
Speaker 1: about like how all this stuff works, they would be
Speaker 1: just better position to make money out of it. And
Speaker 1: that that to me sounded like a pretty good money
Speaker 1: making machine, and that that was one of the reasons
Speaker 1: I kind of expected them to print billions last year
Speaker 1: and maybe you know, just losing some of the venture
Speaker 1: positions this year, and that's a so one of the
Speaker 1: criticisms that's come out about this whole thing, and my gosh,
Speaker 1: there are a lot of things that you could say here,
Speaker 1: but one of them is that this is all about
Speaker 1: centralized finance because f t X was a centralized exchange,
Speaker 1: it wasn't actually decentralized like a lot of other ones are,
Speaker 1: like Newna Swap being the primary example. What do you
Speaker 1: say to that criticism? Is that fair? I think it's
Speaker 1: very fair. Basically, I I really disagree that this is
Speaker 1: a failure of Crypta. I think it's, if anything, it's
Speaker 1: a vindication of everything Crypta is standing for, which is
Speaker 1: basically being completely decentralized, being committed, transparent, and basically, yeah,
Speaker 1: people have an access to their own assets, self study,
Speaker 1: and basically not relying on anything really because like, if
Speaker 1: you look at all the failures of this year, like
Speaker 1: even Terror, even though it was a decentralized protocol, the
Speaker 1: only reason Terror blew up to such a massive proportions
Speaker 1: was well, I think, in my opinion at least, the
Speaker 1: main reason was that this crazy twenty percent yield was
Speaker 1: repackaged by centralized institutions in the very opaque way it
Speaker 1: was repackaged to the retail, and so retail would not
Speaker 1: get ten percent guild on their account. Those centralized entities
Speaker 1: would get like ten percent spread over the Terror, and
Speaker 1: everyone was happy unless until until basically everything blew up.
Speaker 1: The three arrow blob exactly the same thing, like everyone
Speaker 1: lent to three arrows, but nobody knew what the combined
Speaker 1: value of the loans was, and then when they blew up, Yeah,
Speaker 1: all the centralized landers got hurt simply because it was
Speaker 1: just centralized and transparent. And finally f t X exactly
Speaker 1: the same thing they lent Alamida. Nobody knew about it
Speaker 1: because it was yeah, it was not public. It was
Speaker 1: like somewhere on the internal ledger, not even most of
Speaker 1: the place knew about it, I think. And again it
Speaker 1: blew up in a very centralized fation. So to me,
Speaker 1: the crypto kind of solves it. And it's quite unfortunate
Speaker 1: toward a trip to exchange, but it's a to me,
Speaker 1: it's an indication of all the cryptoe ideals. So I
Speaker 1: want to go back to the experience of trading on
Speaker 1: f t X specifically, you mentioned that your perception prior
Speaker 1: to this was that f t X was a high
Speaker 1: quality exchange, a safe place to park capital when it
Speaker 1: wasn't in a in a trade. What was good about
Speaker 1: f t X. It does seem to me like when
Speaker 1: I've talked to professional crypto traders, they liked this site.
Speaker 1: And I think part of the reason maybe people are
Speaker 1: so blindsided by this collapse is the fact that by
Speaker 1: all accounts, the f t X platform seemed to be
Speaker 1: a good one that people really like the experience that
Speaker 1: had a lot of uptime, People like the way the
Speaker 1: liquidations worked on ft X, can you talk about your
Speaker 1: experience just being a traitor on it and in your
Speaker 1: view why f t X got the prominence that it did.
Speaker 1: I think it's very much linked to SBF to be honest, Like, yes,
Speaker 1: sure it was a good platform to trade, especially because
Speaker 1: they were pretty yeah there's a pretty quick about listen ussets,
Speaker 1: they're pretty quick about well. Basically I guess that perhaps
Speaker 1: were great and there were like a lot of different
Speaker 1: products products. One sense it wasn't great about f t
Speaker 1: X and everyone knows about it as well, is this
Speaker 1: throughput was pretty a bit small, like a number of
Speaker 1: others you can send per second. Like all those limits,
Speaker 1: they kept increasing them by I don't know. Sometimes it
Speaker 1: would come and say, oh, good, great news for increased
Speaker 1: but they needed like a two th increase. And one
Speaker 1: of the reasons I think, and yeah, I don't know,
Speaker 1: I have no idea, like I haven't looked through the
Speaker 1: code base, but I guess one of the reasons for
Speaker 1: this was basically what was promoting very much is that
Speaker 1: the matching engine was combined with their risk engine, because
Speaker 1: you could use all those assets on margin as collateral
Speaker 1: to trade all this perpetual products, like every time you
Speaker 1: send another and it gets matched. It would need to
Speaker 1: do both matching and their risk calculation, which I would
Speaker 1: imagine would slow it quite considerably. And I was always
Speaker 1: like very curious how much you can leverage that, like
Speaker 1: how much how much you can expand that, because honestly,
Speaker 1: like none of the centralized cryptic exchanges are close to
Speaker 1: strouput to even like the worst I know European Stock
Speaker 1: Exchange for example, they just all really really bad, like
Speaker 1: even violence, and ft X was quite worse than violence
Speaker 1: in the throughput twice even though it was smaller volume wis.
