Speaker 1: Welcome to tech Stuff, a production from I Heart Radio.
Speaker 1: Hey there, and welcome to tech Stuff. I'm your host,
Speaker 1: Jonathan Strickland. I'm an executive producer with I Heart Radio.
Speaker 1: And how the tech are you? So recently I mentioned
Speaker 1: in a tech News episode of tech Stuff that cryptocurrency
Speaker 1: exchange f t X was in deep trouble, which honestly
Speaker 1: was putting it lightly, and I mentioned that the founder
Speaker 1: of that exchange, or co founder I should say, a
Speaker 1: guy named Sam Bankman Freed but more commonly referred to
Speaker 1: as s b F was making the rounds, taking responsibility
Speaker 1: for the whole thing. He subsequently resigned as CEO of
Speaker 1: f t X. That happened on Friday, last Friday today,
Speaker 1: by the way, being November twenty two. So for those
Speaker 1: of you listening from the future you can you're gonna
Speaker 1: be referring to that calendar a lot. Anyway, Uh, that catastrophe,
Speaker 1: the f t X catastrophe, is far larger than I
Speaker 1: could cover in a typical tech News segment, so I
Speaker 1: thought I would explain it in greater detail here, so
Speaker 1: much detail, and we'll also talk about the ripple effect
Speaker 1: we're seeing as ft X goes through this existential crisis,
Speaker 1: which I think even that is being generous. I think
Speaker 1: ft X is is just uh seeing the end of
Speaker 1: its days. But first, let's talk about cryptocurrency and exchanges
Speaker 1: in general so that we can understand the foundation of
Speaker 1: what's going on before we get into the details of
Speaker 1: what happened at f t X. So let's think back
Speaker 1: way back to the origin of bitcoin. In two thousand eight,
Speaker 1: someone using the name Satoshi Nakamoto published a white paper
Speaker 1: that was titled Bitcoin, a Peer to Peer Electronic Cash System.
Speaker 1: That white paper laid out the details for Bitcoin's operation.
Speaker 1: That this was going to be a decentralized digital currency,
Speaker 1: that it would have a community of participants who would
Speaker 1: track transactions through a shared ledger that was on top
Speaker 1: of a blockchain. That this community would compete against one
Speaker 1: another to validate blocks of transactions, and the winner would
Speaker 1: take uh some newly minted bitcoin as a reward. That
Speaker 1: the supply of bitcoin itself would be finite, That eventually
Speaker 1: all bitcoin that will ever exist will be on the market,
Speaker 1: and that every couple of years, the number of bitcoins
Speaker 1: that are awarded to the successful system that verifies a
Speaker 1: block of transactions will be cut down by half, that
Speaker 1: the system itself would adjust the difficulty of the verification
Speaker 1: task based on the amount of computational power dedicated to
Speaker 1: solving it. This is called proof of work. It's a
Speaker 1: version of UM cryptocurrency validation and minting that is used
Speaker 1: not exclusively but by a lot of different cryptocurrencies, including bitcoin.
Speaker 1: And that's the thing that feeds into people making increasingly
Speaker 1: powerful computer systems to attempt to mine bitcoin. But what
Speaker 1: wasn't really laid out was how people were going to
Speaker 1: get bitcoin outside of just mining it. The peer to
Speaker 1: peer nature would allow one bitcoin holder to transfer bitcoin
Speaker 1: to someone else via some form of forum such as
Speaker 1: bitcoin talk. That was one that Satoshi Nakamoto founded in
Speaker 1: early two thousand nine. Two thousand nine is also when
Speaker 1: bitcoin officially launched. The white paper came out a year earlier,
Speaker 1: or early a few months earlier, at the end of
Speaker 1: two thousand eight. In January two nine, was when bitcoin
Speaker 1: became something that people could actually participate in. Now you
Speaker 1: could use bitcoin in a personal transaction peer to peer,
Speaker 1: but that was really about it. And the peer to
Speaker 1: peer method worked, but it was also risky because there
Speaker 1: was no guarantee that the person with whom you were
Speaker 1: trading was on the up and up, or that whomever
Speaker 1: held the bitcoin would actually transfer the bitcoin at the
Speaker 1: conclusion of the transaction. However, bitcoin at the time was
Speaker 1: also virtually worthless. It would take thousands and thousands of
Speaker 1: bitcoin to amount to enough money to buy a pizza,
Speaker 1: for example, and it would take a year before bitcoin
Speaker 1: was worth even thirty nine cents per single bitcoin. So
Speaker 1: what I'm saying is that while it was technically risky
Speaker 1: to engage in a peer to peer bitcoin transaction, the
Speaker 1: value of the currency was so low that even a
Speaker 1: bad experience would likely result in the loss of at
Speaker 1: most a few bucks. Now today, a bitcoin is worth
Speaker 1: around sixteen hundred bucks as of the recording of this episode.
Speaker 1: That is, that level of risk is a bit too
Speaker 1: steep for most folks to just trust a peer to
Speaker 1: peer transaction, though those can still happen. But by late
Speaker 1: we started to see the first exchanges. So in exchange
Speaker 1: does what it says on the ten. It's an entity
Speaker 1: that can exchange one form of currency for another. One
Speaker 1: of the first exchanges was Bitcoin Market, and here's how
Speaker 1: it would work. Let's say you wanted some bitcoin, but
Speaker 1: you weren't interested in mining for it. You just wanted
Speaker 1: to purchase some You want to exchange some let's say
Speaker 1: U S dollars for the equivalent value in bitcoin. Well,
Speaker 1: you could arrange to purchase bitcoin from someone else who
Speaker 1: has it in their own digital wallet to do the
Speaker 1: peer to peer transaction, but again that's risky. The other
Speaker 1: ways you could go with a bitcoin market exchange approach,
Speaker 1: where the bitcoin owner would place the appropriate amount of
Speaker 1: bitcoin in escrow and it would sit there in escrow
Speaker 1: until your payment of the equivalent in U S dollars
Speaker 1: or whatever currency you're using cleared and got to the seller.
Speaker 1: Once the seller received the money, the bitcoin would be
Speaker 1: released from scrow to your digital wallet, whether that was
Speaker 1: on the market or your own personal digital wallet. That's
Speaker 1: you know, that can be pulled offline if you want,
Speaker 1: and the transaction is concluded. One bit that is important
Speaker 1: to remember cryptocurrency exchanges typically require a transaction fee to
Speaker 1: cover this process. The reason that's important is that there's
Speaker 1: really no incentive to use cryptocurrency for very small transactions
Speaker 1: because you end up paying more in transaction fees than
Speaker 1: you would for whatever the actual purchase was. This would
Speaker 1: be like if you walked into a store and you
Speaker 1: wanted to buy some gum and you had a credit card,
Speaker 1: so you buy it. You know, you got a pack
Speaker 1: of gum that's I don't know, a dollar, and you
Speaker 1: want to pay with your credit card, but the merchant
Speaker 1: charges a five dollar minimum for any credit card purchase.
Speaker 1: So do you really want the gun where you're gonna
Speaker 1: pay five bucks for a one dollar pack of gum?
