WEBVTT - How The Winklevoss Twins Lost A Billion Dollars 0:00:02.520 --> 0:00:03.560 All Zone Media. 0:00:05.880 --> 0:00:09.240 Hello and welcome to Better Offline. I'm your host ed Zetron. 0:00:09.840 --> 0:00:11.760 This is a weekly tech show where I walk you 0:00:11.800 --> 0:00:14.079 through the good, the bad, and the stupid of a 0:00:14.160 --> 0:00:18.520 multi trillion dollar industry that's changed and monetized almost every 0:00:18.520 --> 0:00:32.680 part of our lives. So you're likely aware of the 0:00:32.720 --> 0:00:35.800 tale of Sam Bankman Free, the curly haired fraudster who 0:00:35.840 --> 0:00:38.720 conned millions of people out of billions of dollars, crushing 0:00:38.720 --> 0:00:41.879 the cryptocurrency markets in the process. He did so by 0:00:41.920 --> 0:00:45.440 creating a cryptocurrency exchange called ftx, where people could buy 0:00:45.479 --> 0:00:49.120 things like bitcoin and ethereum, except it had one little catch. 0:00:49.680 --> 0:00:52.880 He was stealing the customer funds, keeping only a little 0:00:52.880 --> 0:00:55.480 around at any given time for people to withdraw. This 0:00:55.600 --> 0:00:58.480 meant that when hundreds of thousands of people went to 0:00:58.520 --> 0:01:01.560 withdraw their funds at once, the entire scheme fell apart 0:01:01.640 --> 0:01:05.480 and FTX collapsed. Bankman Fried currently sits in prison awaiting 0:01:05.560 --> 0:01:09.360 sentencing after being convicted and several counts of fraud, including 0:01:09.360 --> 0:01:12.800 wirefraud and wirefraud conspiracy, which is appropriate as him and 0:01:12.840 --> 0:01:16.160 his co conspirators at one point genuinely used their group 0:01:16.319 --> 0:01:20.600 called wirefraud Chat and I am not kidding yet. This 0:01:20.640 --> 0:01:24.760 isn't about SBF. There are actually two other villains in 0:01:24.800 --> 0:01:28.600 this story, two villains of the recent crypto crash that 0:01:28.680 --> 0:01:30.759 you might have missed, despite the fact that they're both 0:01:30.959 --> 0:01:34.480 six foot five and lost their customers over a billion dollars. 0:01:36.080 --> 0:01:40.399 I'm talking about Cameron and Tyler Winklevoss, two brothers, both 0:01:40.400 --> 0:01:44.120 alike in dignity and appearance, the gay notoriety by suing 0:01:44.160 --> 0:01:47.440 Mark Zuckerberg of Facebook now known as Metta in the 0:01:47.480 --> 0:01:49.919 early days of the social network back in two thousand 0:01:49.960 --> 0:01:54.440 and four. In the Winklevi's defense, Zuckerberg dig screw them 0:01:54.480 --> 0:01:57.080 as a student at Harvard, where he pretended to work 0:01:57.080 --> 0:02:00.600 on the Winklevoss's social network, Harvard Connect while actually working 0:02:00.600 --> 0:02:04.840 on the earliest version of Facebook, effectively sabotaging the competition 0:02:04.920 --> 0:02:09.239 from within. When Facebook finally launched the identical Moist, Riverboat 0:02:09.280 --> 0:02:12.080 Giants alleged that Zuckerberg had stolen their idea for a 0:02:12.120 --> 0:02:15.200 social network and used their code, resulting in a year's 0:02:15.240 --> 0:02:17.960 long back and forth and a sixty five million dollar 0:02:18.000 --> 0:02:20.960 settlement that the Winklevosses were forced by a court to accept. 0:02:21.080 --> 0:02:24.760 In twenty eleven, I think the had Zuckerberg kept his 0:02:24.800 --> 0:02:27.800 filthy little hands to himself, we'd likely never have heard 0:02:27.800 --> 0:02:31.399 of Tyler and Cameron Winkelvoss, and I believe the world 0:02:31.400 --> 0:02:34.800 would have been a better place if they weren't already. 0:02:34.880 --> 0:02:38.480 The Winklevoss twins were now millionaires. In twenty ten, Aaron 0:02:38.560 --> 0:02:42.120 Sorkin's Oscar nominated retelling of the Facebook origin story the 0:02:42.160 --> 0:02:45.800 social network would raise their profiles even further, portraying them 0:02:45.840 --> 0:02:51.120 as victims of a calculated, misanthropic opportunist, Mark Zuckerberg. Of course, 0:02:51.639 --> 0:02:53.520 you could almost feel sorry for them, even if they 0:02:53.520 --> 0:02:57.959 were portrayed by Armie Hammer, the famous cannibalism fan and 0:02:58.919 --> 0:03:03.760 potentially perverted in enjoyer of other things too. But you 0:03:03.840 --> 0:03:06.840 really shouldn't feel sorry for Army Hammer. But you definitely 0:03:06.840 --> 0:03:10.560 shouldn't for the Winklevosses either. In the years following their 0:03:10.600 --> 0:03:13.520 legal dust up with Mark Zuckerberg, the Winklevoss twins remained 0:03:13.560 --> 0:03:16.080 active in the tech scene, launching an investment fund in 0:03:16.120 --> 0:03:19.600 twenty twelve that focused on early stage, consumer centric startups. 