Speaker 1: So to me, it was always a question like how
Speaker 1: is it going to grow? Like how is it gonna
Speaker 1: continue making this throutput, especially because like if as a
Speaker 1: bitcoin in the studium, that's fine. But the idea I
Speaker 1: was I think was like expanded the stocks, expanded, the commodities,
Speaker 1: expanding everything. Also, I don't know, maybe maybe it was
Speaker 1: all the facade, but to me, it was always securious
Speaker 1: saying like, yeah, you mentioned engine clearing, it's not great
Speaker 1: that you actually should it. It's physically possible to maintain
Speaker 1: this model. So just to be clear, your perception was
Speaker 1: that there was this trade off that the throughput in
Speaker 1: terms of total volume at f t X was not
Speaker 1: say what you could get it binance, but that was
Speaker 1: because it had this superior matching engine and ability to
Speaker 1: cross margin assets. Can you just explain what that means
Speaker 1: for the listener, that the matching engine, the cross margining asset,
Speaker 1: and what is the advantage of that as a professional trader. Yeah,
Speaker 1: so basically if you go if you go on binance
Speaker 1: and trade binance features, you need to post b U,
Speaker 1: s D or some I think there's a cross margin
Speaker 1: was also stable quins as well now, and but that's
Speaker 1: that's just one instrument. If you if you would trade
Speaker 1: on ft X, you could use your bitcoin, you can
Speaker 1: use an e Syria, and you can use like a
Speaker 1: dozens of other different tokens for which the price would
Speaker 1: be quite volatile. Right, So let's say you have one
Speaker 1: million works of bitcoin and one million works of dollars.
Speaker 1: You could use both of those positions too as a
Speaker 1: margin to enter delative contracts, which is very handy because
Speaker 1: you like you trade sport, you trade perpet you trade perpetuals.
Speaker 1: You can do it all on one account. And yeah,
Speaker 1: it's it's very convenient from the capital perspective because you,
Speaker 1: for example, like what if you only have bitcoin then
Speaker 1: just parking bitcoin and still get margin on on FTX.
Speaker 1: That's great, but that also means that you're met that
Speaker 1: the matching engine continuously had to keep in its mind
Speaker 1: what the price of bitcoin is, because maybe if bitcoin fALS,
Speaker 1: you'll need to liquidate this guy, because really if his
Speaker 1: positions are you know, like his his unrealized profit as
Speaker 1: like THEO low, and so maybe we need to liquidate
Speaker 1: his bitcoin line and then initiate like the whole liquidation process,
Speaker 1: which which is basically way more complex than for binus futures,
Speaker 1: which is just yeah, we just take your perpetual exposure.
Speaker 1: It's it's generous dollars bn L and you only have
Speaker 1: dollars and your accounts. It's very easy. This actually leads
Speaker 1: into something I wanted to ask you, which is a
Speaker 1: sort of I guess fundamental criticism about defy, which is,
Speaker 1: even if you're dealing with decentralized exchanges or you know,
Speaker 1: you hold your own keys or whatever, because you don't
Speaker 1: actually know who you're lending to, DEFY often places a
Speaker 1: lot of emphasis on the underlying collateral. The quality of
Speaker 1: the collateral and the price of it, and so if
Speaker 1: it starts to go down, you do get these big
Speaker 1: margin calls because you don't really know who your counterparty is.
Speaker 1: That seems like a potential vulnerability for defy, particularly in
Speaker 1: an environment where we're seeing the collateral price, you know,
Speaker 1: be extremely volatile. Well, I think that like defy challenges
Speaker 1: potentially is they don't stem from the fact that you
Speaker 1: don't know who your counterpart is. They're primarily stemming from
Speaker 1: two things. One is just a quality of collectal like
Speaker 1: you mentioned, and basically the fact that in extreme market
Speaker 1: moves it might not be possible to liquidated quick enough
Speaker 1: on the access and that basic basically the quality of
Speaker 1: the collateral can drop so quickly, is that there will
Speaker 1: be no incentive for anyone to do liquidations, and that
Speaker 1: can create gaps and products like whole wholes and protocol
Speaker 1: treasuries for example, which which happened after Lunar with with
Speaker 1: some protocols. And the second second issue is it's also
Speaker 1: related to just potential manipulation vectors and that that has
Speaker 1: to do with oracles because you like what we what
Speaker 1: we've seen with malgo markets. So a few weeks ago,
Speaker 1: for example, was that yeah, if you manipulate the oracle price,
Speaker 1: you can potentially create sort of run the bank for
Speaker 1: those sounds of slending protocols as well. Honestly, I think
Speaker 1: it's all like both of those issues are solvable. Basically
Speaker 1: most most of the time issues with descentralized protocols were
Speaker 1: caused by just the quality of a collateral, which works
Speaker 1: both on like a float level, so if if it's
Speaker 1: just some old coin which has a very low float
Speaker 1: yet it just wouldn't be able to liok at it
Speaker 1: fast enough, but also on the oracle level as well,
Speaker 1: if it's like a very small talk and it's very
Speaker 1: easy to manipulate surprise, just like the service Mango. But overall,
Speaker 1: like the defied protocols over the last I know, nine
Speaker 1: twelve months worked perfectly well in terms of stress. Like
Speaker 1: you haven't seen any issues with other you haven't seen
Speaker 1: any issues with Compound. They worked just like they intended
Speaker 1: to be. People are doing liquidations at all. It was
Speaker 1: all very much elderly, so I think from that perspective,
Speaker 1: I think it's still pretticol system to look at. Are
Speaker 1: you going to change the way you think about counterparty
Speaker 1: risk and keeping money on exchanges, any exchanges in the
Speaker 1: wake of this, how are you changing your business up rations?
Speaker 1: We're basically playing it very safe. So there are like
Speaker 1: very small number of exchanges that we considered to be safe,
Speaker 1: and we have is drawing from a lot of like
Speaker 1: what we call t S three exchanges at the moment,
Speaker 1: and even some of the tear too exchanges. We basically
Speaker 1: and I cannot really name names because we actually have
Speaker 1: a pretty good relationship with most of them. And like
Speaker 1: if I say it Withdrew from Exchange, why it does
Speaker 1: mean that we think the bankrupt. It just means that
Speaker 1: we are We're just waiting for our due diligence. We're
Speaker 1: waiting for them to provide financials. We're just waiting for
Speaker 1: them to kind of prove to us that they're fine.
Speaker 1: And so the idea for us is just to get
Speaker 1: this due diligence done and in a week or two
Speaker 1: we just resume training and all the exchanges that remain.
