1 00:00:04,360 --> 00:00:12,319 Speaker 1: Welcome to tech Stuff, a production from iHeartRadio. Hey there, 2 00:00:12,320 --> 00:00:15,840 Speaker 1: and welcome to tech Stuff. I'm your host, Jovin Strickland. 3 00:00:15,920 --> 00:00:19,800 Speaker 1: I'm an executive producer with iHeartRadio and how the tech 4 00:00:19,880 --> 00:00:24,000 Speaker 1: are you? So? Back on January twenty fifth, twenty twenty one, 5 00:00:24,079 --> 00:00:28,480 Speaker 1: I published an episode titled It's a open Bracket Crypto, 6 00:00:29,160 --> 00:00:34,240 Speaker 1: closed bracket Ponzi Scheme. So it's a crypto Ponzi scheme. 7 00:00:34,560 --> 00:00:37,280 Speaker 1: That's where I was paying homage to stuff you should 8 00:00:37,280 --> 00:00:41,080 Speaker 1: know as Chuck Bryant, who I have heard say it's 9 00:00:41,120 --> 00:00:44,200 Speaker 1: a Ponzi scheme way back in the house stuff works days. 10 00:00:44,640 --> 00:00:48,600 Speaker 1: And in that episode, I talked about numerous issues within 11 00:00:48,640 --> 00:00:53,200 Speaker 1: the crypto community that relate to Ponzi schemes, and today 12 00:00:53,240 --> 00:00:55,640 Speaker 1: I thought we would do an update to talk about 13 00:00:55,720 --> 00:01:01,120 Speaker 1: one specific one that really had an enormous impact last year, 14 00:01:01,480 --> 00:01:06,119 Speaker 1: and then a little additional details because even since twenty 15 00:01:06,160 --> 00:01:11,280 Speaker 1: twenty one, there's been more examples of either outright Ponzi 16 00:01:11,360 --> 00:01:15,200 Speaker 1: schemes in the crypto space or closely related issues that 17 00:01:15,280 --> 00:01:18,840 Speaker 1: had enormous impact. So I'm not talking about every single one, 18 00:01:19,319 --> 00:01:22,480 Speaker 1: but I'm talking about the really big ones. Now, first, 19 00:01:23,360 --> 00:01:26,560 Speaker 1: we need to remind ourselves about what a Ponzi scheme 20 00:01:26,680 --> 00:01:30,600 Speaker 1: actually is. Now. It takes its name from a guy 21 00:01:30,680 --> 00:01:34,840 Speaker 1: named Charles Ponzi, who in the nineteen twenties used a 22 00:01:34,959 --> 00:01:38,600 Speaker 1: method to steal a whole lot of money, reportedly around 23 00:01:38,680 --> 00:01:42,560 Speaker 1: fifteen million dollars in less than a year. Now that's 24 00:01:42,600 --> 00:01:44,839 Speaker 1: a lot of money right now, fifteen million. I would 25 00:01:44,880 --> 00:01:49,200 Speaker 1: not sneeze at fifteen million. I would be shuffed to 26 00:01:49,320 --> 00:01:53,080 Speaker 1: receive that. But holy cats, think about that in nineteen 27 00:01:53,280 --> 00:01:59,320 Speaker 1: twenties money a ridiculous amount of cash. Well, what was 28 00:01:59,360 --> 00:02:04,920 Speaker 1: he doing? Well? Schtick was centered around International Reply coupons, 29 00:02:05,040 --> 00:02:09,640 Speaker 1: or IRCs, and essentially an IRC is a voucher for 30 00:02:09,840 --> 00:02:13,960 Speaker 1: postage stamps in another country. So you would go to 31 00:02:14,080 --> 00:02:17,440 Speaker 1: the post office and you would buy IRCs if you 32 00:02:17,520 --> 00:02:20,320 Speaker 1: wanted to write back to your family in the old 33 00:02:20,320 --> 00:02:23,680 Speaker 1: country and then have them be able to respond without 34 00:02:23,840 --> 00:02:29,399 Speaker 1: them having to buy stamps themselves. So instead they would 35 00:02:29,440 --> 00:02:32,359 Speaker 1: go to their post office, they would use the IRC coupon, 36 00:02:32,520 --> 00:02:35,080 Speaker 1: and the coupon would cover the cost of stamps to 37 00:02:35,200 --> 00:02:38,720 Speaker 1: send international mail back to you. You don't have to 38 00:02:38,760 --> 00:02:40,639 Speaker 1: do this within the same country, because then you could 39 00:02:40,680 --> 00:02:44,000 Speaker 1: just use a self addressed stamped envelope, but obviously a 40 00:02:44,200 --> 00:02:48,959 Speaker 1: US stamp doesn't mean anything in a different country. Well, 41 00:02:49,000 --> 00:02:54,639 Speaker 1: Ponzi's idea was to use IRCs and leverage the differences 42 00:02:54,720 --> 00:02:58,760 Speaker 1: in postage costs in different countries. See, when you bought 43 00:02:58,800 --> 00:03:02,440 Speaker 1: an IRC, you did so at whatever the local postage 44 00:03:02,520 --> 00:03:05,919 Speaker 1: rate for a stamp was in your area, and even 45 00:03:05,960 --> 00:03:09,800 Speaker 1: if the postage rate was higher in another country, the 46 00:03:09,919 --> 00:03:14,440 Speaker 1: IRC would still cover the stamp. So this example doesn't 47 00:03:14,480 --> 00:03:17,160 Speaker 1: really hold because the rates would be flip flocked. But 48 00:03:17,480 --> 00:03:20,799 Speaker 1: here we go. If a stamp at the US cost 49 00:03:20,880 --> 00:03:24,480 Speaker 1: a nickel at the time, so five cents, but a 50 00:03:24,560 --> 00:03:28,200 Speaker 1: stamp in Germany cost a dime or ten cents in 51 00:03:28,280 --> 00:03:31,119 Speaker 1: equivalent US cash, what you could do is you could 52 00:03:31,160 --> 00:03:34,440 Speaker 1: go to the US post office. You would use a 53 00:03:34,600 --> 00:03:38,520 Speaker 1: five cent nickel to buy an IRC. You'd send that 54 00:03:38,560 --> 00:03:42,000 Speaker 1: over to your papaw in Germany, and your papa could 55 00:03:42,120 --> 00:03:45,280 Speaker 1: use that same IRC to get a ten cent stamp 56 00:03:45,600 --> 00:03:47,880 Speaker 1: at the post office, even though you only had to 57 00:03:47,880 --> 00:03:51,600 Speaker 1: pay five cents back in the United States. So Ponzi's 58 00:03:51,640 --> 00:03:54,920 Speaker 1: idea was to try and leverage this. He wanted to 59 00:03:54,920 --> 00:03:59,520 Speaker 1: buy IRCs in cheap countries and then redeem them and 60 00:04:00,040 --> 00:04:02,840 Speaker 1: innsive ones and then sell the stamps out a profit. 61 00:04:03,200 --> 00:04:06,000 Speaker 1: So it was like creating money out of nothing. He 62 00:04:06,120 --> 00:04:08,240 Speaker 1: tried to convince a bank to back this idea, of 63 00:04:08,320 --> 00:04:11,280 Speaker 1: the banks weren't convinced that the strategy would work, or 64 00:04:11,400 --> 00:04:14,120 Speaker 1: if it did work, it wouldn't really be scalable. You 65 00:04:14,120 --> 00:04:17,040 Speaker 1: wouldn't be able to do this in a volume that 66 00:04:17,080 --> 00:04:20,560 Speaker 1: would actually make you any significant amount of money. It 67 00:04:20,600 --> 00:04:25,720 Speaker 1: turns out those banks were right. So instead Ponzi goes 68 00:04:25,720 --> 00:04:29,400 Speaker 1: and starts talking to friends and acquaintances, and he starts 69 00:04:29,440 --> 00:04:33,240 Speaker 1: making promises that within three months he could double an 70 00:04:33,240 --> 00:04:38,480 Speaker 1: initial investment, and he secures a round of investment cash, 71 00:04:38,560 --> 00:04:42,680 Speaker 1: and sure enough, some of these investors see impressive payouts 72 00:04:42,720 --> 00:04:45,839 Speaker 1: from Ponzi later down the road. Except it turned out 73 00:04:45,839 --> 00:04:50,800 Speaker 1: those payouts were not the result of this IRC scam 74 00:04:50,880 --> 00:04:53,640 Speaker 1: he had in mind, or not even scam his scheme. 75 00:04:54,720 --> 00:04:59,600 Speaker 1: This IRC scheme wasn't the reason why Ponzi was paying 76 00:04:59,640 --> 00:05:05,320 Speaker 1: out the dividends on those investments. Instead, Ponzi actually found 77 00:05:05,960 --> 00:05:09,200 Speaker 1: the logistics of getting this scheme to work were way 78 00:05:09,240 --> 00:05:11,719 Speaker 1: more complex than he anticipated it. Like I said, the 79 00:05:11,760 --> 00:05:16,880 Speaker 1: banks were right, So I think, at least in the beginning, 80 00:05:16,880 --> 00:05:19,560 Speaker 1: he probably was determined to try and make it work. 81 00:05:19,600 --> 00:05:24,080 Speaker 1: But in the meantime, what he did was he needed 82 00:05:24,120 --> 00:05:26,760 Speaker 1: to find a way to give a return on investment 83 00:05:26,760 --> 00:05:29,560 Speaker 1: to these initial investors. So he took out a second 84 00:05:29,680 --> 00:05:32,599 Speaker 1: round of investing, and with some of the money that 85 00:05:32,640 --> 00:05:36,520 Speaker 1: folks were pouring into the scheme at this round of investment, 86 00:05:36,960 --> 00:05:39,359 Speaker 1: he took that money and paid out some of his 87 00:05:39,480 --> 00:05:45,360 Speaker 1: earlier investors. Well, the earlier investors are incredibly excited to 88 00:05:45,360 --> 00:05:48,320 Speaker 1: see that they got such a rapid and considerable return, 89 00:05:49,240 --> 00:05:53,760 Speaker 1: so a lot of them reinvested back into Ponzi's scheme, 90 00:05:53,839 --> 00:05:57,960 Speaker 1: and before long Ponzi shifts away from trying to make 91 00:05:57,960 --> 00:06:00,760 Speaker 1: the IRC thing work. He just gives up on that 92 00:06:01,080 --> 00:06:04,159 Speaker 1: and he steady just runs a scam where he takes 93 00:06:04,240 --> 00:06:07,960 Speaker 1: the most recent round of investments to pay out returns 94 00:06:08,000 --> 00:06:13,240 Speaker 1: to earlier investors and himself. Now, to be clear, Ponzi 95 00:06:13,360 --> 00:06:16,080 Speaker 1: did not invent this idea. This was not a brand 96 00:06:16,120 --> 00:06:19,200 Speaker 1: new concept. He was not the first to come up 97 00:06:19,240 --> 00:06:22,080 Speaker 1: with a Ponzi scheme, but we call them Ponzi schemes 98 00:06:22,600 --> 00:06:27,360 Speaker 1: because he went big time with this, mostly out of Boston, Massachusetts. 