0:03:20.160 --> 0:03:23.000 A year later, they acquired eleven million dollars of bitcoin, 0:03:23.080 --> 0:03:25.800 and while it's unclear exactly how much they bought. A 0:03:25.800 --> 0:03:28.560 New York Times article about their acquisition, which of course 0:03:28.600 --> 0:03:32.600 featured no verification of that actual purchase, ran on April eleventh, 0:03:32.680 --> 0:03:35.760 twenty thirteen, when bitcoin was around one hundred and fourteen 0:03:35.800 --> 0:03:39.720 dollars apiece, meaning that the Winklevoss brothers likely bought somewhere 0:03:39.840 --> 0:03:43.600 in the region of ninety thousand bitcoin. Based on today's valuation, 0:03:43.920 --> 0:03:46.280 those holdings would be worth an excess of three point 0:03:46.320 --> 0:03:51.080 eight billion dollars. It was a big, stupid bet, and 0:03:51.160 --> 0:03:54.600 it absolutely paid off. In the same year, they'd pursue 0:03:54.640 --> 0:03:58.440 creating a bitcoin exchange traded fund also known as an ETF, 0:03:59.040 --> 0:04:01.440 a thing that allows you to invest in something, in 0:04:01.440 --> 0:04:04.200 this case bitcoin, much like you would trading a stock, 0:04:04.600 --> 0:04:07.600 without all of the complexity and risk associated with actually 0:04:07.640 --> 0:04:11.480 owning the thing in question, in this case bitcoin. While 0:04:11.480 --> 0:04:14.320 this never materialized, the winklevoss Is cozied up with New 0:04:14.360 --> 0:04:17.520 York's Department of Financial Services and realized they could found 0:04:17.640 --> 0:04:22.600 their own cryptocurrency exchange to rival the other American rival, Coinbased, 0:04:22.600 --> 0:04:26.120 which had launched two years earlier. A cryptocurrency exchange, as 0:04:26.120 --> 0:04:28.120 I've discussed, is a place where you can buy and 0:04:28.200 --> 0:04:31.560 sell your crypto using generally a credit card or a 0:04:31.560 --> 0:04:34.440 debit card. At the time very focused on debit cards, 0:04:34.480 --> 0:04:38.800 though in twenty fifteen they launched Gemini, what would eventually 0:04:38.839 --> 0:04:42.360 become a major and highly respected cryptocurrency exchange that from 0:04:42.360 --> 0:04:45.160 the very beginning tried to swaddle its ugly and often 0:04:45.240 --> 0:04:48.880 fraudulent industry in a blanket of legitimacy, winning approval from 0:04:48.920 --> 0:04:53.520 New York state regulators to provide certain financial services. Gemini 0:04:53.560 --> 0:04:56.880 now sits as one of the top ten largest cryptocurrency 0:04:56.920 --> 0:04:59.159 exchanges in the world and one of the few remaining 0:04:59.160 --> 0:05:03.080 American exchange. One might be forgiven for thinking they were trustworthy, 0:05:04.160 --> 0:05:07.679 and they'd be wrong. Toward the end of twenty twenty, 0:05:07.720 --> 0:05:11.000 the price of cryptocurrencies began to climb rapidly, with bitcoin 0:05:11.040 --> 0:05:14.000 climbing from nineteen thousand dollars in December to over forty 0:05:14.040 --> 0:05:17.159 thousand dollars in January, cresting over fifty thousand dollars a 0:05:17.160 --> 0:05:21.360 bitcoin by March twenty twenty one. The cryptocurrency industry would 0:05:21.400 --> 0:05:24.200 see more venture investment in the first quarter of twenty 0:05:24.240 --> 0:05:27.800 twenty one than it had in the entirety of twenty twenty, 0:05:28.040 --> 0:05:30.600 with one hundred and twenty nine crypto and blockchain startups 0:05:30.640 --> 0:05:33.640 receiving two point six billion dollars in the space of 0:05:33.680 --> 0:05:37.000 three months, compared to three hundred and forty one cryptocurrencies 0:05:37.040 --> 0:05:40.280 receiving two point three billion in the entirety of twenty twenty. 