Speaker 1: But my unfortunate yeah, understanding of the situation is there
Speaker 1: might be more exchanges failing, like big and small. So yeah,
Speaker 1: it's just very good security practice to be very safe
Speaker 1: in this environment. I think for individual users, I would
Speaker 1: generally advice to try self custody if you can, or
Speaker 1: withdraw to like very very high quality exchanges if you cannot.
Speaker 1: What exactly is the path for contagion here? Like what
Speaker 1: happens if ft X goes down? Like why should we
Speaker 1: worry about a Tier three exchange? What's the knock on effect? Um?
Speaker 1: The knock on effect can be I guess like multiple vectors.
Speaker 1: First of all, sounds of exchanges like the way they
Speaker 1: operate with market makers. Some of them they provide letters
Speaker 1: of credit, so they basically can extend what leverage effectively
Speaker 1: or just be your free capital to market makers so
Speaker 1: that the market makers would have better incentive to provide markets.
Speaker 1: So if any of those history exchanges gave lots of
Speaker 1: credit Dolometer and Telometer lost money, they could be facing
Speaker 1: some losses. Second way it can be can be happening
Speaker 1: is basically a lot of exchanges will be keeping there
Speaker 1: like some of their capital on FTX. And we've seen
Speaker 1: like some some exchanges coming forward and meeting that whether
Speaker 1: it can be for internal market maker in operations, So
Speaker 1: it can be simply because they just sometimes basically like
Speaker 1: broadcast liquidity on the exchange via ft X either way,
Speaker 1: they could potentially keep some of their money on ft X.
Speaker 1: You know, one of the interesting things that makes crypto
Speaker 1: distinct from say tread fire the stock market if you
Speaker 1: do have this separation of the broker and the market.
Speaker 1: And so if I log into a Schwab account to
Speaker 1: trade stocks, Schwab is the broker, but Schwab is not
Speaker 1: the stock market itself. It seems like that different in crypto,
Speaker 1: where it's like finance or f t X, that's you
Speaker 1: have your account there, but it also is the market
Speaker 1: and that has the order book. Would it make sense
Speaker 1: to separate those? Yeah, it's a very good question. Um,
Speaker 1: I guess it depends as the right answer. On one hand,
Speaker 1: like a few exchanges that I think is perfectly fine
Speaker 1: to do it basically, Okay, let's let's give you this
Speaker 1: kind of framework. The main like not necessarily cause but
Speaker 1: like a huge amount of effort for centralized exchanges goes
Speaker 1: and k I c mL of their customers. So it's
Speaker 1: a pretty big I'm pretty sure it's a big, pretty
Speaker 1: big cost. It's a pretty big number of employees who
Speaker 1: I busited this and that's that's honestly where the biggest
Speaker 1: regulatory attack vector comes from as well, because yeah, if
Speaker 1: you do not cave I see properly, like if you
Speaker 1: kve I see someone, no Korean people or you know whatever,
Speaker 1: you can get in trouble. So that that's pretty big
Speaker 1: cost base. Effectively, if if that part is taken away
Speaker 1: from exchanges, like whoever runs this needs to charge quite
Speaker 1: a bit for it, because yeah, it's a pretty big
Speaker 1: cost to run. And so you can argue that the
Speaker 1: centralized exchanges off setting this course by charge and trading
Speaker 1: fees from all those people that the cave I see, Like,
Speaker 1: if you completely separate it, it would be yeah, it
Speaker 1: would be interesting. I mean it's a kind of a
Speaker 1: different model again obviously because all those kind of broker's
Speaker 1: effectively would be would have to do I s instead.
Speaker 1: But ultimately, yes, they would need to figure out the
Speaker 1: way to i know, either share revenues or basically find
Speaker 1: in a different business small around it, because currently all
Speaker 1: those costs are offset by training fees and whatever the
Speaker 1: auxiliary profits or exchanges generate. So we talked a little
Speaker 1: bit about how you know, f t X was generally
Speaker 1: considered to be a good exchange from a technology perspective.
Speaker 1: Some of the latent latency issues you describe. Notwithstanding, but
Speaker 1: like Sam Bankman, Freed overall was generally considered to be
Speaker 1: this titan of crypto. And we can argue about whether
Speaker 1: or not that reputation was deserved given that he was
Speaker 1: running a centralized exchange versus a decentralized exchange. But this
Speaker 1: seems like a massive, massive deal for the industry as
Speaker 1: a whole, that this guy who was sort of held
Speaker 1: up as the face of it was essentially running some
Speaker 1: sort of fraud. What is the long term impact of
Speaker 1: all of this on the crypto space? Does institutional capital
Speaker 1: just dry up at this point? How do you convince
Speaker 1: people to put money into a space that time and
Speaker 1: time again seems to either blow up or be the
Speaker 1: victim of hacks or fraud. On the institutional side, I
Speaker 1: think it will all come come down to they're just
Speaker 1: just coming up with a better ways to custody assets
Speaker 1: because you have one big issue. Obviously, if you store
Speaker 1: US as an FTX, you basically screwed. But I also
Speaker 1: there are quite quite a few banks that are actively
Speaker 1: working on it, like traditional banks. On the cost of
Speaker 1: the solutions, B and why came up, we came up
Speaker 1: with one like a month ago or something, right, I
Speaker 1: think that that will be ultimately the past institutional adoption
Speaker 1: because they will just need to replicate the same same
Speaker 1: rails effectively to to operate. Saying the custody has been
Speaker 1: the major piece that has been missing, and once it's done,
Speaker 1: it's because like ASBFS failure was not a failure of
Speaker 1: crypto again, it was a failure of his centralizeddentity. So
Speaker 1: once you remove custody from it, Okay, it shouldn't really
Speaker 1: affect you that much because yeah, if you studyr money
Speaker 1: not on a not an FTX but with extodian for example,
Speaker 1: or just story yourself, it should be fine. I think,
Speaker 1: like if you're talking about more longer term impact of this,
Speaker 1: I think it's safety assume there will be a pretty
Speaker 1: big regulatory response, because regulators should have fuel day about
Speaker 1: around this. I kind of hope that, yeah, there there
Speaker 1: would be like some some of the at least some
Speaker 1: of the fault will be recognized, like on the SEC side,
Speaker 1: given just how close those guys were, how this looks like.