99 00:06:27,920 --> 00:06:31,760 Speaker 1: While previous examples of these schemes followed essentially the same 100 00:06:31,800 --> 00:06:35,320 Speaker 1: thing that what Ponzi was doing. Ponzi's version propelled him 101 00:06:35,560 --> 00:06:38,920 Speaker 1: to such wealth that before the whole thing came crashing down, 102 00:06:39,800 --> 00:06:44,200 Speaker 1: he was pretty famous in the New England area. Newspapers 103 00:06:44,200 --> 00:06:47,479 Speaker 1: would cover his business favorably, and that of course led 104 00:06:47,520 --> 00:06:51,360 Speaker 1: to even more investments. So when a newspaper would say, hey, 105 00:06:51,480 --> 00:06:54,440 Speaker 1: these investors are super happy because they got so much 106 00:06:54,520 --> 00:06:58,360 Speaker 1: money back on their investment, more people were begging to 107 00:06:58,400 --> 00:07:01,760 Speaker 1: give Ponzi their money. Was able to perpetuate the scheme 108 00:07:01,800 --> 00:07:05,119 Speaker 1: and make him even richer. But here's the thing. Even 109 00:07:05,160 --> 00:07:10,280 Speaker 1: the best run Ponzi scheme will not last forever. Eventually, 110 00:07:10,320 --> 00:07:13,320 Speaker 1: the incoming investments are not enough to cover all the 111 00:07:13,360 --> 00:07:16,760 Speaker 1: previous investors, and you either have to pay out smaller 112 00:07:16,800 --> 00:07:20,120 Speaker 1: and smaller dividends, which is going to upset your investors, 113 00:07:20,600 --> 00:07:22,840 Speaker 1: or you got to take the money and run while 114 00:07:22,880 --> 00:07:25,760 Speaker 1: you can. But while the scheme is booming, you can 115 00:07:25,800 --> 00:07:28,760 Speaker 1: have yourself a swell time. Just you know, you've got 116 00:07:28,760 --> 00:07:31,920 Speaker 1: to remember that at some point the piper will demand 117 00:07:31,960 --> 00:07:35,280 Speaker 1: to be paid, and you'll likely also have some government 118 00:07:35,320 --> 00:07:39,239 Speaker 1: agencies with some scary initials, and they'll be really, really 119 00:07:39,280 --> 00:07:42,920 Speaker 1: interested in talking to you. Another way to describe the 120 00:07:42,960 --> 00:07:47,360 Speaker 1: Ponzi scheme is the old saying robbing Peter to pay Paul, 121 00:07:47,720 --> 00:07:51,400 Speaker 1: or sometimes it's borrowing from Peter to pay Paul. But 122 00:07:51,480 --> 00:07:54,760 Speaker 1: you get the idea. You're not creating wealth, you're really 123 00:07:54,840 --> 00:07:58,160 Speaker 1: just redistributing it. And it only works as long as 124 00:07:58,200 --> 00:08:00,880 Speaker 1: you can keep finding more Peters so that you can 125 00:08:00,960 --> 00:08:04,400 Speaker 1: keep paying all those Palls and keep them at bay. 126 00:08:05,280 --> 00:08:08,760 Speaker 1: As for Ponzi himself, well, several months after he rocketed 127 00:08:08,800 --> 00:08:12,280 Speaker 1: to wealth, the investigators began to close in on him. 128 00:08:12,440 --> 00:08:17,080 Speaker 1: The US Postal Office denounced the underlying principle of his 129 00:08:17,160 --> 00:08:21,200 Speaker 1: supposed business, which, remember, was not actually what he was doing. 130 00:08:21,280 --> 00:08:24,120 Speaker 1: It was just what he said he was doing. But 131 00:08:24,200 --> 00:08:27,320 Speaker 1: the US post Office said, there's just no way he 132 00:08:27,360 --> 00:08:30,440 Speaker 1: could be making that much money through IRCs because the 133 00:08:30,560 --> 00:08:33,960 Speaker 1: volume he would have to trade in was greater than 134 00:08:34,040 --> 00:08:37,960 Speaker 1: what the supply was, so literally, there was no possible 135 00:08:38,000 --> 00:08:39,720 Speaker 1: way for him to make his money through the way 136 00:08:39,720 --> 00:08:43,760 Speaker 1: he was claiming, because there weren't enough IRCs out there 137 00:08:43,800 --> 00:08:47,040 Speaker 1: to make it happen. And local newspapers began to suspect 138 00:08:47,040 --> 00:08:52,120 Speaker 1: that perhaps they had been hoodwinked, and so chagrined, they 139 00:08:52,160 --> 00:08:56,960 Speaker 1: began to launch their own investigative efforts and a way 140 00:08:57,000 --> 00:09:00,320 Speaker 1: to try and save face, because if you talk someone 141 00:09:00,480 --> 00:09:03,520 Speaker 1: up and then it turns out that they're a flim 142 00:09:03,520 --> 00:09:07,240 Speaker 1: flam artist, that does not go well for your reputation. Right, 143 00:09:07,400 --> 00:09:10,839 Speaker 1: So these newspapers are like, we need to if something 144 00:09:10,920 --> 00:09:12,920 Speaker 1: is hinky here, we need to really look into it. 145 00:09:13,800 --> 00:09:15,600 Speaker 1: There were a couple of points where it seemed like 146 00:09:15,600 --> 00:09:18,080 Speaker 1: the mob was about to turn on Ponzi, that everyone 147 00:09:18,160 --> 00:09:20,520 Speaker 1: was gonna pull their money out, which would have sent 148 00:09:20,600 --> 00:09:23,720 Speaker 1: the whole thing into a collapse. But a couple of 149 00:09:23,720 --> 00:09:26,880 Speaker 1: times he was actually able to dissuade them, and some 150 00:09:26,920 --> 00:09:29,360 Speaker 1: folks who were determined to withdraw their money once the 151 00:09:29,440 --> 00:09:33,960 Speaker 1: investigations began would later reconsider because Ponzi seemed to be 152 00:09:33,960 --> 00:09:36,959 Speaker 1: on the up and up, like he was returning money 153 00:09:37,040 --> 00:09:40,319 Speaker 1: to investors who were requesting it, like millions of dollars 154 00:09:40,320 --> 00:09:43,920 Speaker 1: early on, and so folks began to say, well, if 155 00:09:43,920 --> 00:09:48,200 Speaker 1: he was actually a crook, he wouldn't be returning money, 156 00:09:48,240 --> 00:09:51,720 Speaker 1: so he must be honest. That means I might actually 157 00:09:51,760 --> 00:09:54,000 Speaker 1: stand to make a whole bunch of money from this guy. 158 00:09:54,320 --> 00:09:57,680 Speaker 1: And so people who had initially thought I'm out, ended 159 00:09:57,760 --> 00:09:59,920 Speaker 1: up not just staying in, but some of them put 160 00:10:00,040 --> 00:10:05,120 Speaker 1: even more money into the scheme. Now, ultimately, an audit 161 00:10:05,160 --> 00:10:08,240 Speaker 1: by the US government found that Ponzi's business was thoroughly 162 00:10:08,280 --> 00:10:13,080 Speaker 1: corrupt and totally baseless. The investigation ultimately found there was 163 00:10:13,200 --> 00:10:16,880 Speaker 1: around sixty one dollars worth of IRC's in the whole 164 00:10:16,960 --> 00:10:20,400 Speaker 1: dang business. You are not going to be making millions 165 00:10:20,440 --> 00:10:23,679 Speaker 1: of dollars in profit off of sixty one dollars of 166 00:10:24,520 --> 00:10:28,320 Speaker 1: these coupons, And it proved that what Ponzi really was 167 00:10:28,360 --> 00:10:30,920 Speaker 1: doing was just convincing more and more people to hand 168 00:10:30,960 --> 00:10:34,120 Speaker 1: him money to pay off the earlier investors and to 169 00:10:34,120 --> 00:10:38,160 Speaker 1: make himself rich. Ponzi ultimately would go to jail, though 170 00:10:38,280 --> 00:10:41,520 Speaker 1: not before having a few more adventures through skipping bond 171 00:10:41,600 --> 00:10:44,240 Speaker 1: and running off to different states before he was ultimately 172 00:10:44,720 --> 00:10:49,400 Speaker 1: apprehended and sentenced, and after serving his sentence, he was 173 00:10:49,440 --> 00:10:53,320 Speaker 1: deported to Italy. He was an immigrant from Italy to 174 00:10:53,360 --> 00:10:56,160 Speaker 1: the United States. He did not return to the US, 175 00:10:56,240 --> 00:10:59,319 Speaker 1: but he did immigrate to Brazil and set up a 176 00:10:59,360 --> 00:11:03,440 Speaker 1: business there until in nineteen forty nine he passed away. Now, 177 00:11:03,440 --> 00:11:07,120 Speaker 1: there are a couple of scams that closely relate to 178 00:11:07,160 --> 00:11:10,920 Speaker 1: a Ponzi scheme, but are slightly different. For example, a 179 00:11:10,960 --> 00:11:15,080 Speaker 1: pyramid scheme. This is where you've got one person or 180 00:11:15,080 --> 00:11:17,240 Speaker 1: a group of people at the very tip top of 181 00:11:17,280 --> 00:11:21,640 Speaker 1: the pyramid, and then they recruit a layer of investors 182 00:11:21,679 --> 00:11:26,880 Speaker 1: who pay money into the scheme. In return, these initial 183 00:11:26,920 --> 00:11:30,719 Speaker 1: investors have to go out and recruit another layer of investors, 184 00:11:30,720 --> 00:11:33,080 Speaker 1: and they keep a little bit of the money that 185 00:11:33,280 --> 00:11:36,920 Speaker 1: those folks are contributing to the organization, and they pass 186 00:11:37,000 --> 00:11:39,680 Speaker 1: the rest of the money up the pyramid and then 187 00:11:40,040 --> 00:11:44,240 Speaker 1: this new layer, so now we're two layers down from 188 00:11:44,280 --> 00:11:47,480 Speaker 1: the top. They have to go on and recruit yet 189 00:11:47,520 --> 00:11:50,760 Speaker 1: another layer of investors, and so on. So each group 190 00:11:50,760 --> 00:11:53,720 Speaker 1: of investors needs to get more investors. And if you 191 00:11:53,720 --> 00:11:55,680 Speaker 1: want to think of a simple one, let's say that 192 00:11:55,679 --> 00:11:58,520 Speaker 1: each investor needs to get two other investors to pay 193 00:11:58,559 --> 00:12:05,120 Speaker 1: into the system. And it expands rapidly as you would imagine. 