0:05:41.560 --> 0:05:45.680 As an explanation for those listeners that don't know, venture 0:05:45.680 --> 0:05:49.640 capital investments are generally investing inequacy in the companies. They 0:05:49.680 --> 0:05:51.839 buy a piece of the company for a certain amount 0:05:51.880 --> 0:05:54.279 of money, venture capitalists, of course, taking the risk that 0:05:54.320 --> 0:05:57.120 the company will fall apart. What differs with a lot 0:05:57.160 --> 0:05:59.480 of these companies is that they will sometimes sell you 0:05:59.480 --> 0:06:03.240 a token. This isn't necessarily relevant for this story. I 0:06:03.320 --> 0:06:05.159 just want you to know the fact that this industry 0:06:05.560 --> 0:06:08.680 at its core is based on the idea of basically 0:06:09.080 --> 0:06:14.240 selling securities, you know, like stocks, but hiding from the 0:06:14.320 --> 0:06:18.000 law and conning people. That's not how the Winklevosses fucked 0:06:18.000 --> 0:06:23.280 people over, though, no. So another thing to realize about 0:06:23.279 --> 0:06:26.200 these crypto companies is that they didn't really do anything. 0:06:26.520 --> 0:06:28.880 They'd sell tokens. They would claim that they would build 0:06:28.960 --> 0:06:31.400 something in the future on something called a roadmap. They 0:06:31.400 --> 0:06:33.919 would sometimes have a white paper which would describe some 0:06:34.120 --> 0:06:37.680 underlying technological stuff. But there are really none of them 0:06:37.720 --> 0:06:41.279 that had a feature or a function. They were mostly 0:06:41.400 --> 0:06:45.960 just nonentities that promise things. But because you could trade 0:06:46.080 --> 0:06:49.880 their tokens, which much like a stock, should have been 0:06:50.600 --> 0:06:53.000 regulated by the government, but were not because they were 0:06:53.040 --> 0:06:58.520 such new financial devices and objects. Well, this whole market 0:06:58.640 --> 0:07:02.080 was growing and growing and growing, and along with it, 0:07:02.120 --> 0:07:06.400 the Winklevosses were getting even richer. Then they got greedy. 0:07:07.560 --> 0:07:10.920 To understand how the Winklevosses bungled a billion dollars, I 0:07:10.960 --> 0:07:12.520 have to give you a little bit of background on 0:07:12.560 --> 0:07:16.200 the last few years of hell in the cryptocurrency industry. 0:07:16.280 --> 0:07:19.920 In February twenty twenty one, Gemini, that's their cryptocurrency exchange 0:07:19.920 --> 0:07:23.640 where you could buy and sell different cryptocurrency began something 0:07:23.720 --> 0:07:27.520 called Earn, their Earn program. It was an interest earning 0:07:27.600 --> 0:07:31.840 program where users could feed their cryptocurrency like Bitcoin, for example, 0:07:32.160 --> 0:07:36.160 into Gemini through a few clicks and earn interest. And 0:07:36.200 --> 0:07:38.720 you should put quotation marks around those so you would 0:07:38.720 --> 0:07:42.560 get a percentage return on the crypto that you put 0:07:42.600 --> 0:07:46.360 into Gemini Earn. One might be forgiven for believing that 0:07:46.400 --> 0:07:48.400 as a result, they were putting money into some sort 0:07:48.440 --> 0:07:51.880 of secure protected account like a certificate of deposit. They 0:07:51.960 --> 0:07:55.000 really were not, I must be clear, how not like 0:07:55.040 --> 0:07:58.720 a bank. This was Gemini, a New York based trust 0:07:58.760 --> 0:08:02.040 company that promised to security protocols on par with those 0:08:02.080 --> 0:08:06.320 offered by top financial institutions. Claimed to generate this interest 0:08:06.400 --> 0:08:10.280 by working with and I quote institutional borrowers who were 0:08:10.320 --> 0:08:12.960 partners who had been vetted through Gemini's and I quote 0:08:13.000 --> 0:08:17.280 again risk management framework. What's also important to know is 0:08:17.280 --> 0:08:18.960 that none of what you're about to hear was the 0:08:19.000 --> 0:08:23.200 security issue. It was entirely the result of two greedy 0:08:23.280 --> 0:08:27.520 riverboat giants pissing away money because they were greedy little pigs. 0:08:28.400 --> 0:08:31.000 And as a result of trusting this company that was 0:08:31.040 --> 0:08:34.240 a trust company, a New York based trust company, a 0:08:34.360 --> 0:08:37.520 regulated one allegedly, but not regulated for the thing that 0:08:37.559 --> 0:08:40.839 I'm about to tell you, people trusted them, and as 0:08:40.840 --> 0:08:44.760 a result, customers deposited somewhere between seven hundred million and 0:08:45.040 --> 0:08:48.440 a billion dollars of funds into Gemini Earn, believing that 0:08:48.520 --> 0:08:52.160 Gemini was offering something akin to an interest generating savings account. 