Speaker 1: This is Bloomberg Crypto, a daily Bloomberg Ihad podcast, and
Speaker 1: I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg News.
Speaker 1: It's Monday, February twenty hill, Stacy Marie here today in
Speaker 1: the US, it's a holiday, so we thought this would
Speaker 1: be a good opportunity to reshare an episode that we
Speaker 1: had previously recorded with my colleague from Odd Lots, Joe.
Speaker 1: And as an aside, you should definitely be listening to
Speaker 1: the Odd Lots podcast. We first recorded this episode in
Speaker 1: the immediate aftermath of the collapse of Crypto Exchange f
Speaker 1: t X. Joe's comments are insightful and as always quite entertaining.
Speaker 1: I hope you enjoy. Have you heard the one about
Speaker 1: the box? Well. In April two, long before Sam bankmun
Speaker 1: Freed was tweeting rambling threads about the collapse of his
Speaker 1: f t X empire, uh, he joined the Bloomberg Odd
Speaker 1: Lots podcast and talked about the box. What this protocol is,
Speaker 1: It's called protocol Eye. It's a box and you can
Speaker 1: can take it token, and you can take a theory
Speaker 1: and you can put it in the box and you
Speaker 1: can take it out like you put it in the
Speaker 1: box and you get like, you know, an I owe
Speaker 1: you for for having to put it in box, and
Speaker 1: then you can redeem that I owe you back out
Speaker 1: for the token. The box was bankman Fred's metaphor for
Speaker 1: describing the crypto practice of yield farming, and his description
Speaker 1: at the time raised many an eyebrow because it seemed well,
Speaker 1: both too blunt and too good to be true. I'm
Speaker 1: joined today by Joe Wisenthal, co host of the Odd
Speaker 1: Lots podcast, who at that time ended that episode with
Speaker 1: a deeply releasable comment, I don't know how to feel
Speaker 1: about it. I feel weird. We all feel weird. Joe,
Speaker 1: Welcome to the show. Thank you so much for having me. Yeah,
Speaker 1: and you know you range from like what's happening with
Speaker 1: trucking supply chains to Guyana to interviewing some bankman Freed.
Speaker 1: So for the for the purposes of this episode, we're
Speaker 1: going to talk about that interview. In April two. This
Speaker 1: was right before the Salt conference in the Bahamas. Things
Speaker 1: were still um i'll use the word frothy and optimistic.
Speaker 1: The vibe was very much, you know, to the moon,
Speaker 1: as the bitcoin folks like to say, and bankman. Freed
Speaker 1: came on the show, which was co hosted by Tracy
Speaker 1: and had a special guest to parents from Matt Levine.
Speaker 1: Among many other things you talked about, one of the
Speaker 1: things was about Defy and yield farming, and at that point,
Speaker 1: you know, he had this metaphor about the box, which
Speaker 1: is like you put money in and kind of money
Speaker 1: comes out, and what happens in between is mysterious. And
Speaker 1: I really listened to that episode before we recorded this one,
Speaker 1: and I just remember you, Tracy and Matt all doing
Speaker 1: variations on what it's interesting because the box comments, I
Speaker 1: think it's about twenty or so minutes into the episode,
Speaker 1: and I do think that if you sort of listened
Speaker 1: to the full episode, just the tone of it, we
Speaker 1: never quite recovered or got back on track after that,
Speaker 1: I think because we were all like a little like flabbergasted,
Speaker 1: a little bit surprised by the bluntness these sort of
Speaker 1: you know, after he described yield farming as like this
Speaker 1: sort of magic money box where you put money in
Speaker 1: and then money comes out, and Matt's first response was like,
Speaker 1: to be honest, that sounds like a Ponzi scheme. And
Speaker 1: I was like doesn't really seem like there's any economics
Speaker 1: value created at all. My expectation at that moment in
Speaker 1: the conversation was that he would push back a little bit,
Speaker 1: like he would say something like, oh, well, that's just
Speaker 1: sort of like the structure of it, but something cool
Speaker 1: and productive could theoretically happen in the box. So what
Speaker 1: surprised me at the time was not even the metaphor