194 00:12:05,559 --> 00:12:07,520 Speaker 1: And that's just if you only had to get two. 195 00:12:08,440 --> 00:12:11,400 Speaker 1: And so meanwhile, the people at the top, they're getting 196 00:12:11,440 --> 00:12:15,600 Speaker 1: payouts with every successive layer that's added to this pyramid. 197 00:12:16,000 --> 00:12:19,720 Speaker 1: Each person along the top is getting a small amount 198 00:12:19,840 --> 00:12:22,439 Speaker 1: per investment till you get to the tippy top where 199 00:12:22,480 --> 00:12:25,040 Speaker 1: they're really making bank. But the people at the bottom 200 00:12:25,080 --> 00:12:28,319 Speaker 1: are not making anything at all unless they are recruiting 201 00:12:28,480 --> 00:12:33,080 Speaker 1: new people into the organization, so they're feeding into the pyramid. 202 00:12:33,640 --> 00:12:37,320 Speaker 1: And like a Ponzi scheme, a pyramid scheme will ultimately 203 00:12:37,320 --> 00:12:40,000 Speaker 1: fall apart because at some level the base of the 204 00:12:40,000 --> 00:12:42,480 Speaker 1: pyramid is so large that there's no way to recruit 205 00:12:42,559 --> 00:12:47,440 Speaker 1: more people to pay into the system, and the whole 206 00:12:47,480 --> 00:12:50,000 Speaker 1: thing starts to fall apart. And really the only people 207 00:12:50,000 --> 00:12:52,880 Speaker 1: who make any serious money are the ones near the 208 00:12:52,920 --> 00:12:56,079 Speaker 1: top layers, like maybe the first couple of layers, and 209 00:12:56,160 --> 00:12:58,080 Speaker 1: the tippy top being the ones who make the most 210 00:12:58,080 --> 00:13:00,440 Speaker 1: money out of the whole thing. Now relate into that 211 00:13:00,640 --> 00:13:05,280 Speaker 1: are multi level marketing schemes. These aren't necessarily outright scams, 212 00:13:06,559 --> 00:13:10,439 Speaker 1: they are not necessarily illegal, but they also rely heavily 213 00:13:10,480 --> 00:13:14,559 Speaker 1: on recruiting new members, and sometimes they rely more on 214 00:13:14,600 --> 00:13:18,600 Speaker 1: the recruitment side than they do with whatever they're actually 215 00:13:19,160 --> 00:13:23,160 Speaker 1: supposedly selling or marketing. And there are tons of these, 216 00:13:23,240 --> 00:13:25,679 Speaker 1: and they're known for selling all sorts of stuff. The 217 00:13:25,720 --> 00:13:30,360 Speaker 1: classic example is cosmetics, where you have people who get 218 00:13:30,760 --> 00:13:33,560 Speaker 1: pay into the system in order to get access to 219 00:13:34,320 --> 00:13:38,400 Speaker 1: cosmetics supplies to sell to people, but very quickly they 220 00:13:38,440 --> 00:13:41,319 Speaker 1: see that the real money isn't in selling the cosmetics, 221 00:13:41,320 --> 00:13:45,120 Speaker 1: but recruiting other people to join in to sell these cosmetics. 222 00:13:45,559 --> 00:13:49,200 Speaker 1: And once you really start stripping things away, it starts 223 00:13:49,240 --> 00:13:52,760 Speaker 1: to look like the cosmetics are just an excuse for 224 00:13:52,880 --> 00:13:56,959 Speaker 1: the organization to exist. The real money comes in looping 225 00:13:57,000 --> 00:14:00,800 Speaker 1: in more and more people into the scheme until you've saturation, 226 00:14:01,480 --> 00:14:05,600 Speaker 1: and then if the cosmetics can support that, if selling 227 00:14:05,640 --> 00:14:08,960 Speaker 1: the cosmetics can keep the organization going, it's technically a 228 00:14:09,040 --> 00:14:13,080 Speaker 1: legitimate organization. It's just that it's probably not making the 229 00:14:13,120 --> 00:14:14,880 Speaker 1: same amount of money it was when it was in 230 00:14:14,920 --> 00:14:19,720 Speaker 1: the recruitment phase, and it's still kind of questionable. And 231 00:14:19,760 --> 00:14:22,320 Speaker 1: then we've got the crypto version, and these can take 232 00:14:22,320 --> 00:14:24,600 Speaker 1: a lot of forms, but the basic sequence tends to 233 00:14:24,600 --> 00:14:28,720 Speaker 1: be someone creates a new cryptocurrency, either on an existing 234 00:14:28,760 --> 00:14:32,000 Speaker 1: blockchain or possibly through a new one, and they hold 235 00:14:32,040 --> 00:14:36,920 Speaker 1: an initial offering of coins ioc Man. There's a lot 236 00:14:36,960 --> 00:14:40,720 Speaker 1: of initialisms in this episode, and sometimes I stands for initial, 237 00:14:40,720 --> 00:14:43,760 Speaker 1: and sometimes it stands for international. It's initial in this case, 238 00:14:44,240 --> 00:14:47,880 Speaker 1: so in return for an investment, the investor gets an 239 00:14:47,880 --> 00:14:52,800 Speaker 1: initial offering of coins or digital tokens that are awarded 240 00:14:52,840 --> 00:14:57,000 Speaker 1: to them, and they are newly minted, fresh, crispy crypto coins. 241 00:14:57,840 --> 00:15:01,960 Speaker 1: We'll talk about where this can go wrong after we 242 00:15:02,080 --> 00:15:15,160 Speaker 1: take this quick break. Okay, an initial offering of coins 243 00:15:15,600 --> 00:15:22,240 Speaker 1: where you jump in on a brand new blockchain offering, 244 00:15:22,280 --> 00:15:24,360 Speaker 1: whether it's on a brand new blockchain itself or on 245 00:15:24,440 --> 00:15:27,840 Speaker 1: an existing one. You want to be an initial investor, 246 00:15:27,920 --> 00:15:30,760 Speaker 1: so you put some of your real money into the system, 247 00:15:30,840 --> 00:15:34,560 Speaker 1: and you are awarded some digital tokens, some crypto coins 248 00:15:34,600 --> 00:15:38,680 Speaker 1: that have been mented specifically for this purpose to attract investors, 249 00:15:39,200 --> 00:15:43,239 Speaker 1: and so your investment now is represented by these digital tokens. 250 00:15:44,480 --> 00:15:48,560 Speaker 1: There's nothing inherently wrong with that, right. There are legit cryptocurrencies, 251 00:15:49,000 --> 00:15:52,720 Speaker 1: or as legit as you believe cryptocurrencies to be. That's 252 00:15:52,800 --> 00:15:57,040 Speaker 1: kind of a sliding scale in public perception. But there 253 00:15:57,040 --> 00:16:01,280 Speaker 1: are also schemers who would follow this exact same chain 254 00:16:01,360 --> 00:16:04,160 Speaker 1: of events in order to rake in that investor money. 255 00:16:04,520 --> 00:16:08,479 Speaker 1: They'd meant out cryptocurrencies that ultimately would end up being worthless. 256 00:16:09,000 --> 00:16:12,960 Speaker 1: Once the whole scheme comes down and the ringleader runs 257 00:16:13,000 --> 00:16:15,920 Speaker 1: off with the investment cash, and everyone else's left with 258 00:16:16,000 --> 00:16:19,320 Speaker 1: digital tokens that don't hold any value, and due to 259 00:16:19,360 --> 00:16:22,600 Speaker 1: the fact that crypto allows for a certain amount of anonymity, 260 00:16:22,680 --> 00:16:25,080 Speaker 1: it can be possible for the same scam artist to 261 00:16:25,120 --> 00:16:27,640 Speaker 1: pull the scheme again at a later date with a new, 262 00:16:27,800 --> 00:16:32,760 Speaker 1: equally worthless crypto coin. It's also possible for a well 263 00:16:32,800 --> 00:16:36,600 Speaker 1: intentioned person or group to fall into this trap of 264 00:16:36,640 --> 00:16:40,560 Speaker 1: a Ponzi scheme because they found themselves in a tough 265 00:16:40,640 --> 00:16:44,400 Speaker 1: spot that they hoped was just a temporary situation, and 266 00:16:44,440 --> 00:16:47,400 Speaker 1: they start practicing the whole Rob Peter to pay Paul 267 00:16:47,440 --> 00:16:51,000 Speaker 1: approach just as a way to stay afloat while still 268 00:16:51,000 --> 00:16:55,240 Speaker 1: hoping to make a legitimate recovery and not have to 269 00:16:55,280 --> 00:17:00,560 Speaker 1: continue that practice. And maybe sometimes that works. Some folks 270 00:17:00,640 --> 00:17:03,160 Speaker 1: might be able to use creative accounting to stay above 271 00:17:03,200 --> 00:17:07,639 Speaker 1: water long enough to regain stability, But it definitely doesn't 272 00:17:07,680 --> 00:17:11,600 Speaker 1: always work right, because there are lots of examples where 273 00:17:12,040 --> 00:17:15,680 Speaker 1: this kind of thing will ultimately lead to a total collapse. 274 00:17:16,200 --> 00:17:19,600 Speaker 1: And I want to add that one of the factors 275 00:17:19,640 --> 00:17:24,280 Speaker 1: that I believe really helps fuel this is the combination 276 00:17:24,440 --> 00:17:31,320 Speaker 1: of high enthusiasm and low knowledge or experience that the 277 00:17:31,359 --> 00:17:34,520 Speaker 1: promise of a huge return, which is a typical red 278 00:17:34,520 --> 00:17:38,120 Speaker 1: flag of any Ponzi scheme can really excite someone who 279 00:17:38,160 --> 00:17:40,639 Speaker 1: has some money that they would like to invest and 280 00:17:40,720 --> 00:17:46,080 Speaker 1: see that money increase. And the fact that cryptocurrency itself 281 00:17:46,240 --> 00:17:50,960 Speaker 1: is a difficult thing to describe and explain. It's hard 282 00:17:51,000 --> 00:17:53,600 Speaker 1: to teach someone how it works in a way that 283 00:17:53,680 --> 00:17:58,919 Speaker 1: doesn't make them go cross eyed because it is very complicated. Ultimately, well, 284 00:18:00,240 --> 00:18:04,560 Speaker 1: lack of information can end up helping if you're pulling 285 00:18:04,560 --> 00:18:09,520 Speaker 1: a scam because people just know, oh, cryptocurrency, that's something 286 00:18:09,560 --> 00:18:14,879 Speaker 1: that can in some cases at least lead to massive 287 00:18:15,640 --> 00:18:19,720 Speaker 1: increase in value. So I could get rich overnight by 288 00:18:19,760 --> 00:18:22,880 Speaker 1: investing in this, And because they don't have a full 289 00:18:22,960 --> 00:18:26,359 Speaker 1: understanding of it, they aren't aware of the potential risks, 290 00:18:26,400 --> 00:18:30,440 Speaker 1: and that's what creates this perfect environment for running scams. 