Speaker 1: I mean, alternatively, I guess you could buy a bunch
Speaker 1: of other stuff so that you at least feel like
Speaker 1: you're getting value for your money. But that's the point, right, Like,
Speaker 1: you're not going to use a cryptocurrency if there's a
Speaker 1: if the transaction fee amounts to a significant percentage of
Speaker 1: whatever you're purchasing in the first place. Well. Another early
Speaker 1: cryptocurrency exchange that launched was uh Mount Cox. It launched
Speaker 1: in Mount Cox was empty period g o X, and
Speaker 1: that name was actually an initialism for magic. The gathering
Speaker 1: exchange is referencing the the trading card fantasy game. This
Speaker 1: name is one of the most infamous in cryptocurrency history
Speaker 1: because not only did it become the dominant exchange in
Speaker 1: the crypto world, handling something like sevent of all bitcoin
Speaker 1: transactions by early but that same year saw Mount Cox
Speaker 1: go under, so like they were on top of the heat,
Speaker 1: and in that same year they went extinct. Is not
Speaker 1: that different from what we're going to talk about with
Speaker 1: ft X, At least the outcome is not that different.
Speaker 1: The actual events that led to it were a little different.
Speaker 1: The exchange, which again was the dominant entity on the
Speaker 1: crypto market, found for bankruptcy and we would learn that
Speaker 1: Mount Cox had been hacked, with assets stolen and hundreds
Speaker 1: of millions of dollars worth of bitcoin disappearing from the exchange.
Speaker 1: In fact, at the time, the thefts amounted to seven
Speaker 1: percent of the total supply of bitcoin in the world.
Speaker 1: Like when you can when you can look at a
Speaker 1: bank robbery and you can contextualize that as a percentage
Speaker 1: of all the money in the world. That's a big
Speaker 1: bank robbery. And most of the the money that was
Speaker 1: stolen didn't belong to the exchange itself. It belonged to
Speaker 1: customers who were keeping their money on digital wallets that
Speaker 1: were on exchange accounts. Again, not a good look when
Speaker 1: a bunch of people lose their money, not through any
Speaker 1: fault of their own but because the exchange that held
Speaker 1: their accounts got hacked. Now, Mount Gox's implosion sent a
Speaker 1: shock way through the bitcoin community and the value of
Speaker 1: the currency dropped more than But despite the massive and
Speaker 1: public collapse of this exchange, cryptocurrency was able to stick
Speaker 1: it out and recovered Alright. So there's a lot more
Speaker 1: to the history of cryptocurrency as well as cryptocurrency exchanges.
Speaker 1: But that really gives us a foundation that we can
Speaker 1: work from. So we're not gonna dive into that anymore.
Speaker 1: Let's talk about f t X in particular. Now, that
Speaker 1: story begins with Sam Bankman Freed or SBF. This young
Speaker 1: man had worked for a while on Wall Street, and
Speaker 1: in sen he co founded a company called Alameda Research.
Speaker 1: This was a quantitative trading firm. And that phrase, will
Speaker 1: we have at least some of you say in what now?
Speaker 1: If you didn't say what, you should at least know
Speaker 1: that I did say what when I encountered it, Because
Speaker 1: the world of investment is one that I'm not particularly
Speaker 1: well versed in, but I'll give it a shot. Generally speaking,
Speaker 1: a quantitative trading firm relies heavily on math, statistics, and probability.
Speaker 1: Estimations to determine where markets are most likely heading, So
Speaker 1: you can sort of think of it as feeding a
Speaker 1: whole bunch of variables into a computer model and then
Speaker 1: projecting out what will happen from there. This, of course,
Speaker 1: is predicated on the assumption that financial markets will generally
Speaker 1: behave according to the value of these variables, which is
Speaker 1: an assumption that not everyone agrees with. This quantitative approach
Speaker 1: is heavily disputed in the investment world. I personally think
Speaker 1: it might be somewhat unreliable, but again, I hadn't even
Speaker 1: heard about this approach until today, so you could very
Speaker 1: legitimately argue that this is just my skeptical nature coming out,
Speaker 1: and I don't know what I'm talking about when it
Speaker 1: comes to validity of the theory. Anyway, Alameda Research specialized
Speaker 1: in cryptocurrencies, so the firm would leverage cryptocurrency markets to
Speaker 1: make itself and its clients money. So that could include
Speaker 1: stuff like arbitrage. This is where you attempt to leverage
Speaker 1: a difference in price for something like a commodity or
Speaker 1: some asset and you try to make a profit. So
Speaker 1: if you wanted, like an oversimplified example, let's say you
Speaker 1: know that apples are super cheap near you at the supermarket,
Speaker 1: like you can buy them for super super cheap, but
Speaker 1: you also happen to know that apples are twice as
Speaker 1: expensive across town. So you might buy up a bunch
Speaker 1: of cheap apples near you and then go across town
Speaker 1: and sell them for a profit, you know, lower than
Speaker 1: what the local markets are selling, but higher than what
Speaker 1: you paid for them. That kind of thing is what
Speaker 1: arbitrage is about, except you know, with crypto, and in
Speaker 1: much larger amounts than a few apples. So yeah, crypto apples.
Speaker 1: Alimator Research did more than arbitrage deals, however, but we
Speaker 1: can really think of it as a company that relied
Speaker 1: on computer models to make market based decisions related to cryptocurrency.
Speaker 1: Alimator Research is going to play a huge part in
Speaker 1: our story moving forward. So SPF founds Alimator Research. In
Speaker 1: two years later, twenty nineteen, SPF partners with Gary Wong,
Speaker 1: who used to be a Googler. He worked for Google. Uh.
Speaker 1: They in turn founded the ft X Cryptocurrency Exchange. So
Speaker 1: now they've got a company that is an investment company
Speaker 1: that's entrenched in cryptocurrency and a cryptocurrency exchange, so two
Speaker 1: very closely related entities here they do different things, but
Speaker 1: it's all in the world of crypto now. F d X,
Speaker 1: like a lot of cryptocurrency exchanges, had its own exchange token.
Speaker 1: This is a type of cryptocurrency that's created by the
Speaker 1: exchange itself, and it's meant to be used in all
Speaker 1: sorts of transactions and as an award and an incentive.
Speaker 1: So exchanges often use these tokens to encourage users to
Speaker 1: cover transaction costs and that kind of thing, or they
Speaker 1: might do it to raise the company's liquidity in the exchange.
Speaker 1: It may also be used to hold a stake in
Speaker 1: the exchange, so users can purchase exchange tokens in order
Speaker 1: to have kind of a seat at the table when
Speaker 1: it comes to blockchain governance. This is kind of the
Speaker 1: decentralized approach of crypto, the idea that governance does not
Speaker 1: fall to some centralized entity, but instead is made up
Speaker 1: of the community itself. So by putting a stake in,
Speaker 1: you have a seat. It's kind of like owning stock
Speaker 1: in a company. Right. If you own stock, that gives
Speaker 1: you the right to vote in various um stockholder meetings.