Speaker 1: per se. But after a sort of said that sounds
Speaker 1: like Ponzi, after we all kind of said, oh, where's
Speaker 1: the value, there was like no pushback or anything. And
Speaker 1: I think that was actually the part, more than anything
Speaker 1: else that I found to beat Jarring. And then yeah afterwards,
Speaker 1: like you know, but yeah to the end and Tracey
Speaker 1: and I are did our outro, and I think we
Speaker 1: just sort of like stammered a little bit because after
Speaker 1: that moment we didn't really know what to say except wow,
Speaker 1: that was in a in a weird way, it seemed
Speaker 1: very honest. It seemed like he was being extremely candid
Speaker 1: about what he thought cynical. But it you know, it
Speaker 1: almost came off as like, well, yeah, here's a crypto
Speaker 1: person saying what many people outside of crypto believed to
Speaker 1: be the case about the industry. You, like many other people,
Speaker 1: have read the Vox story in which which was essentially
Speaker 1: like he was texting with a Fox Reports, and there
Speaker 1: was so much in there in which he indicated just
Speaker 1: how savvy he was about his public persona and the
Speaker 1: kinds of things that he had to say in order
Speaker 1: to seem credible. But you also got the impression that
Speaker 1: this is a person who, while he was doing that,
Speaker 1: while he was playing this part to some extent, believed
Speaker 1: that he was above the free right that he was
Speaker 1: to use a very old phrase and finance actually still
Speaker 1: the smartest guy in the room. Well, you know, one
Speaker 1: thing that I long thought about Sam and being separate,
Speaker 1: and so I don't know if above is right, but
Speaker 1: you know, maybe he did think of himself but definitely separate,
Speaker 1: which is that you know, in his public persona leg
Speaker 1: on Twitter, etcetera. He never really made the case that
Speaker 1: crypto is good. Most people in the space argue that, oh, yeah,
Speaker 1: of course, you know, they don't really talk about all
Speaker 1: the money they're making or they were making anyway. They
Speaker 1: talked about, Oh, we're changing the world, and we're gonna
Speaker 1: bring transparency and trustlessness and you're not gonna have your
Speaker 1: money do valued by the FED, and you're not gonna
Speaker 1: have to trust JP Morgan, etcetera, or the sort of
Speaker 1: other version that it's like, oh, well, people in emerging
Speaker 1: markets without access to reliable payments, there stable, whatever it is.
Speaker 1: They're all these stories that crypto people tell the public,
Speaker 1: and I think, to a large extent, tell themselves to
Speaker 1: put this gloss on making a lot of money so
Speaker 1: that sounds like important in world changing. And he never
Speaker 1: did that, as far as I could tell. It was
Speaker 1: always about the money, not just in that conversation but elsewhere,
Speaker 1: and so I always thought, you know, I remember, like
Speaker 1: even a friend of mine several months ago asked me
Speaker 1: what I thought of um SPF. I thought it was
Speaker 1: sort of refreshing that he didn't sort of like position
Speaker 1: making a lot of money and crypto is sort of
Speaker 1: this noble thing. And basically he was like he and
Speaker 1: the various Lamenta people who are on Twitter or like,
Speaker 1: they really just talked about the money. And they talked
Speaker 1: about the money. Obviously there was this backdrop, whether you
Speaker 1: believe that it was sincere or not of you know,
Speaker 1: what's called effective altruism. But the idea is like you
Speaker 1: make a bunch of money and eventually maybe you change
Speaker 1: the world. But it was also the way that they
Speaker 1: talked about the money was very matter of facts, and
Speaker 1: I think in addition to what you're identifying about the
Speaker 1: the self righteousness that can infuse crypto Twitter, sometimes there's
Speaker 1: also a lot of mud slinging. Right there's as is
Speaker 1: happening right now, various similarly disgraced crypto founders of spending
Speaker 1: quite a lot of time on Twitter redirecting attention towards
Speaker 1: you know, Sam Bankman, Freed and ft X right now.