Speaker 1: But overall, yeah, I think I think there are laws
Speaker 1: that we will see implemented on the U S side
Speaker 1: of things, and maybe globally as well won't be as
Speaker 1: favorable as they would have been like a few months ago.
Speaker 1: For me, the events of the past week kind of
Speaker 1: proved that we need to go back to the to
Speaker 1: those ideas of the centralization of But it basically exists
Speaker 1: in the trust less old whenever it comes to individual users,
Speaker 1: and I think that's that to me. Is this something
Speaker 1: that kind of like re rebooted the whole thing for me,
Speaker 1: I rebooted my whole approach to crypto, rebooted my face
Speaker 1: and crypt as something that can replace future financial system
Speaker 1: as well, Like I actually believe even more than before
Speaker 1: after this somehow, Hey, Jenny, thank you so much for
Speaker 1: coming out a lots. Yeah, thank you for having it.
Speaker 1: That was if Jinny guy boy of Winter Mute talking
Speaker 1: to us about how he had seen f t X
Speaker 1: is business. Next up, we'll be speaking to James Block.
Speaker 1: You might know him better from his Twitter handle Mike
Speaker 1: Burger's Burg. He also writes about crypto and fraud at
Speaker 1: the Dirty Bubble media sub stacks, So we will be
Speaker 1: talking to him about what he saw at f t
Speaker 1: X that raised some initial red flax. So we are
Speaker 1: back and we're about to speak with James Block. He
Speaker 1: was one of the initial researchers who sounded the alarm
Speaker 1: on f t X and Alameda and set some of
Speaker 1: these events in motion. So James, thanks so much for
Speaker 1: coming on all thoughts. Hey, it's great to be here. James,
Speaker 1: tell us who you are, because it seems like you
Speaker 1: are basically a doctor by day and crypto researcher by night.
Speaker 1: Is that accurate, that's something like that. Yeah, yeah, I'm
Speaker 1: trained as a physician scientist. Kind of got interested in
Speaker 1: this space, if you want to call it that, about
Speaker 1: a year ago. Just kind of always had a fascination
Speaker 1: with financial crimes and kind of the oddities of how
Speaker 1: financial markets work. So crypto seemed like a really interesting
Speaker 1: place to kind of dive in and learn some stuff.
Speaker 1: What first got you interested in f t X specifically?
Speaker 1: So before I was writing about f t X, I
Speaker 1: was really looking into this Selsia's network scandal, which might
Speaker 1: have been writing about extensively prior to their collapse. And
Speaker 1: it turns out that there were extensive ties between Celsia's
Speaker 1: network and FTX, both financial and other. So that's kind
Speaker 1: of how I kind of got into it looking at
Speaker 1: it from that perspective, and then I was able to
Speaker 1: find out some information about their actual financial condition, and
Speaker 1: then that's when I wrote an article about Alameda's financial
Speaker 1: situation that has some impact on the how the events
Speaker 1: turned out. So one of the things that we hear
Speaker 1: about crypto quite a lot is that, you know, it's
Speaker 1: very transparent, you can trace wallet addresses, you can sort
Speaker 1: of follow the money and figure out what's going on.
Speaker 1: And yet yet we seem to have um like repetitive
Speaker 1: frauds in the space. What's your sense of that part
Speaker 1: of crypto When you're looking at crypto trying to expose
Speaker 1: potential frauds, is it easier than with traditional finance. I
Speaker 1: definitely think that it is easier in some respects. I mean,
Speaker 1: a lot of the information is public and easily legible
Speaker 1: if you understand how to read the data, which isn't. Honestly,
Speaker 1: it's not that complicated. The part of it that people
Speaker 1: forget about is that the vast majority of the economic
Speaker 1: activity happening in this space doesn't happen on the blockchain.
Speaker 1: It happens in centralized exchanges and other platforms that don't
Speaker 1: use the blockchain for any of the transactions. They perform. So,
Speaker 1: for example, ft x is an exchange, you would deposit
Speaker 1: your crypto there and then it just sits there. Theoretically
Speaker 1: it should sit in their wallet, and then all of
Speaker 1: the trading actually happens on a off off chain like
Speaker 1: centralized platform. And then eventually, let's say you want to
Speaker 1: take your crypto back out, then it goes back onto
Speaker 1: the blockchain and moves back to your wallet. But there's
Speaker 1: never the trading that happens, any of the market activity
Speaker 1: that happens. That's totally opaque. To let it we start
Speaker 1: with the details. You mentioned that you saw there were
Speaker 1: more links between f t X, you believed in Celsius
Speaker 1: than perhaps people appreciated. What did you first see there? Yeah,
Speaker 1: so for people who aren't familiar, Celsius was a lending platform.
Speaker 1: Basically it allowed you to do was either deposit crypto
Speaker 1: and earn yield on it kind of like a savings account,
Speaker 1: or you could borrow against your crypto. You could borrow
Speaker 1: dollars against a bitcoin, and then what Celsius would do
Speaker 1: is rehypothecate those assets into various supposed yield yield earning strategies.
Speaker 1: And it turned out that what they were doing wasn't
Speaker 1: actually profitable, and they collapsed. And there's a lot of
Speaker 1: allegations about kind of what was going on in that
Speaker 1: company that are still being kind of figured out. But
Speaker 1: what I noticed, among other things, was that in June
Speaker 1: they froze. They froze withdrawals, so like all their customers
Speaker 1: could no longer withdraw their funds. And then there was
Speaker 1: a month period of time between June and July where
Speaker 1: the company was engaging in a significant number of transactions
Speaker 1: on the blockchain, and then in July they filed for bankruptcy.