Speaker 1: Throughout the year. So yeah, that's kind of what these
Speaker 1: tokens are used for in general. And the f t
Speaker 1: X exchange token is the f t T And yes,
Speaker 1: I apologize, we're getting into alphabet suit territory here, right
Speaker 1: because we've got SPF the guy, the human being who
Speaker 1: co founded this company, and then you've got f t
Speaker 1: X the company, and then f t X meants the
Speaker 1: f t T token. Yeah, you know me, I'm down
Speaker 1: with f t T. Not really, I'm not down with
Speaker 1: f t T at all. F t T is down though. Um,
Speaker 1: we're not done with initialisms. We're going to have more
Speaker 1: before this is done. But you know, this is kind
Speaker 1: of the way that the crypto community communicates. They do
Speaker 1: it in a lot of like idioms and initialisms and acronyms,
Speaker 1: and it gets to a point where you start to
Speaker 1: wonder if anyone knows what they're talking about, or can
Speaker 1: even you know, explain the content of their sentences. I
Speaker 1: don't know, it's all Greek to me. Before everything went
Speaker 1: pear shaped, you could buy f t T on f
Speaker 1: t X, but there were also other cryptocurrency exchanges that
Speaker 1: bought and sold f t T, so it was available
Speaker 1: on exchanges across the crypto world, not just f t
Speaker 1: X is and I mentioned ft T because that's also
Speaker 1: going to play a very important part in our story later. Okay,
Speaker 1: we've been going for a bit. Let's take a quick break,
Speaker 1: and when we come back, we'll talk more about what
Speaker 1: went down at f t X. All right, So SBF
Speaker 1: and Wong co founded f t X in two thousand nineteen.
Speaker 1: One early investor in the company was a rival cryptocurrency exchange,
Speaker 1: the number one cryptocurrency exchange in the world, called Binance.
Speaker 1: So yeah, the biggest cryptocurrency exchange out there. Now, this
Speaker 1: story is going to unfold a little bit like a
Speaker 1: superhero and their arch nemesis kind of both coming of
Speaker 1: age at the same time. You know, they start off
Speaker 1: as friends, the old Clark Kent and Lex Luthor or
Speaker 1: buddies at first, but then things take a turn and
Speaker 1: one of them wants to see the end of the other.
Speaker 1: You've got your supervillain. So if ft X is our superhero,
Speaker 1: Binance is our supervillain, or if we want to talk
Speaker 1: about founders, SBF is our superhero. And Chong Peng Zhao
Speaker 1: also known as c Z because again more initialisms, is
Speaker 1: our supervillain, and spoiler alert, and this superhero story, the
Speaker 1: bad guy wins. Now, for the record, I actually don't
Speaker 1: want to cast Binance or c Z as the villain,
Speaker 1: partly because the more we learn about fd X and SBF,
Speaker 1: the less heroic those seem as well. And I think
Speaker 1: this is more of a story of a bunch of
Speaker 1: supervillains working against each other in a way. Alright, So
Speaker 1: Finance puts in a significant investment into this young f
Speaker 1: t X cryptocurrency exchange company. Two years later in fd
Speaker 1: X is ready to pay back Binances investment. You know,
Speaker 1: the whole point of an investment is to get a return.
Speaker 1: So this is ft X saying, okay, we've made our money.
Speaker 1: We're paying you off. Here's what you gave us plus more.
Speaker 1: Finance was essentially cashing out and ft X paid Binance
Speaker 1: in ft T. Again, that's the exchange currency for f
Speaker 1: t X, right we talked about just a minute ago.
Speaker 1: So in all, Finance received twenty three million f t
Speaker 1: T tokens and it had a value around that time
Speaker 1: of five nine million dollars. So Binance has a big
Speaker 1: old stash of FTT sitting in the exchange in June,
Speaker 1: f d X holds a round of funding that accumulates
Speaker 1: nearly one billion dollars in investments. That's billion with a B.
Speaker 1: The company's value is projected at eighteen billion bucks. Not
Speaker 1: bad to go from being founded in twenty nineteen two
Speaker 1: hitting nearly twenty billion dollars in value in just two years.
Speaker 1: That's crazy. But hold onto your proverbial hats because we're
Speaker 1: about to get crazier. In fact, hold onto your hats
Speaker 1: and since your socks tight, because I'm gonna knock both
Speaker 1: of them off if you're not careful. So in October
Speaker 1: of twenty twenty one, just a few months after being
Speaker 1: valued at eighteen billion dollars, f t X went up
Speaker 1: to being valued at twenty five billion dollars, a boost
Speaker 1: of seven billion dollars in just a few months, and
Speaker 1: f t X was leveraging this valuation to raise even
Speaker 1: more money from investors. That's one of the reasons why
Speaker 1: you want to tout your valuation, as you're telling investors, hey,
Speaker 1: look at how quickly we are growing. You want to
Speaker 1: get in on this, so pour your money into it.
Speaker 1: So you might wonder, well, what is f t X
Speaker 1: doing with all the money it's making, you know, because
Speaker 1: I mean, obviously a lot of it's going into the
Speaker 1: operation of the exchange itself. But f t X was
Speaker 1: getting so much cash, so what was it doing with it? Well,
Speaker 1: one thing he was doing was promoting f t X
Speaker 1: in various extravagant ways. For example, in September one, ft
Speaker 1: X signed a sponsorship deal with a Formula One racing team,
Speaker 1: so they started putting the logo on the cars. And
Speaker 1: in April one, ft X signed a sponsorship deal with
Speaker 1: the home arena for the Miami Heat basketball team, calling
Speaker 1: it the f t X Arena. And this was a
Speaker 1: nineteen year deal to have that naming rights. But f
Speaker 1: t X wouldn't last nineteen years. And if I remember
Speaker 1: to come back to this, I'll give you an update
Speaker 1: on what's going on at the home of the Miami
Speaker 1: Heat and also that Formula one team spoiler alert. I
Speaker 1: will remember because I know I wrote it down. Meanwhile,
Speaker 1: f t X is operating as a cryptocurrency exchange and
Speaker 1: becomes the second largest crypto exchange, only behind Binance. So
Speaker 1: Binance helped f t X get started, and now f
Speaker 1: t X is number two behind Finances number one and
Speaker 1: SPF started to make some really big moves, some of
Speaker 1: which would sour his relationship with Binance and its CEO
Speaker 1: c z you know, Chong Pang Zhao. Alright, so first
Speaker 1: let's talk about SPFS moves to help companies that were
Speaker 1: affected by the collapse of cryptos value. Now, I'm pretty
Speaker 1: sure in a recent news episode I talked about cryptos
Speaker 1: value crashing a couple of years ago. But that was
Speaker 1: my brain misfiring, Like it hit me later that day
Speaker 1: that I said something that was wrong, because I think
Speaker 1: I said, you know, a couple of years ago when
Speaker 1: bitcoin was worth sixty dollars. That wasn't a couple of
Speaker 1: years ago. That was this year. That crash actually happened
Speaker 1: earlier this year, in the spring of this year. It
Speaker 1: just feels to me like this year has lasted five years,
Speaker 1: which I guess I could say about the last couple
Speaker 1: of years have felt that way. But anyway, so this
Speaker 1: past spring, and again that's the Spring of two for
Speaker 1: any of you listening from the future, we saw crypto
Speaker 1: values in sharp decline. In a May two article titled
Speaker 1: Cryptocurrencies melt down in a perfect storm of fear and panic,
Speaker 1: The New York Times reporter team spelled it all out,
Speaker 1: all right. So towards the beginning of the Panto back
Speaker 1: back in, there was a spike in cryptocurrency adoption. This
Speaker 1: increase in demand caused cryptocurrency values to increase. You know,
Speaker 1: the more people want something, the more expensive it gets.