Speaker 1: There were a couple of times I remember, you know
Speaker 1: when bank when Freed talked about like coin based earnings
Speaker 1: and various other things, but for the majority of his
Speaker 1: presence he was talking up or talking about like his
Speaker 1: own entities. And there were many when you were interviewing
Speaker 1: other folks in the crypto space, and you've talked to
Speaker 1: a lot of them, what was their perception of what
Speaker 1: was happening at Alameda, ft X, Bankman Freed himself. That's
Speaker 1: a good question. So I don't think in any of
Speaker 1: our interviews that we've actually done on the podcast that
Speaker 1: we actually like talked about f t X and later
Speaker 1: or SBF. What I do know is that, you know,
Speaker 1: when I spoke to traders just sort of independently or
Speaker 1: my curiosity about the industry, they really like trading on
Speaker 1: f t X, and I think this is like it
Speaker 1: from my perspective again, you know, sort of going back
Speaker 1: and like rethinking things. Like one of the through lines
Speaker 1: was that professional like crypto hedge fund traders, etcetera, thought
Speaker 1: it was a really high quality product for a number
Speaker 1: of reasons, that there was a high level of customer support,
Speaker 1: that there was a high level of up time. If
Speaker 1: you recall, sites like coin base have had some pretty
Speaker 1: big down times from time to time, it didn't seem
Speaker 1: like f t X had any I remember talking to
Speaker 1: a trader who once told me that, like, basically you
Speaker 1: can buy with a tremendous amount of leverage, so it's
Speaker 1: like ft X and binance, etcetera. And then if the
Speaker 1: position moves against you get the position liquid and your
Speaker 1: collateral gets taken away from you. But of course, any
Speaker 1: algorithm that determines with when your collateral is gonna get
Speaker 1: taken away from you, you know, it's gotta it's based
Speaker 1: on some sort of like you know, probabilistic measure. I
Speaker 1: don't really know the math, but some sort of probabilistic
Speaker 1: measure of your in risk of losing the exchange money.
Speaker 1: And what I was told by one trader is like
Speaker 1: that f t x is liquidation engine works so well,
Speaker 1: and they're like, oh, ft X is going to take
Speaker 1: over the world because their liquidation engine is so much
Speaker 1: better than everyone else's that they've trade with. There was
Speaker 1: also cross margining abilities, so you could post one type
Speaker 1: of token is a collateral and get leverage against the
Speaker 1: different asset you apparently could not get on binance. So
Speaker 1: I think there was another aspect in which, you know,
Speaker 1: you sort of like if you were to think about
Speaker 1: from an investor perspective, like doing due diligence on a company.
Speaker 1: We want to talk to to the customers like the product,
Speaker 1: and my impression always was that customers really like trading
Speaker 1: on ft X. You have this combination of software that
Speaker 1: seemed to be pretty decent, right and insofar as the
Speaker 1: value that the ft X trading platform is providing to
Speaker 1: institutional investors, a lot of intelligence, a lot of people
Speaker 1: who were all about the money, and yet the size
Speaker 1: of the losses that whether it's between eight or ten
Speaker 1: billion dollars, seems to have stunned a lot of people
Speaker 1: just in terms of the share scoope of it. Yeah,
Speaker 1: and I do believe that, like where the money went
Speaker 1: is still a mystery, but what seems like very plausible
Speaker 1: is that Alameda was lost a lot of money trading.