Speaker 1: And what I found was that they had sent hundreds
Speaker 1: of millions of dollars worth of assets from their wallets
Speaker 1: to the ft X exchange, and then in return, it
Speaker 1: seemed like they had received about a billion dollars in
Speaker 1: USDC from that exchange and used it to pay off
Speaker 1: various debts. According to the bankruptcy filing, celsius od ft
Speaker 1: X about a hundred and eight million dollars, and apparently
Speaker 1: that loan was also discharged in that time period. So
Speaker 1: my concern was that there were some very questionable transfers
Speaker 1: happening that we're within the ninety day period prior to
Speaker 1: filing for bankruptcy that seemed to me to be preferential transfers,
Speaker 1: although you know, I'll let the lawyers figure that one out.
Speaker 1: And additionally, just the opaqueness of what they were doing
Speaker 1: with those funds. So I started looking into that, and
Speaker 1: then there's a number of other connections to I mean, Celsius.
Speaker 1: One of their main shareholders was the Tether stable Coin Company,
Speaker 1: and that was also very closely tied to ft X
Speaker 1: and Alimator Research, So there are multiple ties between these
Speaker 1: companies that go back number of years. It seems like
Speaker 1: there were a few months between Celsius experiencing problems and
Speaker 1: all the ft X issues sort of coming home to roost.
Speaker 1: Why do you think it took a while? Well, I
Speaker 1: don't think that Celsius was necessarily material to the collapse
Speaker 1: of Alimta and ft X. They were doing business together
Speaker 1: and FTX actually got their money back, so for them
Speaker 1: it probably worked out pretty well. Um. I think Elma
Speaker 1: was a party to the bankruptcy and is own something
Speaker 1: like ten or eleven million dollars from Celsius, But relatively
Speaker 1: the amount of money that they apparently got paid back,
Speaker 1: it's not very significant. What appears what happened with Alameda,
Speaker 1: and we don't actually know. I mean, honestly, I don't
Speaker 1: want to speculate at this point. I still can't imagine
Speaker 1: how they managed to lose the amount of money that
Speaker 1: they're saying that they lost. I mean, eight to ten
Speaker 1: billion dollars is a lot of money. Celsius by comparison,
Speaker 1: is maybe three billion dollars to four billion dollars in
Speaker 1: the whole. So it's this is a it's a it's
Speaker 1: a massive loss, and nobody, I think it knows entirely
Speaker 1: yet where the where the money went in terms of FDx. Right,
Speaker 1: So just on this note, I mean, this was one
Speaker 1: of the things that I think was surprising for a
Speaker 1: lot of people, which is, you know, we all listen
Speaker 1: to Sam Bankman Freed when he was on this podcast
Speaker 1: describe yield farming as the sort of magical money box,
Speaker 1: but he was describing the business of crypto and we
Speaker 1: sort of thought, well, you know, he's operating an exchange
Speaker 1: where people are trading these things and that's how he's
Speaker 1: making his money, and that must be incredibly profitable, And
Speaker 1: it turns out it wasn't. Where do we actually think
Speaker 1: the money went? Well, I mean, we know for a
Speaker 1: fact at this point, we know that a large portion
Speaker 1: of user assets ended up going to Sam Bankment Fred's
Speaker 1: trading firm, which was Elevated Research. Where it goes from
Speaker 1: there is, uh, the eight to ten billion dollar question.
Speaker 1: I guess they were doing a number of different things
Speaker 1: with the funds. We know that they were investing in
Speaker 1: a lot of different venture opportunities, you can call them
Speaker 1: various crypto projects that never seemed to work out. I
Speaker 1: think five million went to some AI research nonprofit. You know,
Speaker 1: obviously they weren't spending a lot of money on advertising
Speaker 1: and on political contributions. So I mean, I don't think
Speaker 1: anyone's come close to accounting for the amount of money
Speaker 1: that's apparently missing here, but we know at least where
Speaker 1: some of it went. The question is, yeah, I mean,
Speaker 1: so were they profitable? I mean, you can look at
Speaker 1: coin bases earnings and that just as a disclosure, I
Speaker 1: am shortcoin based, so my opinions about that company are
Speaker 1: colored by that position. But I mean, coin bay has
Speaker 1: been losing a substantial amount of mine in the last year.
Speaker 1: Were they actually profitable? As a very good question, and
Speaker 1: you know, the thing to remember too, is that FTX
Speaker 1: always build themselves as sort of the the exchange for
Speaker 1: institutional institutional traders. Like there was retail involved, but a
Speaker 1: lot of the volume was supposedly these institutional people who
Speaker 1: are playing on there, and so they're their actual revenue
Speaker 1: from that would have been much lower than what somebody
Speaker 1: with primarily a retail customer base would make. So's it's
Speaker 1: actually very questionable if they were ever really making money
Speaker 1: or not. That's a really interesting observation, and it's just,
Speaker 1: you know, it's something that come up with coin based specifically. Obviously,
Speaker 1: as you know, if you're short it, this idea that
Speaker 1: institutional clients are way less profitable than retail clients is
Speaker 1: something that Jim Chanos has talked a lot about. So
Speaker 1: the fact that f t X was to institutionally focused
Speaker 1: would be a suggestion that, you know, it's margins even
Speaker 1: in the best case scenario, we're pretty slim. Let's go
Speaker 1: back to just La Meta for a can. I think
Speaker 1: the perception was that, you know, it was a profitable
Speaker 1: market making firm and that maybe it had some leg
Speaker 1: up by dint of its relationship with f t X.
Speaker 1: What is it that first cut your attention and get
Speaker 1: you thinking that maybe it wasn't all sound with Alameda specifically.
Speaker 1: I'm a very skeptical person when it comes to crypto.