291 00:18:31,160 --> 00:18:34,359 Speaker 1: I frequently say, if there's a lack of information and 292 00:18:34,480 --> 00:18:39,560 Speaker 1: an overabundance of enthusiasm, that is an enormous warning sign 293 00:18:39,640 --> 00:18:42,040 Speaker 1: and you should take a moment to really think things 294 00:18:42,080 --> 00:18:45,560 Speaker 1: through before you jump in and participate. Doesn't mean that 295 00:18:45,560 --> 00:18:49,439 Speaker 1: it's necessarily going to go bad, but it's just that 296 00:18:49,520 --> 00:18:52,400 Speaker 1: conditions are perfect for that thing to kind of happen, 297 00:18:52,520 --> 00:18:55,120 Speaker 1: So you need to take that step back and start 298 00:18:55,160 --> 00:19:01,359 Speaker 1: asking questions and make sure that you understand can you 299 00:19:01,680 --> 00:19:04,880 Speaker 1: evaluate the answers before you start making decisions? All right? 300 00:19:05,160 --> 00:19:09,560 Speaker 1: This finally brings us to talk about Terraform and UST 301 00:19:10,240 --> 00:19:14,120 Speaker 1: and Luna. So Terraform Labs would be the company we'll 302 00:19:14,119 --> 00:19:17,520 Speaker 1: be talking about. And the co founders were Quan Do Jung, 303 00:19:18,560 --> 00:19:21,960 Speaker 1: although in the crypto community he's known as Do Quan 304 00:19:22,680 --> 00:19:26,760 Speaker 1: and his business partner Daniel Shin. Quan had previously worked 305 00:19:26,800 --> 00:19:29,159 Speaker 1: for some big tech companies in the US before he 306 00:19:29,280 --> 00:19:31,800 Speaker 1: moved from the United States back to his home country 307 00:19:31,800 --> 00:19:34,840 Speaker 1: of South Korea. He went into business for himself, and 308 00:19:34,880 --> 00:19:40,800 Speaker 1: then in twenty eighteen, he moved to Singapore and co 309 00:19:41,040 --> 00:19:46,320 Speaker 1: founded Terraform Labs in January of that year. So he 310 00:19:46,800 --> 00:19:50,159 Speaker 1: located in Singapore, and you might wonder why, and a 311 00:19:50,160 --> 00:19:53,240 Speaker 1: lot of these crypto companies they will locate in places 312 00:19:53,280 --> 00:19:57,320 Speaker 1: that have lax regulatory bodies in an effort to be 313 00:19:57,359 --> 00:20:01,680 Speaker 1: able to do business without having two much interference from 314 00:20:01,840 --> 00:20:06,800 Speaker 1: government agencies. So Terraform Labs then introduces the terra blockchain 315 00:20:07,400 --> 00:20:11,439 Speaker 1: and ultimately would begin to mint two different cryptocurrencies, although 316 00:20:11,520 --> 00:20:14,800 Speaker 1: not right out of the gate. These were actually unveiled 317 00:20:15,040 --> 00:20:18,560 Speaker 1: in different times. But one I want to talk about 318 00:20:18,680 --> 00:20:23,359 Speaker 1: is terra USD, which we usually just refer to as UST. 319 00:20:24,320 --> 00:20:29,280 Speaker 1: That does get confusing because UST stands for terra us D, 320 00:20:30,480 --> 00:20:34,480 Speaker 1: and then the other cryptocurrency is Luna. All right, even 321 00:20:34,480 --> 00:20:36,919 Speaker 1: though it came out second, we're going to take Ust 322 00:20:37,280 --> 00:20:42,000 Speaker 1: first to explain what it is. Terraform introduced Ust as 323 00:20:42,040 --> 00:20:46,520 Speaker 1: an algorithmic stable coin. Now we need to break that down. 324 00:20:47,040 --> 00:20:51,720 Speaker 1: A stable coin is a type of cryptocurrency that has 325 00:20:51,800 --> 00:20:56,120 Speaker 1: its value connected or pegged, as they say, in crypto, 326 00:20:56,359 --> 00:21:01,720 Speaker 1: to some other asset. This is why ideally would keep 327 00:21:02,080 --> 00:21:06,040 Speaker 1: this particular type of cryptocurrency stable. The value of the 328 00:21:06,119 --> 00:21:10,520 Speaker 1: stable coin, at least theoretically, would only change if the 329 00:21:10,640 --> 00:21:15,239 Speaker 1: value of the pegged asset also changed. So if you 330 00:21:15,280 --> 00:21:19,240 Speaker 1: were to peg your cryptocurrency stable coin to the US dollar, 331 00:21:19,440 --> 00:21:23,240 Speaker 1: which is a pretty common thing, then in theory, as 332 00:21:23,280 --> 00:21:27,480 Speaker 1: the US dollars value rises, so would your stable coin 333 00:21:27,520 --> 00:21:31,240 Speaker 1: that's pegged to it. Or if the US dollar value decreased, 334 00:21:31,600 --> 00:21:35,080 Speaker 1: then the value of your stable coin would decrease in kind. 335 00:21:35,600 --> 00:21:38,320 Speaker 1: Typically we're looking at a one to one relationship when 336 00:21:38,320 --> 00:21:42,520 Speaker 1: we're talking about fiat currency, So one US dollar and 337 00:21:42,800 --> 00:21:48,600 Speaker 1: one Ust would be equivalent in value, assuming that everything 338 00:21:48,680 --> 00:21:52,600 Speaker 1: is going correctly. Stable coins try to address an issue 339 00:21:52,800 --> 00:21:58,480 Speaker 1: that non backed cryptocurrencies often encounter, which is volatility. Now 340 00:21:58,480 --> 00:22:02,199 Speaker 1: you've probably heard me say way too many times that 341 00:22:02,359 --> 00:22:06,040 Speaker 1: one of my big problems with cryptocurrencies like bitcoin is 342 00:22:06,040 --> 00:22:09,760 Speaker 1: that their value can fluctuate so much that you are 343 00:22:09,840 --> 00:22:14,679 Speaker 1: discouraged from using it as actual currency unless you're willing 344 00:22:14,720 --> 00:22:20,000 Speaker 1: to encounter some potentially significant problems. For example, the value 345 00:22:20,000 --> 00:22:24,680 Speaker 1: of some cryptocurrencies like bitcoin can change by significant amounts 346 00:22:24,760 --> 00:22:28,840 Speaker 1: so quickly that when you start a transaction, you're exchanging 347 00:22:28,880 --> 00:22:33,040 Speaker 1: a certain amount of value or purchasing power, but by 348 00:22:33,040 --> 00:22:36,440 Speaker 1: the time the transaction is complete, that amount could have 349 00:22:36,520 --> 00:22:42,440 Speaker 1: changed dramatically. So let me give you a very oversimplified example. 350 00:22:42,920 --> 00:22:45,359 Speaker 1: This is one I've used before. So let's say you 351 00:22:45,480 --> 00:22:48,760 Speaker 1: walk into a convenience store and you want to buy 352 00:22:49,119 --> 00:22:51,920 Speaker 1: a candy bar, and the candy bar is priced at 353 00:22:52,000 --> 00:22:55,640 Speaker 1: one US dollar. So you pick up the candy bar, 354 00:22:55,720 --> 00:22:58,760 Speaker 1: you go to the cash register, you hand over your 355 00:22:58,840 --> 00:23:02,439 Speaker 1: hard earned US dollar, and in return, you get to 356 00:23:02,440 --> 00:23:05,280 Speaker 1: take the candy bar and leave the store. But right 357 00:23:05,359 --> 00:23:08,240 Speaker 1: at the moment that you're doing this exchange, let's say 358 00:23:08,240 --> 00:23:13,000 Speaker 1: that the value of the dollar changes wildly, and now 359 00:23:13,080 --> 00:23:18,040 Speaker 1: that one dollar bill has five dollars worth of purchasing power, 360 00:23:18,600 --> 00:23:21,320 Speaker 1: because now the value of the dollar has changed, So 361 00:23:21,600 --> 00:23:25,360 Speaker 1: what you could have bought with one dollar before has 362 00:23:25,400 --> 00:23:30,359 Speaker 1: increased by five times. Now like technically that one dollar 363 00:23:31,119 --> 00:23:34,119 Speaker 1: is equivalent to the value of five candy bars, not 364 00:23:34,160 --> 00:23:38,199 Speaker 1: just one. But now that means the candy bar you 365 00:23:38,240 --> 00:23:42,560 Speaker 1: bought is way overpriced, right, because it should now cost 366 00:23:42,600 --> 00:23:46,760 Speaker 1: twenty cents, because the presumably the candy bar's value is 367 00:23:46,800 --> 00:23:50,119 Speaker 1: independent of how much a dollar is worth. It's not 368 00:23:50,200 --> 00:23:53,040 Speaker 1: like a candy bar is magically one dollar. No matter 369 00:23:53,119 --> 00:23:56,640 Speaker 1: how much a dollar is valued, a candy bar has 370 00:23:56,640 --> 00:24:00,720 Speaker 1: its own intrinsic value, and that value the price should, 371 00:24:01,119 --> 00:24:04,239 Speaker 1: in theory, fluctuate with the value of the dollar, at 372 00:24:04,320 --> 00:24:06,840 Speaker 1: least at some point. It's probably gonna trail because these 373 00:24:06,840 --> 00:24:11,679 Speaker 1: things are not instantaneous, but it will change. So it 374 00:24:11,720 --> 00:24:14,239 Speaker 1: would mean that perhaps in the future you would come 375 00:24:14,280 --> 00:24:15,840 Speaker 1: to that same store and now you'd see all the 376 00:24:15,840 --> 00:24:18,520 Speaker 1: candy bars are valued at twenty cents, not a dollar, 377 00:24:19,400 --> 00:24:22,199 Speaker 1: because the value of the dollar itself has changed. On 378 00:24:22,240 --> 00:24:25,199 Speaker 1: the flip side, let's say that at the moment of 379 00:24:25,359 --> 00:24:29,400 Speaker 1: purchase the value of the dollar decreases by half, which 380 00:24:29,440 --> 00:24:32,720 Speaker 1: means you've got yourself a one dollar candy bar, but 381 00:24:32,800 --> 00:24:36,440 Speaker 1: at the purchasing equivalent of fifty cents before this change. 