Speaker 1: And these included not just your regular old folks dipping
Speaker 1: their toes into doge coin or whatever. You had these
Speaker 1: massive financial companies, including banks and hedge funds that were
Speaker 1: purchasing large amounts of cryptocurrency and a bet that those
Speaker 1: coins would continue to increase in value to the moon.
Speaker 1: As the crypto bros would say. Um side note, crypto
Speaker 1: bro is a pretty common, somewhat dismissive term for cryptocurrency enthusiasts,
Speaker 1: but obviously anyone of any gender can be interested in crypto,
Speaker 1: so crypto bro, as far as I'm concerned, should be
Speaker 1: considered a non gendered term. But whether you agree with
Speaker 1: that or not, it is the term that a lot
Speaker 1: of folks use, all right. So the value for cryptocurrencies
Speaker 1: in general goes up and up. Bitcoin reached a peak
Speaker 1: of around sixty grand for a single unit of bitcoin.
Speaker 1: In turn, the rising value of cryptocurrencies had lots of
Speaker 1: other consequences. Proof of work cryptocurrencies like bitcoin, you know,
Speaker 1: those are the ones that require participants to dedicate enormous
Speaker 1: amounts of compute power to have even a hope of
Speaker 1: mining a block of transactions. Well, that meant that collectively,
Speaker 1: people were spending the same amount of electricity just to
Speaker 1: mind cryptocurrency as certain countries would use in an entire year.
Speaker 1: That in turn has an impact not just on electrical grids,
Speaker 1: but on carbon dioxide emissions. So for any coal powered
Speaker 1: power plants out there, I mean that increased demand just
Speaker 1: meant we were dumping more CEO two in the atmosphere
Speaker 1: because people wanted to mine Bitcoin. Then, for less valuable
Speaker 1: cryptocurrencies like Ether, a lot of the miners were scooping
Speaker 1: up powerful graphics cards like Bitcoin at this point had
Speaker 1: graduated well beyond graphics cards. You could have the best
Speaker 1: graphics cards on the market and not even make a
Speaker 1: dent in the sophisticated bitcoin mining systems out there. But
Speaker 1: for stuff like either where it wouldn't make financial sense
Speaker 1: to go so hard on your mining rig. You know,
Speaker 1: GPUs were a big asset, and it made it very
Speaker 1: hard for anyone else to get hold of those graphics
Speaker 1: processing cards, which really irritated a lot of gamers. Anyway,
Speaker 1: this trend could not continue indefinitely, and eventually values began
Speaker 1: to dip a bit. Now there were a lot of
Speaker 1: external forces that would have a big impact as well.
Speaker 1: The world began to enter into economic uncertainty. I guess
Speaker 1: I still can't say recession. Um. You started to have
Speaker 1: issues with inflation, you had interest rates going up, investments
Speaker 1: and stuff like crypto started to look increasingly risky. Then
Speaker 1: you know, Russia invaded Ukraine, which may economic uncertainty even worse,
Speaker 1: and that led to some folks pulling out of the
Speaker 1: crypto market. So they were selling off their crypto so
Speaker 1: that they could walk away with a nice little profit,
Speaker 1: and then the value would dip a bit. Then you
Speaker 1: had folks getting nervous, So some folks began to sell
Speaker 1: off their's because they're like, well, it's starting to go
Speaker 1: down and I don't want to be left holding the bag,
Speaker 1: so I'm getting out too. Now, arguably these cryptocurrencies were overvalued,
Speaker 1: so there was a need for a market correction. But
Speaker 1: this actually became a casscade because more and more folks
Speaker 1: began to try and claw back their money, and crypto
Speaker 1: in general saw a really tough decline that meant that
Speaker 1: some companies in crypto got into financial difficulty. They had
Speaker 1: extended deeply into the crypto market. The crypto market drops
Speaker 1: out from under them and they are drowning and in sweeps. SBF,
Speaker 1: who may or may not be a superhero or supervillain
Speaker 1: now SPF really believed in his vision of crypto, and
Speaker 1: he has an altruistic streak, a sile wide. I mean
Speaker 1: he genuinely has talked a big talk and put a
Speaker 1: lot of money towards philanthropy. But for crypto to succeed,
Speaker 1: you know, he felt we really needed these various crypto
Speaker 1: companies to stick around or else all confidence is going
Speaker 1: to go out of crypto and the whole thing dies.
Speaker 1: So rather than let these companies go out of business
Speaker 1: while companies like Alameda, ft X and Binance may or
Speaker 1: may not be able to weather the storm, he directed
Speaker 1: his companies, which he owned like seventy of them, to
Speaker 1: acquire and bail out some of the smaller crypto companies
Speaker 1: that were in trouble. For example, this past July July
Speaker 1: of two thousand twenty two, ft X signed a deal
Speaker 1: with a company called Block five, which was a crypto
Speaker 1: lender company. That deal had an option to buy Block
Speaker 1: five at reportedly around two hundred forty million dollars, but
Speaker 1: the actual deal involved providing a four hundred million dollar
Speaker 1: credit facility for Block five to use. We'll get back
Speaker 1: to that at the end of this episode. Later in July,
Speaker 1: f t X reached out to a different crypto lender,
Speaker 1: one that was in the throes of bankruptcy, so this
Speaker 1: one wasn't just teetering it was in chapter eleven. This
Speaker 1: one was called Voyager Digital, so the offer was for
Speaker 1: a partial bailout. The Voyager Digital dismissed the offer as
Speaker 1: a low ball bid, but the bankruptcy proceedings continued, and
Speaker 1: eventually Voyager Digital essentially went up on the auction block
Speaker 1: and f t X ended up winning the auction, so
Speaker 1: it outbid all other competitors and f t X was
Speaker 1: expected to bring Voyager Digital out of bankruptcy, which is
Speaker 1: not going to happen. Spoiler alert. F t X started
Speaker 1: to run into trouble later in the summer of two
Speaker 1: for one thing, UH the f d i C a
Speaker 1: U S Bank regulator issued a stern warning to ft X,
Speaker 1: claiming the company had made misleading statements regarding whether it's
Speaker 1: funds were ensured by the US government. Specific the f
Speaker 1: d i C called out a tweet by Brett Harrison,
Speaker 1: who was a leader at f t X. The f
Speaker 1: d i C argued that Harrison's tweet made it sound
Speaker 1: like customers who held funds at f t X and
Speaker 1: who were purchasing stocks through f t X had the
Speaker 1: benefit of those transactions being f d I C ensured,
Speaker 1: which was not the case. Harrison would subsequently delete the tweet,
Speaker 1: and folks assume that the whole thing was a poorly
Speaker 1: worded message in the first place that was intended to
Speaker 1: reassure people that crypto really isn't as risky as some
Speaker 1: folks were saying. Keep in mind, this is happening in
Speaker 1: the wake of the crypto market decline that began back
Speaker 1: in the spring. Then we get to early November. Now,
Speaker 1: for those listening from the future, I'm recording and publishing
Speaker 1: this in mid November two. So everything I'm going to
Speaker 1: talk about next happened in the last two weeks, and
Speaker 1: a whole bunch of things happened in rapid succession. On
Speaker 1: November two, the crypto news site coin Desk posted an
Speaker 1: article about Elite balance sheet regarding Alimator Research, and the
Speaker 1: implications were troubling, to say the least. According to the
Speaker 1: balance sheet, Alimator Research was taking assets from ft X,
Speaker 1: the cryptocurrency exchange, and then using those assets to fund
Speaker 1: trades that Alimator Research was was making Those f t
Speaker 1: X assets belonged to f t X customers, So one
Speaker 1: of sbfs companies was essentially dipping into one of his
Speaker 1: other companies in order to fund trades. And moreover, it
Speaker 1: was doing this without the consent of f t X customers. Okay,
Speaker 1: that's a lot to take in, but we've got so
Speaker 1: much more. We're going to take another break, and when
Speaker 1: we come back, I'm going to talk about some of
Speaker 1: the really crazy stuff that's happened in the last two weeks.