0:08:52.679 --> 0:08:56.760 After all, Gemini had institutional partners, and that is plural. 0:08:56.880 --> 0:08:59.520 That's what they said and they had vetted said partners 0:08:59.679 --> 0:09:03.920 through their collateralization management process, which means, in the case 0:09:03.960 --> 0:09:06.559 of a loan, you collateralize the loan, you give them something. 0:09:06.760 --> 0:09:09.160 For example, you would collateralize the loan for a house 0:09:09.200 --> 0:09:11.640 by giving them a down payment of twenty percent. In 0:09:11.679 --> 0:09:14.040 the case of a loan, you might borrow a certain 0:09:14.040 --> 0:09:16.000 amount of money, but put some money down so they 0:09:16.000 --> 0:09:18.960 have something in the event that you default on the loan. 0:09:20.400 --> 0:09:23.400 In plain English, they were claiming to work with institutional 0:09:23.440 --> 0:09:27.040 investors like banks and hedge funds that would pull Gemini 0:09:27.120 --> 0:09:30.120 earn customers, so people giving them their Bitcoin ethereum and 0:09:30.160 --> 0:09:33.680 all that they would pull those resources to allow them 0:09:33.920 --> 0:09:36.520 to get involved in big trades with better returns than 0:09:36.640 --> 0:09:38.680 users will be able to get on their own. Indeed, 0:09:39.400 --> 0:09:43.920 classical financial markets have larger loans that have preferential rates 0:09:43.920 --> 0:09:46.520 and get involved in deals that the regular customer would 0:09:46.520 --> 0:09:49.040 not be able to. That's what people thought they were getting. 0:09:50.120 --> 0:09:53.360 The other suggestion was that Gemini had diversified its risk 0:09:53.840 --> 0:09:56.160 and there's actually an archived version of the Gemini earned 0:09:56.160 --> 0:09:58.360 Patron twenty twenty one that said that Gemini worked with 0:09:58.480 --> 0:10:02.959 multiple accredited party borrowers to do so. As a result, 0:10:03.040 --> 0:10:06.600 as a customer, you may believe, well, if one fails, 0:10:06.760 --> 0:10:11.199 that won't be the end of the world. Right. It's 0:10:11.200 --> 0:10:13.480 also important explaining that the way that a lot of 0:10:13.520 --> 0:10:16.720 these companies in crypto made their money was by loaning 0:10:16.720 --> 0:10:20.360 it to others in the form of margin trading, where investors, 0:10:20.400 --> 0:10:24.240 both retail and institutional, borrowed a massive amount of cryptocurrency 0:10:24.240 --> 0:10:27.199 in returned for collateral which was usually less than the 0:10:27.240 --> 0:10:29.440 amount they were borrowing. As I mentioned, kind of like 0:10:29.480 --> 0:10:32.760 putting a damn payment for a house, except the asset 0:10:32.800 --> 0:10:37.160 is a token on a blockchain like bitcoin. In fact, 0:10:37.480 --> 0:10:41.240 as you'll find out, most of the cryptocurrency industry was 0:10:41.240 --> 0:10:46.280 held up by these loans. Now, all of this supposedly 0:10:46.480 --> 0:10:50.760 legal and cool and normal stuff. All this sounded very trustworthy. 0:10:51.000 --> 0:10:54.000 This was, of course not the case. Neither was it 0:10:54.080 --> 0:10:57.480 the case that Gemini had diversified their investments at all, 0:10:58.600 --> 0:11:02.400 or actually really any risk management of any kind. Although 0:11:02.480 --> 0:11:05.520 Gemini had the outward appearance of being a highly diversified, 0:11:05.559 --> 0:11:09.880 sophisticated and well run financial services business, it actually wasn't. 0:11:10.480 --> 0:11:13.480 They placed the vast majority of their eggs in one 0:11:13.760 --> 0:11:19.679 single basket, and that was a cryptocurrency brokerage called Genesis. 0:11:21.120 --> 0:11:25.520 Genesis provided a variety of cryptocurrency related services for large 0:11:25.520 --> 0:11:29.680 institutional investors and high net worth individuals. Their money was 0:11:29.720 --> 0:11:33.600 made by offering these institutions and individuals loans leveraged by 0:11:33.600 --> 0:11:38.120 their cryptocurrency, which Genesis would in turn invest, theoretically profiting 0:11:38.120 --> 0:11:41.240 in the process through their access to large deals. As 0:11:41.280 --> 0:11:45.600 I previously mentioned, when I say leverage, I mean the 0:11:45.760 --> 0:11:48.840 very simple thing of I give you some money and 0:11:48.880 --> 0:11:52.040 then you lend me money in return, and there is 0:11:52.120 --> 0:11:54.400 usually some