382 00:24:36,480 --> 00:24:39,679 Speaker 1: Now the candy bar company or the convenience store is 383 00:24:39,720 --> 00:24:42,920 Speaker 1: hurting because the dollar they collected isn't worth as much 384 00:24:42,960 --> 00:24:45,800 Speaker 1: as it would have been pre purchase. Now that's a 385 00:24:45,880 --> 00:24:48,760 Speaker 1: very silly example, right, But that sort of stuff actually 386 00:24:48,800 --> 00:24:52,560 Speaker 1: happens with cryptocurrencies because the transaction times can be long. 387 00:24:52,600 --> 00:24:56,120 Speaker 1: With bitcoin, you're talking about potentially ten minutes, and the 388 00:24:56,200 --> 00:25:00,080 Speaker 1: fees that you pay with transactions are fairly high, and 389 00:25:00,080 --> 00:25:05,320 Speaker 1: then you pair that with the currency's volatility. People end 390 00:25:05,400 --> 00:25:10,879 Speaker 1: up being discouraged from actually using cryptocurrencies as currency because 391 00:25:10,920 --> 00:25:13,520 Speaker 1: you could end up losing a huge amount of money 392 00:25:13,560 --> 00:25:17,160 Speaker 1: just in the process as you're completing a transaction. However, 393 00:25:17,200 --> 00:25:22,439 Speaker 1: stable coins, because theoretically they lack volatility, they can be 394 00:25:22,520 --> 00:25:26,840 Speaker 1: more useful as digital currency. You could actually buy into 395 00:25:26,880 --> 00:25:29,800 Speaker 1: a stable coin and be relatively sure that your money 396 00:25:29,920 --> 00:25:33,080 Speaker 1: will be good wherever you spend it, and you don't 397 00:25:33,080 --> 00:25:35,800 Speaker 1: have to worry about massive fluctuations and value. You can 398 00:25:35,920 --> 00:25:38,160 Speaker 1: use it as a currency. Now, a lot of people 399 00:25:38,280 --> 00:25:42,160 Speaker 1: use stable coins to move money into and out of 400 00:25:42,880 --> 00:25:48,000 Speaker 1: non backed cryptocurrencies. Right, so instead of just immediately withdrawing 401 00:25:48,040 --> 00:25:52,560 Speaker 1: bitcoin into US dollars, you might convert bitcoin into a 402 00:25:52,600 --> 00:25:57,399 Speaker 1: stable coin first, then go through the conversion of the 403 00:25:57,400 --> 00:26:00,160 Speaker 1: stable coin into US dollars. If you want to liquefy 404 00:26:00,240 --> 00:26:03,920 Speaker 1: or liquid date, I should say your assets. Liquidity is 405 00:26:04,040 --> 00:26:08,119 Speaker 1: very important for there to be confidence in the crypto market. 406 00:26:09,119 --> 00:26:13,280 Speaker 1: But Ust is not a backed stable coin. It's an 407 00:26:13,320 --> 00:26:17,440 Speaker 1: algorithmic stable coin. That means UST relies on a set 408 00:26:17,440 --> 00:26:20,399 Speaker 1: of rules that's one algorithm is Ultimately, it's just a 409 00:26:20,440 --> 00:26:23,880 Speaker 1: set of rules in order to keep the coins value stable. 410 00:26:24,359 --> 00:26:27,159 Speaker 1: And this involves stuff like keeping very careful control of 411 00:26:27,200 --> 00:26:30,640 Speaker 1: the supply of stable coins and by extension, the supply 412 00:26:30,880 --> 00:26:36,359 Speaker 1: of the related but non stable cryptocurrencies. And that brings 413 00:26:36,440 --> 00:26:39,679 Speaker 1: us to Luna. So unlike Ust, which is on the 414 00:26:40,080 --> 00:26:43,760 Speaker 1: again the Terra blockchain and also traded on other blockchains, 415 00:26:44,720 --> 00:26:48,800 Speaker 1: Luna was not a stable coin, and Ust, rather than 416 00:26:48,840 --> 00:26:52,560 Speaker 1: being backed by a fiat currency or other commodity, was 417 00:26:52,600 --> 00:26:56,040 Speaker 1: instead backed by Luna. And you might say, huh, so 418 00:26:56,080 --> 00:27:00,800 Speaker 1: you've got one digital token and it's being used to 419 00:27:00,960 --> 00:27:05,600 Speaker 1: help stabilize a different digital token, neither of which are 420 00:27:05,600 --> 00:27:09,720 Speaker 1: connected to any real world commodity, and we could get 421 00:27:09,760 --> 00:27:13,280 Speaker 1: into a discussion about how money in general is also 422 00:27:13,880 --> 00:27:16,560 Speaker 1: a step away from real world, but then I'm just 423 00:27:16,600 --> 00:27:20,200 Speaker 1: going to descend into madness, so we'll leave that for now. 424 00:27:20,600 --> 00:27:25,640 Speaker 1: So terraform Labs, the company was using Luna to not 425 00:27:25,720 --> 00:27:31,200 Speaker 1: just peg ust to another currency, but also to act 426 00:27:31,240 --> 00:27:34,359 Speaker 1: as a proof of steak for the Terra blockchain. Proof 427 00:27:34,400 --> 00:27:37,800 Speaker 1: of steak is how blockchains like Terra and now Ethereum 428 00:27:38,119 --> 00:27:42,520 Speaker 1: allow for transaction verification. Members who want to participate put 429 00:27:42,600 --> 00:27:46,480 Speaker 1: up a portion of their crypto holdings their steak in 430 00:27:46,560 --> 00:27:48,840 Speaker 1: an effort to win the right to validate a block 431 00:27:48,880 --> 00:27:52,959 Speaker 1: of transactions, and if they win that, they get a 432 00:27:53,040 --> 00:27:57,119 Speaker 1: reward then the form of more digital tokens. So really 433 00:27:57,160 --> 00:27:59,159 Speaker 1: the more you have, the more you can earn on 434 00:27:59,200 --> 00:28:02,240 Speaker 1: these proof of steak models. Luna was also used to 435 00:28:02,280 --> 00:28:05,560 Speaker 1: pay transaction fees on the Tara blockchain, because while proof 436 00:28:05,560 --> 00:28:09,720 Speaker 1: of state doesn't require the massive compute power of the 437 00:28:09,720 --> 00:28:14,159 Speaker 1: proof of work cryptocurrencies like Bitcoin, there's still are bills 438 00:28:14,160 --> 00:28:17,199 Speaker 1: that have to be paid and also holding onto Luna 439 00:28:17,400 --> 00:28:21,639 Speaker 1: gave Tara blockchain members the right to vote on proposals 440 00:28:21,640 --> 00:28:26,119 Speaker 1: that would shape the network. So let's say you held 441 00:28:26,200 --> 00:28:29,480 Speaker 1: some Luna and you wanted to trade that Luna out 442 00:28:29,560 --> 00:28:32,879 Speaker 1: and withdraw your money from the Tara blockchain. First, you 443 00:28:32,880 --> 00:28:36,439 Speaker 1: would trade the Luna for UST, and this would burn 444 00:28:36,880 --> 00:28:41,880 Speaker 1: the Luna tokens, essentially destroying the specific tokens you held, 445 00:28:42,320 --> 00:28:45,360 Speaker 1: and you would be paid an equivalent value in UST, 446 00:28:46,080 --> 00:28:52,280 Speaker 1: with one UST being equated to one dollars worth of Luna. 447 00:28:52,400 --> 00:28:55,160 Speaker 1: That's important, we'll come back to that. And since Ust 448 00:28:55,360 --> 00:28:57,080 Speaker 1: was meant to be more or less the same value 449 00:28:57,080 --> 00:29:00,760 Speaker 1: as a US dollar, this was like being paid out 450 00:29:00,800 --> 00:29:03,880 Speaker 1: in US dollars, but it required another step, so it 451 00:29:03,920 --> 00:29:05,800 Speaker 1: wasn't exactly the same because you would still have to 452 00:29:05,840 --> 00:29:09,720 Speaker 1: convert your UST to US dollars at a crypto exchange 453 00:29:10,000 --> 00:29:13,760 Speaker 1: and also pay some transaction fees along the way. This 454 00:29:13,800 --> 00:29:19,240 Speaker 1: would set up the scenario that would allow for absolute 455 00:29:19,320 --> 00:29:24,480 Speaker 1: disaster once things began to unravel. I'll explain more when 456 00:29:24,480 --> 00:29:37,280 Speaker 1: we come back after this quick break. Okay, let's say 457 00:29:37,480 --> 00:29:41,320 Speaker 1: that you had Luna. You had let's say eighty five 458 00:29:42,240 --> 00:29:48,200 Speaker 1: dollars worth of Luna. Well, because the UST was supposed 459 00:29:48,240 --> 00:29:50,440 Speaker 1: to be equivalent to a US dollar, even though it 460 00:29:50,520 --> 00:29:55,240 Speaker 1: wasn't pegged to the US dollar. You do this transaction 461 00:29:55,320 --> 00:29:59,600 Speaker 1: and Luna ends up converting over into eighty five US 462 00:29:59,680 --> 00:30:06,160 Speaker 1: t right, and then they would burn Luna. That Luna 463 00:30:06,200 --> 00:30:10,960 Speaker 1: token would get burned, and then you would liquefy your 464 00:30:11,080 --> 00:30:13,520 Speaker 1: UST holdings. Let's say you want to pull that out, 465 00:30:13,560 --> 00:30:16,880 Speaker 1: you want to make them into dollars. Well, in order 466 00:30:16,920 --> 00:30:21,000 Speaker 1: to preserve the value of stable coins and keep them stable, 467 00:30:21,520 --> 00:30:25,040 Speaker 1: the Tarra blockchain would then meant more Luna, and this 468 00:30:25,120 --> 00:30:28,320 Speaker 1: was meant to keep the UST stable. Right, So even 469 00:30:28,320 --> 00:30:31,680 Speaker 1: though we're talking about two different digital tokens that are 470 00:30:31,720 --> 00:30:35,800 Speaker 1: not backed by anything other than each other, and as 471 00:30:35,840 --> 00:30:38,840 Speaker 1: you are pulling out one, you have to ment more 472 00:30:38,880 --> 00:30:42,400 Speaker 1: of the other to keep things stable. And then as 473 00:30:42,640 --> 00:30:47,760 Speaker 1: you end up purchasing more Ust, you might end up 474 00:30:49,440 --> 00:30:53,960 Speaker 1: having some different issues with the Luna supply as well. 475 00:30:54,040 --> 00:30:57,960 Speaker 1: We'll get to that. So you could use your Ust 476 00:30:58,160 --> 00:31:01,800 Speaker 1: to buy Luma. And you know, as I said, one, 477 00:31:01,920 --> 00:31:05,800 Speaker 1: Ust was established as being worth one dollar of Luna. However, 478 00:31:06,480 --> 00:31:09,680 Speaker 1: because Ust was not actually pegged to the US dollar, 479 00:31:10,440 --> 00:31:13,880 Speaker 1: that meant that if UST was to slip and value 480 00:31:14,200 --> 00:31:19,600 Speaker 1: and dip below a dollar, well, it gave you an opportunity. 