Speaker 1: I agree, I view most of these things is very
Speaker 1: very very questionable operations, that many of them, most of
Speaker 1: them are probably losing money and engaging in things that
Speaker 1: aren't very savory. But of all the people, I actually
Speaker 1: didn't think that maybe if anybody was making money, it
Speaker 1: was Alameda, because everybody always said they were the smartest
Speaker 1: guys in the room. To make a reference to my
Speaker 1: favorite documentary of all time. When I really started thinking
Speaker 1: there was something wrong was when all of these firms
Speaker 1: started failing, like block fi Um and Voyager and f
Speaker 1: t X was suddenly stepping in and Alameda was stepping
Speaker 1: in and bailing these companies out. And I knew enough
Speaker 1: about how these firms operated and how how big the
Speaker 1: holes were to just think there was no reason for
Speaker 1: them to do that would make any sense. I mean,
Speaker 1: these companies, like the names of these companies are worthless
Speaker 1: now because they've shown that they did a very poor
Speaker 1: job of handling people's money. It's not somebody's gonna want
Speaker 1: to invest again in Block Fight once they find out
Speaker 1: that they went in solvent because they were lending to
Speaker 1: what as allegedly at ponzi scam, the three three year
Speaker 1: olds capital, So it wasn't like he was getting any
Speaker 1: kind of advantage by doing that, And so my question
Speaker 1: was was he just trying to get ahold of the
Speaker 1: user assets or was he trying to cover up debt
Speaker 1: that Alimada had to those to those platforms. And it
Speaker 1: seems like it's the latter case. That both of those
Speaker 1: platforms held large amounts of these liquid tokens that Alameda
Speaker 1: owned and that FTX had issued, and that basically they
Speaker 1: were trying to protect themselves from getting liquidated on all
Speaker 1: of that. So basically it was in protecting himself and
Speaker 1: that's what kind of initially made me think there's something
Speaker 1: wrong here. I didn't know how bad it was until
Speaker 1: I saw their balance sheet, though. Sorry just to be
Speaker 1: clear on that last point, because I think that's really key,
Speaker 1: This idea that some of these other firms held on
Speaker 1: their books assets that Almada didn't want liquidated. Was that public? Yes,
Speaker 1: that's public, that's in that's in the Voyager. I can't
Speaker 1: remember what doc at number, but it is in the
Speaker 1: Voyage of bankruptcy filing is part of the There was
Speaker 1: an agreement for FTS two or elimated to receive their
Speaker 1: collateral back and payback the loans that they had taken out,
Speaker 1: and it was all F T T and serum tokens,
Speaker 1: which are the tokens that I and coin does showed
Speaker 1: were kind of the albatrosses around their neck on their
Speaker 1: balance sheet. So the Coin Desk report sort of kicked
Speaker 1: all of this into high gear. And there was you know,
Speaker 1: speculation and research before then, including some of the work
Speaker 1: that you did. But when that came out, I mean,
Speaker 1: things happened very very quickly after that. What's been your
Speaker 1: just personal experience of the past ten days or so.
Speaker 1: So Coin Desk grew at their article, I believe. On
Speaker 1: the second I had my own information that suggested basically
Speaker 1: the same thing they had said, and I had a
Speaker 1: little bit more information about exactly how much of the
Speaker 1: other holdings they had, which was interesting to find out.
Speaker 1: And so on the fourth I published my article which
Speaker 1: basically just showed took it took the acquaintance article step
Speaker 1: further and said instead of just saying they have this
Speaker 1: much in these tokens, my question was how much of
Speaker 1: these tokens actually worth and it's pretty easy to show
Speaker 1: that they were in all practical senses worthless because nobody
Speaker 1: else owned them except Alameda, and the market was entirely
Speaker 1: controlled by this company, and they were basically faking an
Speaker 1: entire market. So that came on the fourth it kind
Speaker 1: of went viral, which was kind of cool. And then
Speaker 1: a couple of days after that was when the head
Speaker 1: of finance announced that he was going to liquidate all
Speaker 1: of their assets in this ft T token, which was
Speaker 1: some five sixty million or more worth of it. And
Speaker 1: that's that's the point when it really kicked off the
Speaker 1: bank rund on FTX. And then the thing was that
Speaker 1: they were fighting a battle on two fronts, right, They
Speaker 1: had to simultaneously pay people back their money, and then
Speaker 1: they also had to keep the price of this token
Speaker 1: up because they had levered themselves on this totally a
Speaker 1: liquid asset, so they couldn't win that. Here's the thing,
Speaker 1: Like I, like I said, I'm a very suspicious person
Speaker 1: by nature. When I saw their balance sheet, I knew,
Speaker 1: I knew based on the information I had, I knew
Speaker 1: that they were in very serious trouble. Sorry, when you
Speaker 1: say they just to be clear, do you mean Alimata,
Speaker 1: Speciflimta and FTX. Yeah. And the thing to remember for
Speaker 1: people listening is that for years, Sam bankman Fried and
Speaker 1: others have always alleged or stated that Alimta and FTX
Speaker 1: were totally separate entities, despite the fact that they were
Speaker 1: owned by the same person. The argument was that their
Speaker 1: leadership is different, they don't share information, they don't share assets,
Speaker 1: they are separate companies. And clearly that was not the
Speaker 1: case because they actually filed for bankrupcy together a couple
Speaker 1: of days ago, so they were one and the same.
Speaker 1: But yeah, so they were fighting a battle on two fronts.
Speaker 1: And I mean, like I was saying before, I knew
Speaker 1: that they were in trouble based on looking at their financials,
Speaker 1: but I didn't realize the extent to which they had
Speaker 1: lost customer assets and the whole that they were in.
Speaker 1: I didn't think they would go down as quickly as
Speaker 1: they did, for sure, But very shortly after that they
Speaker 1: were insolvent and froze froze withdrawals, and from there on
Speaker 1: we kind of know what happened. And I guess we're
Speaker 1: gonna find out who else has a lot of exposure
Speaker 1: to this thing. Just on that note, you kind of
Speaker 1: touched on this already. But one of the big walking
Speaker 1: points now is that, well, this isn't a failure of crypto.
Speaker 1: This is a failure of a centralized exchange. And you know,
Speaker 1: real crypto is decentralized, and you should own your own
Speaker 1: keys and run your own node and you know, only
Speaker 1: trade through unite swap or whatever. Is that a valid
Speaker 1: argument to make? Here is the problem the centralized entities
Speaker 1: who act badly, or is the problem something fundamental about
Speaker 1: crypto and it's tech. So here's my answer to that question.