sort of interest deal, or there is some 0:11:54.520 --> 0:11:57.400 way where both parties benefit. Sometimes it will be that 0:11:57.920 --> 0:12:01.400 they are borrowing an asset like bitcoin. The price can change, 0:12:01.920 --> 0:12:04.560 then the collateral they give maybe an excess of the 0:12:04.600 --> 0:12:07.360 amount they're borrowing in dollars, but the price of bitcoin 0:12:07.400 --> 0:12:09.840 may go down. Thus, as a result, if I loaned 0:12:09.920 --> 0:12:11.959 somebody a billion dollars a bitcoin, but the price of 0:12:12.000 --> 0:12:14.280 bitcoin went down and they gave me, I don't know, 0:12:14.480 --> 0:12:18.840 one point something billion in return, They're gambling the idea 0:12:18.840 --> 0:12:21.160 that bitcoin will go up from there, and I'm gambling 0:12:21.160 --> 0:12:22.439 that it will go down, and I would have made 0:12:22.480 --> 0:12:25.720 money on that loan. This is a messy stupid assholes 0:12:25.720 --> 0:12:29.720 industry one built on sand and you're about to find 0:12:29.720 --> 0:12:34.480 out how badly it can go. So Genesis was also 0:12:34.600 --> 0:12:37.600 part of a huge empire called the Digital Currency Group, 0:12:37.760 --> 0:12:41.439 a holding company for multiple different parts of the cryptocurrency ecosystem, 0:12:41.520 --> 0:12:46.600 including cryptocurrency news outlet coin Desk, which ironically was a 0:12:46.679 --> 0:12:49.040 large part of the reason that Sam Bankman Freed has 0:12:49.040 --> 0:12:52.559 gone to prison. I could do an entire episode on 0:12:52.640 --> 0:12:54.480 this company, but all you really need to know is 0:12:54.520 --> 0:12:57.040 that they own Genesis, and while Genesis was meant to 0:12:57.080 --> 0:13:01.640 be independent, it absolutely was not. And what's really important 0:13:01.640 --> 0:13:04.679 to know is how stupidly Genesis was run. They weren't 0:13:04.720 --> 0:13:08.560 simply bad at investing. They were so bad at investing 0:13:08.600 --> 0:13:11.360 that they somehow managed to invest in not one, but 0:13:11.520 --> 0:13:15.200 two of the entities that brought down the entire cryptocurrency 0:13:15.240 --> 0:13:19.360 industry in twenty twenty two. Their first mistake was investing 0:13:19.400 --> 0:13:23.440 two point four billion dollars in Three Arrows Capital, a 0:13:23.480 --> 0:13:26.920 major cryptocurrency hedge fund that ended up being a significant 0:13:26.920 --> 0:13:29.640 scam that also led to the collapse of FTX, the 0:13:29.679 --> 0:13:33.120 other entity that Genesis had trusted with its capital, and 0:13:33.240 --> 0:13:37.520 again that's the subject of another episode. Three Arrows Capital 0:13:37.640 --> 0:13:40.800 was a Singapore based cryptocurrency hedge fund with over a 0:13:40.880 --> 0:13:44.880 decade worth of history. Run by two guys. It started 0:13:44.880 --> 0:13:47.560 life in arbitrage, essentially making money on the differences in 0:13:47.600 --> 0:13:50.640 prices of products in two separate locations, with a niche 0:13:50.679 --> 0:13:53.320 in smaller traditional currencies like the ty bart and the 0:13:53.520 --> 0:13:57.440 Indonesian Rupia. This business model often relied on a healthy 0:13:57.480 --> 0:14:01.000 relationship with legacy banks. We had some success on that front. 0:14:01.000 --> 0:14:04.560 It's relationship soured in twenty seventeen, forcing the company to 0:14:04.559 --> 0:14:07.959 pivot to the wild West of cryptocurrency. It started investing 0:14:07.960 --> 0:14:10.840 its client's money in early stage crypto projects, hoping for 0:14:10.880 --> 0:14:13.680 a big return when their values went up. One of 0:14:13.720 --> 0:14:17.240 these projects was terror Lunar, an algorithmic stable coin which, 0:14:17.280 --> 0:14:20.560 in plain English is meant to be a cocoon on 0:14:20.600 --> 0:14:23.760 the Ethereum blockchain that is always related to the price 0:14:23.760 --> 0:14:26.880 of a dollar, except in this case. You may have 0:14:26.960 --> 0:14:30.720 heard that word algorithmic. You know what The problem with 0:14:30.760 --> 0:14:33.760 algorithms is they need to be perfect in they almost 0:14:33.800 --> 0:14:39.120 never are. But this bit kind of requires some explanation, 0:14:39.280 --> 0:14:43.240 so bear with me. Cryptocurrencies like Bitcoin and Ethereum, they're 0:14:43.280 --> 0:14:46.160 wildly volatile, which is bad if you want to actually 