481 00:31:20,160 --> 00:31:25,120 Speaker 1: You could purchase UST with US dollars and remember, at 482 00:31:25,120 --> 00:31:27,040 Speaker 1: this point the UST is worth less. Let's say it's 483 00:31:27,040 --> 00:31:30,200 Speaker 1: worth ninety cents instead of a dollar. You could use 484 00:31:30,320 --> 00:31:35,880 Speaker 1: US dollars to buy more Ust, because the US dollars 485 00:31:35,880 --> 00:31:38,800 Speaker 1: worth more than the UST is at this point. Then 486 00:31:38,840 --> 00:31:43,720 Speaker 1: you could exchange the ust each UST for one dollar 487 00:31:43,800 --> 00:31:48,200 Speaker 1: worth of Luna. So if UST dropped to ninety cents, 488 00:31:48,200 --> 00:31:50,160 Speaker 1: but you could still buy a whole bunch of UST 489 00:31:50,280 --> 00:31:52,920 Speaker 1: and then use that to secure Luna, you could buy 490 00:31:53,000 --> 00:31:56,640 Speaker 1: Luna at a ten percent discount because that one Ust 491 00:31:56,840 --> 00:32:01,000 Speaker 1: equals one dollar of Luna. That wouldn't change. So UST's 492 00:32:01,120 --> 00:32:03,280 Speaker 1: drop in value would give you the chance to buy 493 00:32:03,440 --> 00:32:06,200 Speaker 1: Luna at a discount and potentially make a whole lot 494 00:32:06,240 --> 00:32:09,200 Speaker 1: of money. Now let's get to the Ponzi scheme side 495 00:32:09,320 --> 00:32:13,239 Speaker 1: of this. The Tara blockchain launched in twenty eighteen, and 496 00:32:13,320 --> 00:32:17,000 Speaker 1: for the first three years things were pretty quiet, but 497 00:32:17,280 --> 00:32:20,600 Speaker 1: in twenty twenty one things would change. So one of 498 00:32:20,600 --> 00:32:23,280 Speaker 1: the things that helped this was an initiative that do 499 00:32:23,400 --> 00:32:27,800 Speaker 1: Quan had previously introduced as an incentive to attract new 500 00:32:27,840 --> 00:32:31,560 Speaker 1: investors to the Tara network, and that was promising a 501 00:32:31,680 --> 00:32:36,920 Speaker 1: twenty percent annual return on investment if you posted your 502 00:32:37,160 --> 00:32:42,400 Speaker 1: ust holdings the stable coin holdings against a lending platform 503 00:32:42,520 --> 00:32:47,320 Speaker 1: called Anchor, which Doquan had also established Anchor. This lending 504 00:32:47,360 --> 00:32:50,920 Speaker 1: platform was built also on top of the Tara blockchain, 505 00:32:51,400 --> 00:32:55,920 Speaker 1: So you've got your stake right however much you decide 506 00:32:55,960 --> 00:32:58,560 Speaker 1: to put on Anchor, and then on top of that, 507 00:32:58,600 --> 00:33:01,920 Speaker 1: you make twenty percent every year, and you still have 508 00:33:01,960 --> 00:33:05,160 Speaker 1: the original steak, So if you decide that you're done, 509 00:33:05,280 --> 00:33:08,040 Speaker 1: you could just withdraw your steak, plus you have all 510 00:33:08,080 --> 00:33:11,680 Speaker 1: those returns you've made over the years. Side note, in 511 00:33:11,760 --> 00:33:15,400 Speaker 1: my experience, people never get tired of making money. So 512 00:33:15,880 --> 00:33:18,240 Speaker 1: the thought was people will put up their steak and 513 00:33:18,240 --> 00:33:20,560 Speaker 1: they'll just leave it there because it'll just continue to 514 00:33:20,600 --> 00:33:23,920 Speaker 1: generate a twenty percent return year over year. So in 515 00:33:23,960 --> 00:33:28,120 Speaker 1: five years, you've doubled your investment, right, because you could 516 00:33:28,120 --> 00:33:30,360 Speaker 1: always pull your steak and then you'd have twice as 517 00:33:30,440 --> 00:33:32,400 Speaker 1: much money as when you put it in. But these 518 00:33:32,480 --> 00:33:35,040 Speaker 1: kind of promises are exactly the red flags for stuff 519 00:33:35,040 --> 00:33:38,320 Speaker 1: like Ponzi schemes, and typically those promise an incredible return 520 00:33:38,400 --> 00:33:41,680 Speaker 1: on a relatively short time frame, and the Anchor platform 521 00:33:41,720 --> 00:33:45,840 Speaker 1: itself was a decentralized money market that again was built 522 00:33:45,880 --> 00:33:48,480 Speaker 1: on top of the Tara blockchain, and its purpose was 523 00:33:48,520 --> 00:33:51,600 Speaker 1: to loan out money to investors so that they could 524 00:33:51,600 --> 00:33:55,880 Speaker 1: pour that money into, you know, another investment, perhaps right 525 00:33:55,960 --> 00:33:59,200 Speaker 1: back into the system. So, in other words, they were 526 00:33:59,360 --> 00:34:04,680 Speaker 1: encouraging UST holders to post money to Anchor. Doquon would 527 00:34:04,720 --> 00:34:08,520 Speaker 1: then apparently take that steak and loan it out to 528 00:34:08,640 --> 00:34:12,520 Speaker 1: investors who would then pour the money into investments, potentially 529 00:34:12,640 --> 00:34:17,800 Speaker 1: right back into the tarra form blockchain. And meanwhile Doquan 530 00:34:17,920 --> 00:34:22,239 Speaker 1: was promising the initial Anchor backers a twenty percent return 531 00:34:22,280 --> 00:34:24,640 Speaker 1: on their investment. And people said, you know, this is 532 00:34:24,680 --> 00:34:26,839 Speaker 1: sounding more and more like a Ponzi scheme. You're taking 533 00:34:26,880 --> 00:34:30,880 Speaker 1: investor money to pay out other people. Things started to 534 00:34:30,920 --> 00:34:33,960 Speaker 1: go south in the spring of twenty twenty two. On 535 00:34:34,160 --> 00:34:38,360 Speaker 1: May seventh, twenty twenty two, some investors who had staked 536 00:34:38,440 --> 00:34:42,040 Speaker 1: Ust on the Anchor platform began pulling their stakes to 537 00:34:42,120 --> 00:34:46,040 Speaker 1: the tune of about two billion dollars worth of UST, 538 00:34:46,800 --> 00:34:49,800 Speaker 1: and a lot of folks began to liquidate their assets entirely, 539 00:34:50,320 --> 00:34:54,000 Speaker 1: meaning they were pulling it off the Tara blockchain. They 540 00:34:54,040 --> 00:34:56,879 Speaker 1: weren't just converting to Ust, they were converting it to 541 00:34:56,920 --> 00:35:00,200 Speaker 1: something else, whether it was another stable coin or a 542 00:35:00,280 --> 00:35:04,759 Speaker 1: fiat currency. And there were questions initially about whether this 543 00:35:04,880 --> 00:35:07,880 Speaker 1: started as a purposeful attack on the Tarra blockchain, that 544 00:35:08,000 --> 00:35:13,520 Speaker 1: someone was specifically doing this to orchestrate the events that followed, 545 00:35:13,560 --> 00:35:16,880 Speaker 1: because these were things that people had been warning about 546 00:35:17,480 --> 00:35:21,560 Speaker 1: ever since the launch of UST, and it's pegging to 547 00:35:21,880 --> 00:35:26,600 Speaker 1: the Luna cryptocurrency. People were saying, this sets things up 548 00:35:26,640 --> 00:35:29,799 Speaker 1: for disaster, and that's exactly what was happening. So it 549 00:35:29,920 --> 00:35:31,840 Speaker 1: led people to say, oh, did someone look at the 550 00:35:31,960 --> 00:35:34,719 Speaker 1: warnings and take that as an instruction booklet on how 551 00:35:34,760 --> 00:35:38,920 Speaker 1: to do an attack? But further investigations suggested that perhaps 552 00:35:39,320 --> 00:35:42,359 Speaker 1: this wasn't so much an attack. It may have just 553 00:35:42,440 --> 00:35:46,279 Speaker 1: been that investors were getting concerned because interest rates were 554 00:35:46,320 --> 00:35:49,080 Speaker 1: on the rise around the globe and they wanted to 555 00:35:49,120 --> 00:35:53,480 Speaker 1: start pulling their money. But whatever the cause, it all 556 00:35:53,560 --> 00:35:56,919 Speaker 1: started a massive domino effect. So people started to cash 557 00:35:56,960 --> 00:36:01,720 Speaker 1: out and the value of UST began to slip. And again, 558 00:36:01,760 --> 00:36:05,640 Speaker 1: like when the value of UST goes down, it means 559 00:36:05,680 --> 00:36:09,759 Speaker 1: technically you have the opportunity to purchase more Luna at 560 00:36:09,800 --> 00:36:12,919 Speaker 1: a lower price. You're getting it for a discount, so 561 00:36:13,360 --> 00:36:18,080 Speaker 1: the ust slipped to almost ninety cents, and cryptotraders pounced 562 00:36:18,120 --> 00:36:22,360 Speaker 1: on it. They started to buy up Ust in order 563 00:36:22,440 --> 00:36:25,880 Speaker 1: to convert it into Luna, and Luna was trading at 564 00:36:25,920 --> 00:36:28,279 Speaker 1: a very high value up to that point, like in 565 00:36:29,320 --> 00:36:32,640 Speaker 1: April of twenty twenty two, it was almost one hundred 566 00:36:32,680 --> 00:36:37,440 Speaker 1: twenty dollars per Luna token. So if you could suddenly 567 00:36:37,480 --> 00:36:41,200 Speaker 1: buy a ten thousand dollars stake of Luna for nine 568 00:36:41,239 --> 00:36:46,200 Speaker 1: thousand dollars, and then because Luna's value had exploded since 569 00:36:46,239 --> 00:36:48,839 Speaker 1: early twenty twenty one, like in early twenty twenty one, 570 00:36:48,840 --> 00:36:51,680 Speaker 1: it was trading at around a dollar, well now is 571 00:36:51,719 --> 00:36:54,680 Speaker 1: at one hundred twenty dollars or close to it. So 572 00:36:56,040 --> 00:36:58,480 Speaker 1: you started to think, Wow, if it continues on that 573 00:36:58,520 --> 00:37:03,319 Speaker 