Speaker 1: I've I've had to answer that question a few times
Speaker 1: in the last week. My opinion about crypto is I'm
Speaker 1: fairly negative. I'm fairly skeptical. But I think arguments about
Speaker 1: whether or not the blockchain technology or bitcoin has any
Speaker 1: intrinsic value can be set to one side because the
Speaker 1: fact is that regardless of whether or not it's cryptos
Speaker 1: fault or centralized exchanges fault, the fact of the matter
Speaker 1: is most of the people involved in this ecosystem at
Speaker 1: this point are transacting through centralized exchanges. All the prices
Speaker 1: are determined by centralized exchanges. Centralized exchange hold most of
Speaker 1: the assets and are controlling the entire market. So regardless
Speaker 1: of whatever is good or bad about the crypto, in
Speaker 1: its essence, there's a very very very very big problem
Speaker 1: here that defines the industry. In my opinion, I don't
Speaker 1: think there's you know how many people. The number of
Speaker 1: people who own crypto on these exchanges and don't even
Speaker 1: know how to pull them pull the assets off into
Speaker 1: their own wallet is unbelievable. It's unbelievable. So to say
Speaker 1: it's a specific problem, it's only Sam, it's only Uh,
Speaker 1: it's only this one exchange, it's only this one lending platform.
Speaker 1: I think we're going to find out that it is
Speaker 1: a an industry ride problem because ultimately none of these
Speaker 1: things produce anything of value. All they do is they
Speaker 1: trade money in a circle, and that money has to
Speaker 1: leave the system eventually. And what we're going to find
Speaker 1: out is that there is much less money in the
Speaker 1: system now than there was when it started, and a
Speaker 1: lot of people are not gonna be able to exit
Speaker 1: the system without losing a lot of their money. I'm
Speaker 1: so glad you said that, because I keep seeing these
Speaker 1: discussions on Twitter and alto the solution is decentralized exchanges
Speaker 1: or just holding your own keys to etcetera. And the
Speaker 1: main chain auditing is the new one, and maybe there's
Speaker 1: some truth to that, but I'm also surprised how rarely
Speaker 1: I hear what you said is like, why don't you
Speaker 1: make a product of the point And you would not
Speaker 1: have these same problems if there were sort of like
Speaker 1: coins and platforms that solved real problems, that had revenue
Speaker 1: that wasn't tied to speculation, that had real businesses. And
Speaker 1: so to my mind, it almost doesn't matter centralized decentralized
Speaker 1: if there is no naturally natural pull and revenue. I
Speaker 1: want to ask another question, though, which is why couldn't
Speaker 1: in your view, f t X have just let element
Speaker 1: to go. Okay, it was like blowing up. The balance
Speaker 1: sheet was wrecked. Could FTX have just say, you know
Speaker 1: what this are trading arm blew up, but we still
Speaker 1: have an exchange. No, because they were trading with their
Speaker 1: customers money. They took their customers assets. You could literally
Speaker 1: watch as as as they were paying out withdrawals, you
Speaker 1: could watch the fun is returning. Through Elimator research addresses.
Speaker 1: This is confirmed by multiple individuals. They had taken the funds.
Speaker 1: I mean, they've essentially admitted to that at this point.
Speaker 1: That's why there's a hole there, I mean, because you
Speaker 1: have to remember, part of the reason that crypto is
Speaker 1: is what it is, is that people are so against
Speaker 1: the traditional banking system and fractional banking and all that stuff,
Speaker 1: and these exchanges are supposed to operate as fully capitalized.
Speaker 1: They're not supposed to be playing around with their customers assets,
Speaker 1: and that's exactly what they were doing. And you know,
Speaker 1: mean FTX is offering yield on their customer's assets as well,
Speaker 1: which is I mean obviously a red flag that they're
Speaker 1: doing something more than just holding onto the assets and
Speaker 1: keeping them there for for safe keeping. Just to be clear,
Speaker 1: your perception or your view is that the transference of
Speaker 1: customer assets to elimated, which going on for a very
Speaker 1: long time, that is what everything points to. I think
Speaker 1: there's been a fair amount of reporting at that point
Speaker 1: that I mean, I saw it myself, but yeah, there's
Speaker 1: been a lot of other reporting as well that shows
Speaker 1: that the money came back through their wallets, and if
Speaker 1: you look at where the money went, it went to
Speaker 1: their wallets, what they did with it after that nobody's
Speaker 1: figured out yet. That's a very massive problem to figure out,
Speaker 1: probably far beyond my abilities. But yeah, I mean they
Speaker 1: absolutely were. There's no there's no excuse. Again, there's no excuse.
Speaker 1: If you look at f t X as user agreements,
Speaker 1: they weren't supposed to be doing that with the customer's assets.
Speaker 1: They were supposed to hold onto the assets and keep
Speaker 1: them safe and if the customers wanted to leave. And
Speaker 1: that's the thing now is there's a lot of other
Speaker 1: exchanges facing very big withdrawal pressure. The fact is all
Speaker 1: of them should be able to give back all of
Speaker 1: the money and be fine. They shouldn't have any problem
Speaker 1: with that. And if they do have a problem with that,
Speaker 1: that means they were doing something with the money that
Speaker 1: they weren't supposed to be doing. Right. So, if it
Speaker 1: is true, if you look at the f t X
Speaker 1: user agreement, like it says specifically, we will not lend
Speaker 1: out the cryptocurrency that we custody. So okay, two quick questions. One, overall,
Speaker 1: how damaging is this for crypto given that you know
Speaker 1: part of Crypto's raised on Dutch I guess was to
Speaker 1: reform the financial system in a way that would avoid
Speaker 1: a lot of these problems. And then secondly, what are
Speaker 1: you watching out for in terms of contagion. So I'm
Speaker 1: going to disagree with you a little bit. I think
Speaker 1: that that's the narrative for crypto is that it's there
Speaker 1: to change the financial system and offer individual responsibility alternative
Speaker 1: to the central banking world, and you know, inflation free alternative,
Speaker 1: and that's like gold or something in practical terms. Most
Speaker 1: of the people that have gotten involved in crypto in
Speaker 1: the last year and a half or so are not
Speaker 1: people who care about that narrative. They're people who just
Speaker 1: want to get rich. It's just like any of the
Speaker 1: gambling that's going on the stock market is the same thing.