0:14:46.160 --> 0:14:48.720 transact with them. If a currency could be twenty five 0:14:48.760 --> 0:14:52.040 percent more or less the next day, how do you 0:14:52.040 --> 0:14:54.840 actually know what to charge for something? And that's where 0:14:54.880 --> 0:14:58.680 stable coins come in. These are cryptocurrencies that aim to 0:14:58.680 --> 0:15:02.360 fix their value to that of a traditional fiat currency 0:15:02.560 --> 0:15:06.160 like the US dollar or the Euro. Most stable coins have, 0:15:06.480 --> 0:15:09.960 or say they have, at least a cash reserve equivalent 0:15:10.080 --> 0:15:13.720 to the amount of tokens in circulation. Terror Lunar differed 0:15:13.960 --> 0:15:18.200 using an algorithm to maintain price parity rather than any reserves. 0:15:18.440 --> 0:15:22.240 The algorithm worked until it suddenly and violently did not. 0:15:22.880 --> 0:15:26.320 On May third, twenty twenty two, a Terror stable coin 0:15:26.680 --> 0:15:29.640 was worth one dollar. A few days later, it was 0:15:29.680 --> 0:15:43.560 worth a fraction of a penny. The Bearre offline theme 0:15:43.600 --> 0:15:46.760 song by Mattasowski will be dropping this Friday, March first, 0:15:46.760 --> 0:15:50.120 on all streaming platforms. You can find the Spotify presab 0:15:50.200 --> 0:16:11.240 link in the episode notes. Terr Luna collapsed in May 0:16:11.280 --> 0:16:14.640 twenty twenty two with the loss of forty five billion 0:16:14.760 --> 0:16:18.960 dollars in market capitalization, meaning the total value of all 0:16:19.000 --> 0:16:23.680 of the tokens on the blockchain. Three arrows capital's entire 0:16:23.960 --> 0:16:28.480 five hundred million dollar position in Lunar was now effectively worthless. 0:16:29.560 --> 0:16:33.080 This collapse also shaved off and estimated one trillion dollar 0:16:33.200 --> 0:16:37.720 value from the wider crypto market. Three Arrows Capital, the 0:16:37.720 --> 0:16:41.720 so called hedge fund to quote research firm fs insight, 0:16:42.080 --> 0:16:45.360 was an old fashioned, made off style Ponzi scheme where 0:16:45.440 --> 0:16:48.760 founders Suzo and Carl Davis would use client funds to 0:16:48.840 --> 0:16:51.600 borrow from basically anywhere that would let them in the 0:16:51.720 --> 0:16:55.880 entire crypto ecosystem. And because Three Arrows didn't bother collateralizing 0:16:55.920 --> 0:16:58.840 these loans sufficiently or managing the risk behind them, there 0:16:58.920 --> 0:17:03.160 was very little money to turn to customers. The failure 0:17:03.320 --> 0:17:06.920 of Three Arrows Capital left a multi billion dollar hole 0:17:06.960 --> 0:17:10.399 in Genesis balance sheet that if paypered over with a 0:17:10.400 --> 0:17:13.840 one point one billion dollar promissory note from its holding company, 0:17:13.880 --> 0:17:17.040 Digital Currency Group that was due in twenty thirty two. 0:17:18.160 --> 0:17:21.920 This sounds like it would be helpful, right. The problem 0:17:22.000 --> 0:17:25.080 is this maneuver never appeared to involve the conveyance of 0:17:25.119 --> 0:17:28.719 any actual money. It pretty much existed only to pretend 0:17:28.720 --> 0:17:31.439 that Genesis had another one point one billion dollars on 0:17:31.480 --> 0:17:35.400 the books. To be abundantly clear, no money actually ever 0:17:35.440 --> 0:17:39.119 got sent to anybody. This promissory note only existed to 0:17:39.200 --> 0:17:42.760 mislead creditors about the financial health of Genesis. As you 0:17:42.800 --> 0:17:46.919 can understand, those creditors would probably want to know, well, okay, 0:17:46.960 --> 0:17:49.040 do you have enough money in case we need our 0:17:49.080 --> 0:17:52.760 money back? Little bit of a spoiler for you, they didn't. 0:17:53.760 --> 0:17:56.639 The Terror Lunar and Three Arrows capital fiasco trash the 0:17:56.720 --> 0:17:59.840 value of cryptocurrencies, with Bitcoin dropping from around thirty thousand 0:18:00.240 --> 0:18:02.439 in mad twenty twenty two to less than twenty grand 0:18:02.480 --> 0:18:06.560 in October. And in November twenty twenty two, ftx collapsed 0:18:06.600 --> 0:18:09.200 as a result of the coin Desk article, again owned 0:18:09.200 --> 0:18:12.720 by DCG, that revealed that most of ftx's assets were 0:18:12.720 --> 0:18:15.360 held in FTT, a token that they owned the majority 0:18:15.400 --> 0:18:17.720 of and could never sell because doing