1: trajectory and I'm able to essentially buy a thousand dollars 574 00:37:03,360 --> 00:37:06,600 Speaker 1: of it for free, I'm if I'm already sinking ten 575 00:37:06,719 --> 00:37:11,359 Speaker 1: grand into it, man, I'm going to get stinking rich 576 00:37:11,760 --> 00:37:13,960 Speaker 1: and it's just going to take a year, right if 577 00:37:13,960 --> 00:37:17,000 Speaker 1: we're on the same trajectory. So you had all these 578 00:37:17,080 --> 00:37:22,000 Speaker 1: these crypto traders jumping on that opportunity. Well, it turns 579 00:37:22,040 --> 00:37:25,560 Speaker 1: out the assumption that the value of the lunatoken would 580 00:37:25,600 --> 00:37:29,880 Speaker 1: hold was a really bad one because UST continued to 581 00:37:29,920 --> 00:37:33,760 Speaker 1: slip and it became completely unpegged to the US dollar, 582 00:37:34,239 --> 00:37:37,080 Speaker 1: and that led to a panic. Folks began to liquidate 583 00:37:37,520 --> 00:37:40,440 Speaker 1: their UST holdings in an effort to save as much 584 00:37:40,480 --> 00:37:43,600 Speaker 1: of their investment as they could. They were pulling out, 585 00:37:43,960 --> 00:37:45,400 Speaker 1: you know, maybe they had made some money in the 586 00:37:45,400 --> 00:37:48,160 Speaker 1: past and they're hoping like, all right, let's cut and run. 587 00:37:48,480 --> 00:37:50,319 Speaker 1: This is about to go south. I want to get 588 00:37:50,320 --> 00:37:52,440 Speaker 1: my money out before I take a bath on this. 589 00:37:53,120 --> 00:37:56,920 Speaker 1: And some people got out with a considerable amount of money, 590 00:37:57,000 --> 00:38:01,080 Speaker 1: but they were acting super early. And in the process, 591 00:38:01,160 --> 00:38:04,040 Speaker 1: as people were liquidating their UST, it meant, because of 592 00:38:04,080 --> 00:38:09,680 Speaker 1: the nature of this UST to Luna relationship, that the 593 00:38:09,800 --> 00:38:14,240 Speaker 1: Terra blockchain had to mint more Luna to cover UST 594 00:38:14,360 --> 00:38:18,919 Speaker 1: and stabilize it. Well. By minting more Luna, it meant 595 00:38:18,920 --> 00:38:22,720 Speaker 1: that you were increasing the supply of the Luna cryptocurrency token, 596 00:38:23,400 --> 00:38:26,879 Speaker 1: and opportunists meanwhile had been grabbing up more and more 597 00:38:26,960 --> 00:38:30,240 Speaker 1: Luna due to UST's value taking a hit. But now 598 00:38:30,480 --> 00:38:33,160 Speaker 1: all the Luna they had scooped up was worth less 599 00:38:33,160 --> 00:38:36,200 Speaker 1: than it had been because you had this new rush 600 00:38:36,200 --> 00:38:39,239 Speaker 1: of supply right, Supply and demand are the two things 601 00:38:39,239 --> 00:38:43,840 Speaker 1: that determine stuff like value, and when the supply dramatically increases, 602 00:38:43,880 --> 00:38:47,080 Speaker 1: the demand decreases and then you start to see the 603 00:38:47,160 --> 00:38:52,279 Speaker 1: value drop. So at this point, crypto exchanges began to 604 00:38:52,360 --> 00:38:56,600 Speaker 1: jump in because the value of Ust was plummeting and 605 00:38:56,760 --> 00:39:00,200 Speaker 1: Luna was following suit, and so the crypto exchang just 606 00:39:00,239 --> 00:39:05,040 Speaker 1: in order to reduce their liability, began to delist Ust 607 00:39:05,280 --> 00:39:09,719 Speaker 1: and Luna because both currencies were seen as being extremely unstable. 608 00:39:09,920 --> 00:39:14,880 Speaker 1: But obviously by delisting the cryptocurrency, that added to that instability. 609 00:39:15,440 --> 00:39:18,239 Speaker 1: And you know, it's really hard to keep value with 610 00:39:18,239 --> 00:39:21,040 Speaker 1: a cryptocurrency if it turns out there's nowhere you can 611 00:39:21,080 --> 00:39:24,520 Speaker 1: go to exchange it for something else, because then it 612 00:39:24,600 --> 00:39:28,800 Speaker 1: just exists on its own, isolated little blockchain. It's trapped 613 00:39:28,840 --> 00:39:32,600 Speaker 1: there and its utility is greatly reduced, and that again 614 00:39:32,800 --> 00:39:37,560 Speaker 1: impacts value. So perfect storm situation. The crash of Luna's 615 00:39:37,600 --> 00:39:41,560 Speaker 1: value sent a massive shockwave through the entire cryptocurrency community. 616 00:39:41,840 --> 00:39:44,120 Speaker 1: So it's one of those big events that precipitated the 617 00:39:44,160 --> 00:39:47,920 Speaker 1: collapse of several companies that were connected to the crypto world. 618 00:39:48,160 --> 00:39:52,080 Speaker 1: Like there were crypto exchanges there were crypto loaners. All 619 00:39:52,120 --> 00:39:55,520 Speaker 1: sorts of companies that were related to the cryptospace began 620 00:39:55,560 --> 00:39:59,200 Speaker 1: to take a massive hit due to this collapse. Some 621 00:39:59,320 --> 00:40:01,759 Speaker 1: estimates put the amount of wealth lost in the wake 622 00:40:01,800 --> 00:40:06,040 Speaker 1: of the crash at hundreds of billions of dollars. Now 623 00:40:06,080 --> 00:40:09,880 Speaker 1: this has prompted several massive government agencies in countries like 624 00:40:09,960 --> 00:40:13,360 Speaker 1: South Korea and the United States to look into what happened. 625 00:40:13,800 --> 00:40:17,560 Speaker 1: They are very very interested in speaking with Doquan. Quan 626 00:40:17,719 --> 00:40:21,640 Speaker 1: so far has evaded them. But the SEC, for example, 627 00:40:21,640 --> 00:40:25,479 Speaker 1: believes that Doquan failed to inform investors of risks, that 628 00:40:25,520 --> 00:40:29,120 Speaker 1: he made promises on returns that were unrealistic and unsustainable, 629 00:40:29,360 --> 00:40:33,920 Speaker 1: and that he had outright lied about how Terraform worked. 630 00:40:34,440 --> 00:40:37,680 Speaker 1: In fact, the SEC alleges the Doquan was engaged in 631 00:40:37,760 --> 00:40:42,840 Speaker 1: securities fraud and that quote the Terraform ecosystem was neither 632 00:40:43,120 --> 00:40:48,080 Speaker 1: decentralized nor finance. That's a sick burn, the quote continues. 633 00:40:48,560 --> 00:40:52,160 Speaker 1: It was simply a fraud propped up by a so 634 00:40:52,200 --> 00:40:55,920 Speaker 1: called algorithmic stable coin, the price of which was controlled 635 00:40:55,920 --> 00:41:00,800 Speaker 1: by the defendants, not any code. Quote. The SEC is 636 00:41:00,840 --> 00:41:04,879 Speaker 1: saying there wasn't any algorithmic nature to the stable coin 637 00:41:04,920 --> 00:41:08,759 Speaker 1: at all, it was maintaining its value based upon just 638 00:41:10,280 --> 00:41:14,399 Speaker 1: Terraform Labs saying it dead. Now do Quan's last known 639 00:41:14,440 --> 00:41:18,239 Speaker 1: location with Serbia. He apparently fled there after he left 640 00:41:18,239 --> 00:41:22,840 Speaker 1: Singapore because Singapore police are now investigating Terraform Labs as well, 641 00:41:23,360 --> 00:41:25,880 Speaker 1: and do Quan had already picked up stakes and left. 642 00:41:26,040 --> 00:41:28,880 Speaker 1: He fled to Dubai first and now is in Serbia, 643 00:41:28,960 --> 00:41:31,200 Speaker 1: or at least his last known location with Serbia. My 644 00:41:31,239 --> 00:41:32,960 Speaker 1: guess is he'll continue to try and keep a low 645 00:41:33,000 --> 00:41:36,279 Speaker 1: profile and move around because he is a very much 646 00:41:36,400 --> 00:41:40,799 Speaker 1: wanted man at this point in several countries. Now, before 647 00:41:40,840 --> 00:41:44,160 Speaker 1: I wrap up, I should also mention the FTX debacle. 648 00:41:44,600 --> 00:41:47,760 Speaker 1: I did an entire episode on FTX and Sam Bankman freed, 649 00:41:48,000 --> 00:41:52,439 Speaker 1: the co founder, and arguably FTX isn't quite the same 650 00:41:52,480 --> 00:41:54,879 Speaker 1: thing as a Ponzi scheme, but it does come down 651 00:41:54,960 --> 00:41:58,360 Speaker 1: to a robbing Peter to pay Paul situation all the same. 652 00:41:58,920 --> 00:42:01,759 Speaker 1: So the cliffs Notes version of the FTX debacle goes 653 00:42:01,800 --> 00:42:06,040 Speaker 1: something like this. Sam Bankman Freed, or SBF as the 654 00:42:06,200 --> 00:42:09,400 Speaker 1: folks who used to be his friends and believers called him, 655 00:42:09,600 --> 00:42:14,319 Speaker 1: co founded a crypto investment company called Alimator, Research. So 656 00:42:14,760 --> 00:42:16,839 Speaker 1: this company essentially what it did was it would take 657 00:42:16,880 --> 00:42:20,160 Speaker 1: investor money and it would put it into different crypto 658 00:42:20,320 --> 00:42:23,719 Speaker 1: investments in an attempt to create a profit. So far, 659 00:42:23,760 --> 00:42:27,560 Speaker 1: so good. It's not a guaranteed moneymaker, right because the 660 00:42:27,560 --> 00:42:30,919 Speaker 1: crypto markets can be pretty fickle, but it's fairly straightforward. 661 00:42:31,000 --> 00:42:34,439 Speaker 1: And he located the business off shore because that helps 662 00:42:34,480 --> 00:42:39,399 Speaker 1: and avoid those imperial entanglements. As obi Wan would say, 663 00:42:39,560 --> 00:42:41,920 Speaker 1: that's important to remember. One of the big anchor points 664 00:42:41,920 --> 00:42:46,239 Speaker 1: for the crypto philosophy tends to be that crypto could 665 00:42:46,320 --> 00:42:51,040 Speaker 1: be free from regulations as opposed to the big established 666 00:42:51,080 --> 00:42:56,600 Speaker 1: financial systems in various countries. However, this is something that's 667 00:42:56,680 --> 00:43:00,360 Speaker 1: rapidly changing because governments around the world find themselves saying, wait, 668 00:43:01,000 --> 00:43:06,200 Speaker 1: you lost how much investor money? So the regulatory agencies 669 00:43:06,239 --> 00:43:09,880 Speaker 1: around the world have definitely been closing in on crypto anyway. 