Speaker 1: But first let's take a break. Okay, So Alimator Research
Speaker 1: is taking ft X money, which is provided by f
Speaker 1: t x is customers who are part of this cryptocurrency exchange.
Speaker 1: It's taking money out of those accounts in order to
Speaker 1: fund investments. You might be thinking that doesn't sound like
Speaker 1: it should be legal, and in most places it's not.
Speaker 1: US securities law requires that companies be very transparent about
Speaker 1: this sort of thing, and that they secure the consent
Speaker 1: of customers before doing anything like this with those customers funds.
Speaker 1: This practice actually even goes against f t x is
Speaker 1: own terms of service, So even if it weren't illegal,
Speaker 1: it would be against the company's own policy. And yet,
Speaker 1: according to this leaked document, this is what was happening.
Speaker 1: The balance sheet showed the Alimator Research had a lot
Speaker 1: of assets in f t t that's that exchange coin
Speaker 1: that's used by f t X. Now by itself, that's
Speaker 1: not immediately a problem necessarily, but it brings up some
Speaker 1: red flags because if your investment firms assets are made
Speaker 1: up mostly of a cryptocurrency that you also happen to
Speaker 1: have invented, it begins to sound a little bit like
Speaker 1: you're printing up your own money and you're trying to
Speaker 1: live like Emperor Norton of San Francisco. If you don't
Speaker 1: know who Emperor Norton was, look him up. Because it's
Speaker 1: a crazy story that's genuinely entertaining. There's some tragedy there there,
Speaker 1: but it's it's got a lot of quirky fun stuff
Speaker 1: in it. You should look that up anyway. The biggest
Speaker 1: asset held by Alameda Research was a whopping three point
Speaker 1: six six billion dollars worth of quote unquote unlocked f
Speaker 1: t T. Third place, the third biggest asset was another
Speaker 1: two point one six billion dollars of f t T collateral.
Speaker 1: And then much further down you had another two million
Speaker 1: dollars of locked f t T. And this got a
Speaker 1: lot of folks saying, huh, it kind of looks like
Speaker 1: you're robbing Peter to pay Paul that Alimator Research. This,
Speaker 1: this quantitative investment firm, was leaning heavily on the funds
Speaker 1: within f t X, a cryptocurrency exchange, in order to
Speaker 1: pay for investments. Now, if this balance sheet had not
Speaker 1: been leaked, and f t X customers remained unaware that
Speaker 1: their money was being used to fuel Alimator Research, maybe
Speaker 1: everything would have remained more or less stable, or at
Speaker 1: least not obviously unstable. Maybe f t X would still
Speaker 1: be operating just fine today. But Coin Desks report changed
Speaker 1: all of that. For one thing, it showed that Alimated
Speaker 1: Research had billions of dollars of debt. So that is
Speaker 1: a big risk if this organization is in debt to
Speaker 1: the tune of around eight billion dollars, and if it's
Speaker 1: dependent upon funds from a totally different company, that other
Speaker 1: company as at risk too. So a few days later,
Speaker 1: on November six, Binances CEO ol c z Chong peng
Speaker 1: Zhao said his company would liquidate their FTT holdings. Now
Speaker 1: do you remember those because Binance was an early investor
Speaker 1: into f t X. Then fd X paid off Binances
Speaker 1: investment with twenty three million f t T s. Well,
Speaker 1: now Binance was saying, yeah, we're gonna cash those out.
Speaker 1: We would like to cash out our ft T holdings
Speaker 1: for you know some other form of currency. Well, if
Speaker 1: you flood a market with any asset, you typically see
Speaker 1: that assets value drop. Right in the example I gave
Speaker 1: early on, if you were to buy a bunch of
Speaker 1: cheap apples and you were going across town and selling
Speaker 1: your cheap apples at a profit, eventually you had flood
Speaker 1: the market on the other side of town with apples,
Speaker 1: and they wouldn't be valuable anymore, right they would, they
Speaker 1: would the prices would be closer to evening out. So
Speaker 1: you flood the market, the value drops. Well, finance dropping
Speaker 1: all of its f t T was about to flood
Speaker 1: the exchange with f t T tokens. So then you
Speaker 1: had all these other people who owned f t T
Speaker 1: tokens and they said, well, I don't want to be
Speaker 1: left holding the bag. I don't want my f t
Speaker 1: T tokens to be valueless. I'm going to cash out too. Well, now,
Speaker 1: f t X was in a bind because it had
Speaker 1: been apparently funneling money over to Alimta Research, and it
Speaker 1: didn't have enough cash to cover all the requests as
Speaker 1: people were trying to cash out. It was a liquidity crisis,
Speaker 1: and f t X didn't have enough to cover all
Speaker 1: of these requests. So the company ends up being in
Speaker 1: serious trouble. Like if people here, hey, there's not enough
Speaker 1: money in the bank to cover everyone, then there's often
Speaker 1: a run on the bank. That's exactly what happened. There
Speaker 1: was a run on the bank, except in this case,
Speaker 1: the bank is a cryptocurrency exchange. Now, before I explain
Speaker 1: what happened next, I need to talk a little bit
Speaker 1: about CZ and his ongoing feud with SBF. Yes, it's
Speaker 1: the War of the initials. Now, as we learned, CZ's
Speaker 1: company was one of the earliest investors in SPFS company.