so would crash 0:18:17.720 --> 0:18:22.120 the FTT market, making said asset worthless. Indeed, in cryptocurrency, 0:18:22.240 --> 0:18:25.840 this is a big problem. If you have a big 0:18:25.880 --> 0:18:28.640 market and say there's twenty billion dollars of a token 0:18:28.680 --> 0:18:30.600 out there, but one person owns a billion of it, 0:18:30.840 --> 0:18:34.359 they actually can't sell it because in doing so, the 0:18:34.400 --> 0:18:36.840 market would suddenly think, oh, this is worthless because someone 0:18:36.840 --> 0:18:40.320 wants to dump him. The results of this revelation that 0:18:40.480 --> 0:18:44.080 FTX was holding most of the world's FTT and thus 0:18:44.119 --> 0:18:46.200 could never sell it, and indeed that in the process 0:18:46.200 --> 0:18:50.959 made their company pretty much insolvent. This left both retail 0:18:50.960 --> 0:18:55.920 investors and institutional investors out to dry. Now eager ide 0:18:56.040 --> 0:18:58.720 and eager eared listeners may have probably guessed by this 0:18:58.800 --> 0:19:04.440 point that Genesis was inexhoribly entangled in this disaster, quickly 0:19:04.480 --> 0:19:07.000 going from saying that they had no material exposure to 0:19:07.119 --> 0:19:10.320 FDx on November eight, twenty twenty two, to then saying 0:19:10.320 --> 0:19:13.000 they had seven million dollars of exposure on November tenth, 0:19:13.359 --> 0:19:15.760 to saying that they had one hundred and seventy five 0:19:15.800 --> 0:19:18.439 million dollars in exposure a day later, to saying that 0:19:18.440 --> 0:19:21.399 they needed to freeze all customer withdrawals and new loans 0:19:21.520 --> 0:19:24.520 entirely and that they would likely be going bankrupt, which 0:19:24.560 --> 0:19:27.920 they said on November eighteenth, twenty twenty two. They entered 0:19:28.000 --> 0:19:31.320 Chapter eleven bankruptcy. In the early twenty twenty three. The 0:19:31.359 --> 0:19:34.639 Digital Currency Group, which of course owns Genesis, had also 0:19:34.720 --> 0:19:37.400 borrowed five hundred and seventy five million dollars from them, 0:19:37.800 --> 0:19:40.639 which has since led to the hilarious situation of Genesis, 0:19:40.680 --> 0:19:42.920 suing the company that owns it as part of its 0:19:42.920 --> 0:19:47.440 own bankruptcy proceedings. This is the company that the Wingovoss 0:19:47.480 --> 0:19:51.080 twins and Gemini their cryptocurrency exchange, had allegedly run through 0:19:51.080 --> 0:19:55.879 their risk management framework and despite allegedly reviewing the collateralization 0:19:56.000 --> 0:20:00.600 management process that Genesis underwent, which means how they lateralized 0:20:00.600 --> 0:20:02.560 the loans, what money they took in to make sure 0:20:02.600 --> 0:20:04.840 that the loans did not just fall apart if something 0:20:04.880 --> 0:20:09.880 bad happened. Well, Gemini hadn't diversified their investments at all. 0:20:10.560 --> 0:20:13.800 They put over a billion dollars of customer funds into Genesis, 0:20:13.800 --> 0:20:18.280 money which is most likely gone now. In many respects, 0:20:18.359 --> 0:20:21.960 Gemini was the cryptocurrency equivalent of Green Seal Capital, a 0:20:22.040 --> 0:20:24.560 company that at one point was the highest profile lender 0:20:24.600 --> 0:20:28.200 in the supply chain financing space, touting former British Prime 0:20:28.240 --> 0:20:31.680 Minister David Cameron as one of its advisors. Like Gemini, 0:20:31.840 --> 0:20:34.520 green Seal Capital pretended to be a diversified business, when 0:20:34.560 --> 0:20:37.760 in reality it borrowed money from large institutional investors to 0:20:37.880 --> 0:20:41.000 lend to a handful of companies. The circumstances behind its 0:20:41.040 --> 0:20:43.639 collapse are slightly more complicated than those of Genesis, but 0:20:43.680 --> 0:20:46.680 not by much. Green Sill's implosion in twenty twenty one 0:20:46.960 --> 0:20:49.679 rippled throughout the industry, contributing to the demise of the 0:20:49.720 --> 0:20:53.200 already troubled credit sueese which were acquired really they were 0:20:53.240 --> 0:20:56.280 rescued by UBS in early twenty twenty three for the 0:20:56.320 --> 0:20:59.000 bargain price of just three point twenty five million dollars. 