Speaker 1: I mean, on some level or another, that seems to
Speaker 1: be the case. And you know, this is something that,
Speaker 1: like I said, I never really heard people talk that
Speaker 1: much about Alameda. But you know, of course um Sam
Speaker 1: had a background at the famous quant trading shop Jane Street,
Speaker 1: as did some of his colleagues, and so the presentation
Speaker 1: of Alameda was that it was sort of like this
Speaker 1: market neutral quantitative trading shop. And I'm pretty sure on
Speaker 1: the Alameda website they also talked about that they were
Speaker 1: a market neutral firm. So not taking big directional that
Speaker 1: one way or another. But that being said, and you know,
Speaker 1: if you're like thinking, okay, like let's go back and
Speaker 1: think more about and flags, I do recall, you know,
Speaker 1: and people have since pointed these out, but I do
Speaker 1: remember thinking at the time that the former CEO of Alameda,
Speaker 1: San Trabuco, who left the company earlier in the year.
Speaker 1: At some point this summer he did hit these threads
Speaker 1: that did not seem like very quanty, did not seem
Speaker 1: like market neutral. And one of the threads that people
Speaker 1: point to, if I recall it like basically like, oh,
Speaker 1: we went long doorge coin ahead of elon Esnel, which maybe,
Speaker 1: you know, maybe a fine trade, although I think that
Speaker 1: was the peak. But it's like, oh man, this is
Speaker 1: not exactly what I thought. What my impression of what
Speaker 1: Alameda was doing, And I thought what he was doing was,
Speaker 1: you know, making markets and collecting spreads between the price
Speaker 1: of a coin on one side and the price of
Speaker 1: a coin on another side, or the price of a
Speaker 1: coin on a centralized exchange versus the price on the
Speaker 1: DeFi exchange. So I did, you know, I didn't think
Speaker 1: too much about it, but I did think, I guess
Speaker 1: I that it did seem different what I than what
Speaker 1: I thought Alameda was doing. We'll be right back with
Speaker 1: more from Bloomberg's Joe, wisn't all you said? The friends
Speaker 1: of the show, Katie and Tim that one of the
Speaker 1: signs that crypto is immature is that it's too hard
Speaker 1: to launder money. Yeah, well, without getting caught. Well, this
Speaker 1: is like so something I mean, I've been you know,
Speaker 1: from day one. It's like, this is the question. It's like, well,
Speaker 1: what is crypto good for? Right? We've probably both of
Speaker 1: us have asked this question a million guess like, Okay,
Speaker 1: it's fun as journalists we like looking at the lines
Speaker 1: going up and down, and it's probably fun is traders look,
Speaker 1: you know, big big swink, But like, what is it
Speaker 1: good for? Right? What is the point of any of this?
Speaker 1: And you know, one of the things you hear, particularly
Speaker 1: from the bitcoins side of the world, just like, well,
Speaker 1: it's good for censorship resistant payments, doing the payments that
Speaker 1: the state doesn't want you to do, doing the payments
Speaker 1: that would Venmo or PayPal or zel or your bank
Speaker 1: would kick you off for right, trustless money. And yet
Speaker 1: it doesn't seem to be that good for that either
Speaker 1: as far as I can tell. And so, like, you know,
Speaker 1: even the sort of like bare minimum things that like
Speaker 1: crypto proponents often say, which is like, well, person a
Speaker 1: can a person be money and persons? He can't say no,
Speaker 1: I'm not even convinced that it's true, because again, I
Speaker 1: think in the you know, the context we were discussing
Speaker 1: was like there was a big test of this with
Speaker 1: the Canadian trucker protests earlier this year, and a lot
Speaker 1: of that money got seized or blocked, and that was
Speaker 1: people trying to donate to the protesters. And so, regardless
Speaker 1: of what you think about the protesters mission or cause,
Speaker 1: it struck me as kind of a test of like
Speaker 1: cryptos as particularly bitcoins main claims. And I don't think
Speaker 1: I really lived up. They didn't really have a way