Speaker 1: So what the heck happened to turn these two collaborators
Speaker 1: into bitter rivals. Well, no one has really documented the
Speaker 1: whole thing, but my guess is one really big reason
Speaker 1: comes down to the concept of government regulation. See, governments
Speaker 1: around the world have been debating on how or if
Speaker 1: to regulate the crypto market, and of course, the crypto
Speaker 1: market was set up in a large part as a
Speaker 1: way to sidestep stuff like government regulation. SPF testified before
Speaker 1: US Congress about do and even worked with them to
Speaker 1: sort of draft recommendations for regulations that would end up
Speaker 1: affecting the crypto industry, and c Z just wasn't having
Speaker 1: any of that. C Z definitely does not want regulation
Speaker 1: entering into the conversation at all. It's a four letter
Speaker 1: word in his mind. Now, you could argue that SBF
Speaker 1: saw that regulations are on the horizon and that by
Speaker 1: becoming part of the conversation he could help draft regulations
Speaker 1: that would have a relatively light touch on the crypto market,
Speaker 1: so he could kind of steer the government's approach to crypto.
Speaker 1: But his involvement in even talking about regulations made him
Speaker 1: persona non grata to folks like c Z who just
Speaker 1: don't want to even entertain the thought of it, whether
Speaker 1: it's you know, somewhat favorable to crypto or not. Now,
Speaker 1: did c Z see an opportunity to go for SPF's
Speaker 1: jugular by selling off to any three million f T
Speaker 1: T tokens and tanking and overextended cryptocurrency exchange? Moreover, it's
Speaker 1: a cryptocurrency exchange that is second only to his own, right,
Speaker 1: It's it's one that's run by a guy who's working
Speaker 1: to draft crypto regulations with the US government. So you
Speaker 1: could say that c Z has a whole bunch of
Speaker 1: access to grind against s BF. Like, you've got the
Speaker 1: number two cryptocurrency exchange out there, so it's the biggest competitor.
Speaker 1: You've got this whole potential regulations thing looming on the horizon. Uh,
Speaker 1: you know, all these sort of ideas. But according to
Speaker 1: c Z, none of that even factored into his decision.
Speaker 1: He said that Finance was divesting itself of f T
Speaker 1: T tokens because of quote unquote recent revelations, which he
Speaker 1: did not elaborate upon, but folks took it to mean
Speaker 1: that balance sheet stuff that leaked on coin desk. Now,
Speaker 1: I get the feeling some of this decision may have
Speaker 1: in fact been personal and not just business. But again,
Speaker 1: that's just my opinion. I don't have anything to back
Speaker 1: that up apart from you know, various tweet streams that
Speaker 1: came out, so you can't really call that evidence. It's
Speaker 1: just the feeling I get. Anyway, whatever the motivation was,
Speaker 1: finances move of selling off this f t t directly
Speaker 1: led to a financial crisis for f t X, the
Speaker 1: cryptocurrency exchange. And then two days later, because I told
Speaker 1: you this stuff moved so fast, c Z and Finance
Speaker 1: announced an intent to acquire f t X. So now
Speaker 1: the number one cryptocurrency exchange says it's gonna buy the
Speaker 1: number two cryptocurrency exchange because the number two one is
Speaker 1: in trouble. The following day, so at this point we're
Speaker 1: at November nine, c Z says, yeah, no thanks, I'm
Speaker 1: good and backed away from the deal. And that was,
Speaker 1: you know, legally fined because the two entities had not
Speaker 1: entered into any sort of binding agreement. So Binance said
Speaker 1: it was going to acquire fd X and the next
Speaker 1: day said you know what, no, we're not, and they
Speaker 1: walked away and things got even uglier at f t X,
Speaker 1: and some wonder if that was in fact the point,
Speaker 1: like if Finance ever actually intended to acquire f t X,
Speaker 1: And I don't know the answer to that either. So
Speaker 1: f t X halted withdrawals on November ten, so people
Speaker 1: could not take their money out of f t X
Speaker 1: starting November ten. They also stopped accepting new clients so
Speaker 1: they wouldn't let anyone else get a get an account
Speaker 1: with the exchange, and SPF indicated he was seeking alternative
Speaker 1: saviors now that Binance had bailed out of the bailout,
Speaker 1: so SPF needed more than nine billion dollars to stop
Speaker 1: f t X from collapsing, along with Alimta Research. He
Speaker 1: did not get his nine billion dollars. He reached out
Speaker 1: to coin base CEO Brian Armstrong among others, and no
Speaker 1: lifelines were thrown. So on November eleven, which was last Friday,
Speaker 1: f t X entered into Chapter eleven bankruptcy proceedings here
Speaker 1: in the United States. SBF also stepped down as CEO.
Speaker 1: He was replaced by do you know what? You just
Speaker 1: can't make this stuff up? He was replaced by John
Speaker 1: Jay Ray the third This guy was the lawyer who
Speaker 1: was brought in to oversee the liquidation of the Enron
Speaker 1: Corporation in the wake of that company's scandalous self destruction.
Speaker 1: So if I ever do a podcast series about businesses,
Speaker 1: going to put kind of like business on the BRAINK
Speaker 1: if I ever did that again, I could spend a
Speaker 1: full season just covering what happened at Enron. Anyway, I
Speaker 1: just think it's safe to say that John J. Ray
Speaker 1: the third is an expert at dismantling companies that have
Speaker 1: collapsed in on themselves. But wait, it gets worse. So
Speaker 1: on November twelve, Reuters issued a report saying that f
Speaker 1: t X was missing money, a lot of money. So
Speaker 1: we're talking about around a billion dollars of customer funds
Speaker 1: missing from ft X, maybe as much as two billion,
Speaker 1: with certainly prompts a question, which is, where the hell
Speaker 1: is my money? I'm assuming people who had accounts were
Speaker 1: saying that I don't have an account with them, so
Speaker 1: but I could just that's what I would be saying
Speaker 1: if I did, I'll move. On that same day, f
Speaker 1: t X moved customer funds into offline wallets a k
Speaker 1: A cold storage, meaning that there's no way for customers
Speaker 1: to access those funds. They are disconnected from the exchange,
Speaker 1: but it also means that nothing else happening at the
Speaker 1: exchange can pull money from those digital wallets. And ft
Speaker 1: X then announced that there had been a string of
Speaker 1: quote unquote unauthorized transactions and that these had drained fd
Speaker 1: X funds. You might wonder, well, how much money was taken,
Speaker 1: and that depends upon whom you believe. On the low end,
Speaker 1: we're looking at around four hundred seventy three million dollars
Speaker 1: that were drained or stolen. It could be as much
Speaker 1: as six hundred fifty million or maybe even more. That's
Speaker 1: a huge range right at. F t X definitely did
Speaker 1: not need this on top of everything else. It really
Speaker 1: is kind of like beating a dead horse, and it
Speaker 1: might even be worse because one fd X admin allegedly
Speaker 1: posted to the company's Telegram accounts saying quote f t
Speaker 1: X has been hacked. All funds seem to be gone
Speaker 1: end quote yikes. Immediately there were folks online speculating that
Speaker 1: perhaps someone within f t X, maybe SPF or one
Speaker 1: of the ten people that cohabitate with him in the Bahamas,
Speaker 1: had done this, had siphoned off the cash and they
Speaker 1: were trying to make a quick getaway, but there have
Speaker 1: been no reports to suggest that's actually what is going on.