670 00:43:10,160 --> 00:43:13,760 Speaker 1: A little later after founding Alimator Research, spf CO founds 671 00:43:13,800 --> 00:43:17,360 Speaker 1: another company called FTX, and this is a crypto exchange. 672 00:43:17,719 --> 00:43:20,959 Speaker 1: So this is a business that exchanges currencies for other 673 00:43:21,040 --> 00:43:23,080 Speaker 1: currencies and it takes a little bit off the top 674 00:43:23,320 --> 00:43:26,799 Speaker 1: to pay for its own operations. So an exchange is 675 00:43:26,880 --> 00:43:30,840 Speaker 1: somewhere where you might swap your UST for Luna, for example, 676 00:43:31,360 --> 00:43:34,319 Speaker 1: or vice versa, or UST for US dollars. You get 677 00:43:34,360 --> 00:43:37,600 Speaker 1: the idea. These are the entities that make it possible 678 00:43:37,920 --> 00:43:43,400 Speaker 1: to jump into different cryptocurrencies and participate in the crypto world. Now, 679 00:43:44,080 --> 00:43:47,120 Speaker 1: FTX would actually grow to become the second largest crypto 680 00:43:47,200 --> 00:43:50,920 Speaker 1: exchange in the world, and folks could keep their money 681 00:43:51,160 --> 00:43:53,279 Speaker 1: in the exchange itself. They could treat it kind of 682 00:43:53,280 --> 00:43:55,400 Speaker 1: like a bank, and when the dust would settle a 683 00:43:55,880 --> 00:43:59,600 Speaker 1: FDx collapsed, it would appear as though SPF and his 684 00:43:59,680 --> 00:44:02,280 Speaker 1: crew were a bit lucy goosey with the money stored 685 00:44:02,880 --> 00:44:06,600 Speaker 1: in customer FTX accounts. So, just ahead of the collapse 686 00:44:06,640 --> 00:44:11,640 Speaker 1: came this expose that included screenshots of spreadsheets that appeared 687 00:44:11,640 --> 00:44:16,440 Speaker 1: to show that the FTX folks had been funneling money 688 00:44:16,600 --> 00:44:21,880 Speaker 1: from customer accounts to Alimta Research to help cover investor 689 00:44:21,920 --> 00:44:24,880 Speaker 1: returns there so again it looked like they were robbing 690 00:44:24,920 --> 00:44:28,120 Speaker 1: Peter in the form of FTX customers to pay Paul 691 00:44:28,440 --> 00:44:32,200 Speaker 1: the Alimator Research investors. This expose set off a chain 692 00:44:32,200 --> 00:44:34,960 Speaker 1: of events that would lead to the collapse of FTX, 693 00:44:35,440 --> 00:44:38,960 Speaker 1: and FTX had its own native token the FTT, and 694 00:44:39,040 --> 00:44:42,520 Speaker 1: folks started to cash out their FTT investments because that 695 00:44:42,640 --> 00:44:46,319 Speaker 1: expose showed that FTX probably didn't have enough FTT to 696 00:44:46,400 --> 00:44:49,799 Speaker 1: cover all the money that customers had actually put into 697 00:44:49,880 --> 00:44:53,719 Speaker 1: the exchange. So you're thinking, ha, they don't have as 698 00:44:53,800 --> 00:44:57,960 Speaker 1: much money as people had invested into it, so I 699 00:44:58,000 --> 00:45:00,040 Speaker 1: should pull my money out because I don't want to 700 00:45:00,080 --> 00:45:02,600 Speaker 1: be left holding the bag. So people started to cash out, 701 00:45:02,600 --> 00:45:06,880 Speaker 1: and not included Binance, the largest cryptocurrency exchange in the world, 702 00:45:07,000 --> 00:45:10,560 Speaker 1: which coincidentally had also at one point offered to bail 703 00:45:10,600 --> 00:45:15,120 Speaker 1: out FTX, and then TOTS changed their mind. They ended 704 00:45:15,200 --> 00:45:20,560 Speaker 1: up cashing out their considerable amount of FTT tokens in FTX, 705 00:45:21,040 --> 00:45:25,160 Speaker 1: and this accelerated the collapse, so FTX didn't have all 706 00:45:25,160 --> 00:45:29,080 Speaker 1: the money they needed to pay this out. The reveal 707 00:45:29,120 --> 00:45:33,239 Speaker 1: about the elimated research problem got published and everything came 708 00:45:33,280 --> 00:45:36,600 Speaker 1: crashing down. So it wasn't exactly a Ponzi scheme, but 709 00:45:36,640 --> 00:45:39,040 Speaker 1: there's a lot of overlap in the Venn diagram here, 710 00:45:39,600 --> 00:45:42,000 Speaker 1: and it's stuff like Ponzi schemes that have really hurt 711 00:45:42,000 --> 00:45:45,920 Speaker 1: the cryptocurrency industry in general. Like not every cryptocurrency is 712 00:45:45,920 --> 00:45:50,320 Speaker 1: an outright scam or at least it wasn't initially created 713 00:45:50,360 --> 00:45:52,960 Speaker 1: to be a scam, but there are enough examples that 714 00:45:53,000 --> 00:45:56,720 Speaker 1: have really damaged the whole industry, including banks that didn't 715 00:45:56,760 --> 00:45:59,720 Speaker 1: start in the crypto world but ended up getting tangled 716 00:45:59,800 --> 00:46:02,440 Speaker 1: up in it. If you are interested in learning more 717 00:46:02,440 --> 00:46:05,360 Speaker 1: about that, you should look up the bank silver Gate. 718 00:46:05,760 --> 00:46:08,160 Speaker 1: This was a real estate bank or is a real 719 00:46:08,239 --> 00:46:11,600 Speaker 1: estate bank in southern California that about a decade ago, 720 00:46:11,640 --> 00:46:13,920 Speaker 1: a little less than a decade ago, got involved into 721 00:46:13,960 --> 00:46:17,880 Speaker 1: the cryptocurrency world and now is in real crisis mode 722 00:46:18,360 --> 00:46:21,800 Speaker 1: because of things like the FTX collapse and the collapse 723 00:46:21,840 --> 00:46:26,960 Speaker 1: of several other cryptocurrency companies that had been customers. It 724 00:46:27,000 --> 00:46:30,400 Speaker 1: has even gotten the attention of the US government to 725 00:46:30,480 --> 00:46:33,040 Speaker 1: look into silver Gate, which may or may not have 726 00:46:33,080 --> 00:46:35,520 Speaker 1: done anything wrong. Silver Gate might not have done a 727 00:46:35,560 --> 00:46:38,680 Speaker 1: single thing wrong, but once you start getting the attention 728 00:46:38,680 --> 00:46:42,200 Speaker 1: of the authorities, then customers start to get really nervous, 729 00:46:42,560 --> 00:46:47,040 Speaker 1: and a lot of cryptocurrency companies have pulled their accounts 730 00:46:47,040 --> 00:46:51,840 Speaker 1: with silver Gate. So this kind of activity, these ponzi 731 00:46:51,880 --> 00:46:54,879 Speaker 1: schemes and stuff, can end up having a very large 732 00:46:54,960 --> 00:46:59,240 Speaker 1: ripple effect beyond just the initial investors who lose their money. 733 00:46:59,520 --> 00:47:03,120 Speaker 1: It could end up poisoning the well for everyone. There's 734 00:47:03,120 --> 00:47:06,520 Speaker 1: the saying one bad apple can spoil the bunch. In 735 00:47:06,520 --> 00:47:10,440 Speaker 1: this case those Ponzi schemes and related scams. That's the 736 00:47:10,480 --> 00:47:14,600 Speaker 1: bad apple, and it could poison the entire blockchain community. 737 00:47:15,360 --> 00:47:19,239 Speaker 1: Even though blockchain on its own is not necessarily a 738 00:47:19,239 --> 00:47:23,240 Speaker 1: bad thing, it's just that it's prone to this, largely 739 00:47:23,320 --> 00:47:27,919 Speaker 1: due to the lack of regulation, which again means that 740 00:47:28,400 --> 00:47:32,440 Speaker 1: potentially to solve this, the crypto world needs to change 741 00:47:32,440 --> 00:47:37,000 Speaker 1: its stance and its thoughts about regulation and its role 742 00:47:37,440 --> 00:47:41,680 Speaker 1: in finance. It goes flies in the face of the original, 743 00:47:41,719 --> 00:47:46,239 Speaker 1: like crypto anarchists who thought that deregulation was the way 744 00:47:46,239 --> 00:47:49,360 Speaker 1: of the future. As it turns out, it does create 745 00:47:49,440 --> 00:47:55,120 Speaker 1: the perfect opportunity for scam artists to steal lots of money, 746 00:47:55,120 --> 00:47:59,000 Speaker 1: which hurts everyone. Okay, that's the update on It's a 747 00:47:59,040 --> 00:48:02,399 Speaker 1: crypto Ponzi scheme. Hope you enjoyed this. If you have 748 00:48:02,760 --> 00:48:05,439 Speaker 1: questions or maybe you've got an idea for a show 749 00:48:05,440 --> 00:48:07,160 Speaker 1: I should do in the future, a couple of different 750 00:48:07,160 --> 00:48:08,640 Speaker 1: ways you can reach out to me. One is you 751 00:48:08,640 --> 00:48:10,960 Speaker 1: can send me a message on Twitter. The handle for 752 00:48:11,160 --> 00:48:15,040 Speaker 1: the show is tech Stuff HSW or you can download 753 00:48:15,040 --> 00:48:17,800 Speaker 1: the iHeartRadio apps free to downloads free to use. You 754 00:48:17,840 --> 00:48:19,839 Speaker 1: can navigate over to tech stuff a little search bar. 755 00:48:20,239 --> 00:48:22,279 Speaker 1: You'll see a little microphone icon on there. If you 756 00:48:22,280 --> 00:48:24,160 Speaker 1: click on that, you can leave me a voice message 757 00:48:24,239 --> 00:48:26,360 Speaker 1: up to thirty seconds in length. Let me know what 758 00:48:26,400 --> 00:48:28,279 Speaker 1: you would like to hear, and I'll talk to you 759 00:48:28,320 --> 00:48:39,120 Speaker 1: again really soon. Tech Stuff is an iHeartRadio production. For 760 00:48:39,280 --> 00:48:44,120 Speaker 1: more podcasts from iHeartRadio, visit the iHeartRadio app, Apple Podcasts, 761 00:48:44,239 --> 00:48:46,240 Speaker 1: or wherever you listen to your favorite shows.