Speaker 1: Mostly people don't really care about that narrative. The number
Speaker 1: of people in this in this space they actually care
Speaker 1: about that narrative is relatively small. I think that this
Speaker 1: is going to have a tremendous impact, and we're just
Speaker 1: starting to see that because a couple of reasons. Number One,
Speaker 1: f t X, because of Sam's spending on advertising, is
Speaker 1: one of the most recognizable firms in the entire I
Speaker 1: hate calling an industry because it's not productive, but I'll
Speaker 1: call it into straight He had his name on the
Speaker 1: I mean, I swear I can't get over it. He
Speaker 1: had his name of ft X on the umpire uniforms
Speaker 1: for the Major League Baseball I mean he literally had
Speaker 1: his name on the regulators. You know, he has his
Speaker 1: name on one of the most famous stadiums in the country.
Speaker 1: He had one of the most popular athletes in the
Speaker 1: world advertising for him and apparently invested in him. So yeah,
Speaker 1: everybody knows who f t X is, which is why
Speaker 1: obviously the story is getting as much pressed as it is.
Speaker 1: So them failing number one is going to have a
Speaker 1: massive psychological impact both on the people who already owned crypto,
Speaker 1: who are realizing now that maybe they can't trust any
Speaker 1: of these exchanges. It's also going to have a massive
Speaker 1: effect on anyone who hasn't invested yet, because ultimately this
Speaker 1: space depends entirely on new money coming in in order
Speaker 1: to drive prices up. So that's gonna that alone is
Speaker 1: gonna have a massive impact. And then secondly, Sam was
Speaker 1: very close to regulators, He was very close to a
Speaker 1: lot of politicians. He donated. I think he was the
Speaker 1: second largest donor to the Democratic Party this year. This
Speaker 1: election cycle, there's been a lot of politicians who are
Speaker 1: going to have to explain why did I take money
Speaker 1: from somebody who may have been running something that was
Speaker 1: you know, very very very questionable. Let's just put it
Speaker 1: that way. I think that there's gonna be a lot
Speaker 1: more impetus for the regulators and for lawmakers to act
Speaker 1: on what's happening in crypto, and I don't think they're
Speaker 1: going to act in a way that the industry is
Speaker 1: going to enjoy very much. And then in terms of contagion,
Speaker 1: oh uh yeah, everybody, there is no no But I
Speaker 1: mean I mean realistically, I mean number one, this system again,
Speaker 1: like we talked about a little bit earlier, this is
Speaker 1: not a productive system. Ultimately, this is a destructive system.
Speaker 1: There is no money created by what they're doing. There
Speaker 1: is no value created by what they are doing. So
Speaker 1: it's it's a closed system that only gets new money
Speaker 1: from people who believe in in in crypto and one
Speaker 1: invest more so that once has cut off, everybody has
Speaker 1: to fight over whatever liquidity has left. And if it
Speaker 1: turns out other exchanges we're playing the same games as
Speaker 1: Sam was, which it appears that at least some of
Speaker 1: them were doing those playing the same games and moving
Speaker 1: money around in ways that they shouldn't have been doing,
Speaker 1: and people start withdrawing, it's game over. Anybody who lent
Speaker 1: money to Alameda is in trouble. All of the VC
Speaker 1: firms that invested in Alameda and in f t X
Speaker 1: just got burned to the tune of billions of dollars.
Speaker 1: So are they going to be investing any more on
Speaker 1: crypto firms that don't generate income and need constant infusions
Speaker 1: the capital in order to stay afloat. I don't think so.
Speaker 1: I mean, if any exchange going down could have had
Speaker 1: like a systemic effect on on crypto, ft X is
Speaker 1: probably one of the biggest candidates for that. So it's
Speaker 1: gonna be interested to see what happens in the next
Speaker 1: couple of weeks. Yeah, for sure. And it does seem
Speaker 1: problematic when your your use cases basically predicated on speculation
Speaker 1: if you don't get influence anymore. James, thank you so
Speaker 1: much for joining us. Really appreciate it. Hey, no problems
Speaker 1: if I'm talking to you guys, Tracy. I found that
Speaker 1: conversation to be helpful both in terms of understanding how
Speaker 1: f t X had been perceived prior to the collapse,
Speaker 1: the relationship between f t X l AMDA, and of
Speaker 1: course what those early signs were in terms of collapse.
Speaker 1: And it really did materialize at lightning speed once fears
Speaker 1: of its insolvency started to percolate up right, And I
Speaker 1: do think it's worth noting that within the industry there
Speaker 1: is still this furious discussion about whether the fault was
Speaker 1: crypto itself or whether it was more traditional trad five
Speaker 1: structures that actually imploded. But on some level the debate
Speaker 1: seems really philosophical and one that we will probably be
Speaker 1: talking about for a long time. Right. So in the meantime,
Speaker 1: tomorrow we're going to be going over some of these topics,
Speaker 1: further zooming out of it with our past guest Matt Levine.
Speaker 1: Shall we leave it there? Let's leave it there. This
Speaker 1: has been another episode of the All Thoughts Podcast. I'm
Speaker 1: Tracy Alloway. You can follow me on Twitter at Tracy Alloway,
Speaker 1: and I'm Joe Wisenthal following me on Twitter at the Stalwart.
Speaker 1: Follow our guests if Guinny Guy Boy He's at Guinny
Speaker 1: Guy Boy, and James Block at Mike Burgersburg, and be
Speaker 1: sure to follow our producer Kerman Rodriguez at Kerman Arman
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Speaker 1: for listening.