Speaker 1: Investigations are ramping up. In fact, a few investigations began
Speaker 1: before f t X even announced the theft. For example,
Speaker 1: so you have the Royal Bahamas Police Force. That's one
Speaker 1: entity engaged in investigating ft X. You might wonder, well,
Speaker 1: why the Royal Bahamas Police Force, And again it's because
Speaker 1: last year ft X relocated it's HQ to the Bahamas UM.
Speaker 1: These crypto exchanges frequently choose offshore locations to avoid stuff
Speaker 1: like those pesky government regulations we keep mentioning. Anyway, the
Speaker 1: Bahamas Police have stated that they're looking into f t
Speaker 1: X for any signs of criminal activity in the wake
Speaker 1: of this collapse. Then the Wall Street Journal reports that
Speaker 1: the US Department of Justice, as well as the US
Speaker 1: Securities Exchange Commission or SEC, are also investigating f t X.
Speaker 1: And in fact, these investigations started before we learned about
Speaker 1: the theft. Okay, so investigations are ramping up. We'll probably
Speaker 1: learn more about what was going on and potentially who
Speaker 1: was responsible. But let's also talk about some of the
Speaker 1: other effects this fallout has had beyond f t X
Speaker 1: going into bankruptcy. So just a few months ago, SBF,
Speaker 1: the co founder, had a personal worth of around twenty
Speaker 1: six billion dollars billion with a b billionaire. Now, at
Speaker 1: the beginning of the f t X debacle, that value
Speaker 1: had plunged by more than nine billion dollars. To lose
Speaker 1: nine billion dollars instantly is that's got to be a
Speaker 1: heck of a thing. But obviously things just kept getting worse.
Speaker 1: So toward the middle of last week, SBF was said
Speaker 1: to have lost ninety four percent of his wealth. Now,
Speaker 1: remember he had seventy ownership of his companies of f
Speaker 1: t X and Alimated Research, so a lot of his
Speaker 1: wealth was actually tied up into the value of those companies.
Speaker 1: It's not like he had a Scrooge McDuck style vault
Speaker 1: filled with cash. So with those companies imploding, his wealth
Speaker 1: went up in smoke. And this is where we remember
Speaker 1: that wealth and money are two different things. I'm not
Speaker 1: sure how SPF is doing now, but on paper, he
Speaker 1: essentially went from being a billionaire to being broke in
Speaker 1: just a couple of weeks. I don't know if I
Speaker 1: could manage that, but I'm willing to give it a try.
Speaker 1: Someone just has to give me a few billion dollars first,
Speaker 1: any takers. And yeah, I'm being a little flippant, but
Speaker 1: we should also remember SPF Diden genuinely want to help others,
Speaker 1: or at least he said he did. So let's talk
Speaker 1: about some of the companies that f t X moved
Speaker 1: to bail out before ft X had its own crisis.
Speaker 1: There was Block five, which has recently announced it has
Speaker 1: ceased business as normal. It has cited a lack of
Speaker 1: clarity regarding the situation at f t X as the
Speaker 1: reason to put a freeze on withdrawals. In addition, the
Speaker 1: company had wise customers not to put more money into
Speaker 1: their digital wallets connected to the company's accounts, So that's
Speaker 1: a big old ouch. Voyager Digital, the company that f
Speaker 1: t X purchased at auction, is looking for a new
Speaker 1: buyer to bail out the bankrupt broker and lending company.
Speaker 1: So the life preserver that f t X through to
Speaker 1: Voyager Digital has transformed into an anchor, so they're back
Speaker 1: at square one. The cryptocurrency called Solana is in free
Speaker 1: fall at the moment. Salona has connections to SPF, as
Speaker 1: it is the native token to the Salona blockchain, which
Speaker 1: in turn has ties to another SPF project called Serum.
Speaker 1: So arguably because of SPF's association, Serum is in trouble
Speaker 1: and so Lana's value is plummeting by association. The Miami
Speaker 1: Heat Arena has now removed the f t X arena
Speaker 1: name and said it will search for a new name
Speaker 1: sponsor that we're still seventeen and a half years left
Speaker 1: on the previous deal, but the arena had only received
Speaker 1: a small amount of the hundred thirty five million bucks
Speaker 1: that were said to be part of that deal, so
Speaker 1: they're done now. Uh. The F one racing team owned
Speaker 1: by Mercedes that f t X had sponsored, has similarly
Speaker 1: removed at the ft X logo from their vehicles. Last week,
Speaker 1: f t X is philanthropic organization, the f t X
Speaker 1: Foundation and it's f t X Future Fund projects saw
Speaker 1: a mass resignation as the entire staff quit due to
Speaker 1: having quote fundamental questions about the legitimacy and integrity of
Speaker 1: the business operations that we're funding. The f t X
Speaker 1: Foundation and the future fund end quote. The organization had
Speaker 1: previously committed to awarding more than a hundred fifty million
Speaker 1: dollars in grants. And you know, it's rare that I
Speaker 1: do this these days, because I don't tend to have
Speaker 1: episodes last quite this long. But we're gonna take one
Speaker 1: more break, and I'm going to talk a bit about
Speaker 1: some of the other lasting effects that f t x
Speaker 1: is destruction has had and will continue to have on
Speaker 1: the crypto world. But first, let's take one more break. Okay,
Speaker 1: thanks for sticking around. We are in the home stretch.
Speaker 1: But man, just the the implications of this are so huge,
Speaker 1: and so many different companies and organizations have been affected.
Speaker 1: You know, we've already talked about the companies that f
Speaker 1: t X was trying to bail out and how now
Speaker 1: they're in as bad or if not worse place than
Speaker 1: they were before that happened. H f t X, obviously
Speaker 1: an alimated research, are both totally crumbling. SPF is on
Speaker 1: the bricks. He's been kicked out or really he resigned
Speaker 1: after saying that he uh done messed up, but he
Speaker 1: used more colorful metaphors in his language. But the fallout
Speaker 1: has also raised concerns that these crypto exchanges lack proper governance.
Speaker 1: So the concern is that they're being run by people
Speaker 1: who might be engineers, they might be investors, but they
Speaker 1: aren't people who necessarily have a deep amount of experience
Speaker 1: when it comes to running giant financial companies. And when
Speaker 1: they're on the small scale, it might be manageable, but
Speaker 1: as they get bigger and bigger, that becomes more difficult
Speaker 1: to do. And typically these giant financial institutions have a
Speaker 1: board of directors that pulls from a really diverse group. Uh,
Speaker 1: maybe not racially diverse, as it turns out the finance
Speaker 1: world is overwhelmingly staffed with white men, but it would
Speaker 1: be a diverse from different areas of expertise, so that
Speaker 1: you would have people who could guide an organization so
Speaker 1: that it doesn't find itself in real trouble. But again,
Speaker 1: like cryptocurrency, one of the big things that attracts people
Speaker 1: to it is that it kind of has this bootstrapped,
Speaker 1: almost techno anarchist approach to finance. It's certainly and evangelicized
Speaker 1: as being decentralized. I would argue, effectively, it is not decentralized.