0:21:00.119 --> 0:21:03.840 Since November twenty twenty two, when Gemini froze, withdrawals from 0:21:03.920 --> 0:21:08.080 Gemini earned the interest bearing account, the Winklevosses and Barry Silbert, 0:21:08.200 --> 0:21:10.840 CEO of Digital Currency Group, who, as I've mentioned, are 0:21:10.840 --> 0:21:15.040 technical owners of Genesis, have engaged in an embarrassing back 0:21:15.080 --> 0:21:18.560 and forth publicly on Twitter, where the Winklevosses have attempted 0:21:18.560 --> 0:21:21.480 to frame themselves as victims of a scam rather than 0:21:21.520 --> 0:21:26.159 bad actors acting badly. If they were remotely competent, they 0:21:26.160 --> 0:21:29.399 could have yanked their customers' funds the ones loaned to 0:21:29.480 --> 0:21:32.639 Genesis from the Gemini ern program. When it was revealed 0:21:32.680 --> 0:21:35.600 that Genesis loaned two point four billion dollars for three 0:21:35.600 --> 0:21:39.000 hourrows capital in July of twenty twenty two, call it 0:21:39.040 --> 0:21:42.280 what you want. Prudent's diligence or just risk management, but 0:21:42.320 --> 0:21:45.320 it would have been the sensible thing to do, unless, 0:21:45.359 --> 0:21:47.480 of course, they didn't believe they'd be able to get 0:21:47.520 --> 0:21:52.440 the money out. On October nineteenth, twenty twenty three, New 0:21:52.520 --> 0:21:55.680 York Attorney General Letitia James filed a massive fraud suit 0:21:55.800 --> 0:22:00.159 against Gemini, Genesis Global Capital, and Digital Currency Group, ring 0:22:00.200 --> 0:22:04.080 a conspiracy to mislead customers and cover up of rebillion 0:22:04.160 --> 0:22:07.600 dollars of losses. The Attorney General's office found that the 0:22:07.600 --> 0:22:11.440 twin brothers named Cameron and Tyler Winklevoss had misled investors 0:22:11.640 --> 0:22:15.600 about the risks associated with Genesis, and that Genesis not 0:22:15.720 --> 0:22:19.159 only failed to disclose its losses, but took steps to 0:22:19.200 --> 0:22:23.480 actively hide them from their clients and the public. The 0:22:23.520 --> 0:22:26.040 New York Attorney General's suit is damning and shows that 0:22:26.080 --> 0:22:29.119 Gemini was well aware of the rotten condition of Genesis 0:22:29.280 --> 0:22:32.920 from the launch of the program in twenty twenty one. 0:22:32.960 --> 0:22:36.480 With Gemini and I quote the Attorney General suit here 0:22:37.320 --> 0:22:41.120 their internal risk analysis showing that Genesis Capital's loan book 0:22:41.240 --> 0:22:45.040 was undercollateralized, which means that they did not have enough 0:22:45.080 --> 0:22:48.040 money to give back the money that they owed to 0:22:48.119 --> 0:22:51.960 their customers and that only a year into the program, 0:22:52.119 --> 0:22:56.359 Gemini revised its estimate of Genesis Capital's credit rating, which 0:22:56.359 --> 0:22:58.840 is the way in which you measure whether a creditor 0:22:58.960 --> 0:23:02.200 or someone who is borrowed or loaning money whether they're 0:23:02.240 --> 0:23:05.359 worthy of doing so. They provised its testiment of their 0:23:05.400 --> 0:23:08.399 credit rating from an investment grade of BBB to a 0:23:08.440 --> 0:23:11.960 non investment or junk grade of CCC. Don't need to 0:23:11.960 --> 0:23:15.480 get too technical here, just know that's pretty bad. Genesis 0:23:15.560 --> 0:23:18.600 also routinely reported to Gemini from May twenty twenty two 0:23:18.720 --> 0:23:21.640 through November twenty twenty two that he had failed its 0:23:21.720 --> 0:23:24.840 own internal loan book risk assessments, to the point that 0:23:24.920 --> 0:23:28.080 in July twenty twenty two, a Gemini board member compared 0:23:28.119 --> 0:23:31.639 Genesis Capital to Layman Brothers prior to the financial collapse 0:23:31.640 --> 0:23:33.560 of two thousand and seven and two thousand and eight. 0:23:34.320 --> 0:23:37.000 At this point, you're probably thinking, so all the money's 0:23:37.000 --> 0:23:42.359 gone and your raim. Gemini and the Winklevosses decided they 0:23:42.359 --> 0:23:46.360 would terminate the EARN program on September second, twenty twenty two, 0:23:46.880 --> 0:23:49.320 but only decided to inform Genesis that it would do 0:23:49.400 --> 0:23:53.399 so on October thirteenth, twenty twenty two. It continued to 0:23:53.480 --> 0:23:57.560 send customer funds to Genesis throughout this period until an 0:23:57.560 --> 0:24:00.880 indeterminate time, with all of this information coming from the 0:24:00.960 --> 0:24:04.399