Speaker 1: of getting bitcoin to the protesters in a way that
Speaker 1: was trust list and could avoid blockage. Well, one of
Speaker 1: the things that the truckers did is they like put
Speaker 1: a bunch of wallet addresses on their signs and the
Speaker 1: size of the trucks, and they're like, send us money here,
Speaker 1: and then various regularly says well, like we're just gonna
Speaker 1: but you know, on the other hand, like there's no
Speaker 1: like I think, you know, I remember so after that happened,
Speaker 1: I remember seeing these discussions even among many like sort
Speaker 1: of bitcoin proromis like oh, they shouldn't have like, uh,
Speaker 1: you know, made the wallets address is so public, which fine, maybe,
Speaker 1: but I don't think I ever saw like a great
Speaker 1: alternative solution, and you know, it's like, Okay, let's say
Speaker 1: you are going to be the focal point for disbursing
Speaker 1: the money. I'm going to send it to you, and
Speaker 1: you know who the truckers are privately, and you're gonna
Speaker 1: dispurse it. How do I trust you? How do I
Speaker 1: know you're not gonna pocket it? Etcetera. And so even
Speaker 1: like if you could find a way like around the
Speaker 1: public wallet episodes, like, you still have the problem of
Speaker 1: trusting the intermediaries. So it's very tricky. And so I
Speaker 1: thought that that was like a pretty good test of
Speaker 1: whether you know, like bitcoins core claims and censorship resistance
Speaker 1: could be defended, and I thought it was lacking. Is
Speaker 1: there anything that you're seeing in the response to the
Speaker 1: fallout from algorithmic stable call Three Arrows, Capital Celsius Voyager
Speaker 1: SPF f t X that is suggesting what the next
Speaker 1: crisis could look like? So I did actually have one
Speaker 1: thought on this specific question, which is that one of
Speaker 1: the things you're hearing about now in the wake of
Speaker 1: f t X is this concept where they say, okay,
Speaker 1: crypto entities, particularly centralized ones, if they're going to be centralized,
Speaker 1: should produce some sort of proof of reserves. And this
Speaker 1: idea that with cryptographic technology you don't necessarily have to
Speaker 1: reveal your entire balance sheet or all the items on it,
Speaker 1: but you can prove your solvency in some way. And
Speaker 1: so you have some snapshot of coins that are yours
Speaker 1: and you could prove your solvency. And the first thought
Speaker 1: that went to my mind was sure, you might be
Speaker 1: able to do that, but how do you know that
Speaker 1: the marks are true? And of course in trand FI,
Speaker 1: you know, two thousand, two thousand nine, it was always
Speaker 1: like level on, level two, level three, Mark Smith, That's right,
Speaker 1: And we saw that a bit with f t X
Speaker 1: because part of the story is how much of the
Speaker 1: ft in seram tokens they had, and I think many
Speaker 1: people would say that those coins were marked Smith. You know,
Speaker 1: if the next stage of okay, what lessons learned from
Speaker 1: f t X, every exchange has to sort of like
Speaker 1: have some sort of cryptographic proof of solvency, then I
Speaker 1: think the next crisis after that could have something that's like, yeah,
Speaker 1: but where did these prices come from and how reliable
Speaker 1: are they? Because we do see that of course with
Speaker 1: the f t T and serum question with f t X,
Speaker 1: and I'm not sure that like a proof of reserves,
Speaker 1: had it been in place for f t X, would
Speaker 1: have necessarily been robust against that failure. Thank you so
Speaker 1: much for coming on the show. Thanks for having me.
Speaker 1: You can find more of Joe's work on the Bloomberg
Speaker 1: Ceminal and on Bloomberg dot com, and of course on
Speaker 1: the Odd Lots podcast, as well as the Odd Lots
Speaker 1: News less Of, and be sure to check out our
Speaker 1: twice weekly news less of Bloomberg Crypto. This is Bloomberg Crypto,
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Speaker 1: At is our engineer. Original music by Leo Sidrin. I'm
Speaker 1: Stacy Marie schmal, We'll be back tomorrow.