Speaker 1: It's just kind of surface level decentralized, But effectively you
Speaker 1: get a core of very powerful entities that control everything,
Speaker 1: and so it still becomes centralized. It's just centralized in
Speaker 1: a different way than you would find in traditional financial institutions. Anyway,
Speaker 1: there's a real lack of governance for a lot of
Speaker 1: these organizations, so when things go wrong, there's not really
Speaker 1: anyone there who has the experience to kind of right
Speaker 1: the course before things just escalate into an uncontrollable situation.
Speaker 1: Allah F t X, and this has led to renewed
Speaker 1: calls for regulating the industry. My guess is that any
Speaker 1: regulations we actually see pasted to handle cryptocurrency and crypto
Speaker 1: markets are not going to be the light touch approach
Speaker 1: that SPF was advocating for. Like SPF wrote a a
Speaker 1: white paper that was essentially crypto regulations for Dummies. In fact,
Speaker 1: it was titled something similar to that. And you know,
Speaker 1: his idea was that these are going to happen one
Speaker 1: way or the other, so it's best if our voice
Speaker 1: is represented during the formulation of these regulations so that
Speaker 1: they don't kill the industry, because there's a legit fear
Speaker 1: that could happen. Um And so now with this spectacular
Speaker 1: implosion of FTX, along with SBF being revealed to perhaps
Speaker 1: have been engaged in some uh at least questionable and
Speaker 1: potentially illegal activities as far as Alimator Research and f
Speaker 1: t X are concerned, that really means that I think
Speaker 1: a lot of people who otherwise would have been receptive
Speaker 1: to his ideas are now going to say no, no,
Speaker 1: he's he was protecting himself, right. These regulations were meant
Speaker 1: to allow him to continue to operate in a way
Speaker 1: where he would benefit most, and so we can't trust it,
Speaker 1: so we have to make much much more restrictive regulations. Which, Hey,
Speaker 1: c Z, if in fact any of your motivations tied
Speaker 1: back to a resentment about SBF arguing for regulation, I
Speaker 1: got some bad news for you, Bud. Things are gonna
Speaker 1: be way worse now than they would have been. If
Speaker 1: in fact, Finance's decision to pull out was just business
Speaker 1: and there was nothing personal about it. If in fact
Speaker 1: what c Z said was true that Finance got out
Speaker 1: because they saw this balance sheet or you know, quote
Speaker 1: unquote recent revelations and realized that their their investment was
Speaker 1: unwise and that's why they sold it off, well you
Speaker 1: could argue that that move acipitated into this escalating effect
Speaker 1: that has affected the entire cryptocurrency industry, including finance itself
Speaker 1: and the value of their assets that it may be
Speaker 1: viewed as a very self destructive business move in the
Speaker 1: long run. Not that I think SPF and f t
Speaker 1: X should have just kept getting away with allegedly misusing
Speaker 1: customer funds either. I don't think that. But again, there
Speaker 1: are no good guys in this story, y'all. It's all
Speaker 1: a bunch of supervillains. Speaking of cz, he has also
Speaker 1: gone on to throw shade at another cryptocurrency exchange called
Speaker 1: Crypto dot Com. Crypto dot com got pulled into the
Speaker 1: spotlight when it when it accidentally transferred around three hundred
Speaker 1: sixty million dollars worth of cryptocurrency that belonged to Crypto
Speaker 1: customers off of its own exchange and onto another external
Speaker 1: public exchange. So what they intended to do was transfer
Speaker 1: those funds into cold storage, in other words, into offline
Speaker 1: digital wallets, which already was kind of like it raises
Speaker 1: your bread flags again, like why are you moving money
Speaker 1: off of your exchange and into cold storage where people
Speaker 1: can't access it? Why are you doing that? Or are
Speaker 1: you doing it in a way so that you can
Speaker 1: protect it because you expect some form of intrusion attack
Speaker 1: on your exchange, and this way the money is protected
Speaker 1: from hackers trying to get access to those funds, whatever
Speaker 1: it may be. It starts to raise concerns and uh,
Speaker 1: you know crypto dot Com had accidentally moved these funds
Speaker 1: onto a totally different exchange. Then they wrote to the
Speaker 1: exchange and essentially said, uh, my bad, would you mind
Speaker 1: handing that three hundred and sixty million dollars worth of
Speaker 1: assets back to us please? Which is nice because you
Speaker 1: know that exchange actually did do that. They returned the money,
Speaker 1: but it was beyond embarrassing. I mean, you're talking about
Speaker 1: more than a quarter of a billion dollars accidentally sent
Speaker 1: to the wrong place. That is not the kind of
Speaker 1: story you want to tell when you're desperately attempting to
Speaker 1: reassure people that crypto is not a huge risk. Anyway,
Speaker 1: c Z appeared to allude to Crypto dot Com and
Speaker 1: said that if an exchange is moving large amounts quote
Speaker 1: before or after they demonstrate their wallet addresses, it is
Speaker 1: a clear sign of problems end quote. Now this also
Speaker 1: ties into the pressure that a lot of these exchanges
Speaker 1: are now feeling as governments and as customers are demanding
Speaker 1: that the exchanges prove they have the liquidity, they have
Speaker 1: the cash on hand to cover all the assets on
Speaker 1: the change. So if you think of it like a bank,
Speaker 1: you want proof that the bank has a dollar for
Speaker 1: every dollar that clients have put into an account, so
Speaker 1: that if people wanted to pull their money out of
Speaker 1: the bank and everyone did it at the same time,
Speaker 1: the bank would actually be able to cover that. That's
Speaker 1: what people want exchanges to prove, and because of the
Speaker 1: lack of governance, that's really hard to do. At least
Speaker 1: it's really hard to do in a way that will
Speaker 1: seem legit right, Like there's a real worry that someone
Speaker 1: might just print out a piece of paper say yes,
Speaker 1: we have all the moneys and not actually have to
Speaker 1: prove that they in fact have all the moneys. So
Speaker 1: fd X did not have this right that that company
Speaker 1: had funneled its assets to alimator research, at least allegedly.
Speaker 1: And people want to know if they decide they want
Speaker 1: to withdraw their money that the exchange is actually going
Speaker 1: to have the money to pay them. That's what it
Speaker 1: really boils down to, and it's it's a real crisis
Speaker 1: for cryptocurrency exchanges right now that have been operating fast
Speaker 1: and loose for a few years. Now. Some analysts are
Speaker 1: even warning that Binance could fall into a similar situation
Speaker 1: down the line, because like f t X, Finance is
Speaker 1: also an offshore exchange with very little governance. So there's
Speaker 1: not a whole lot of uh confidence that finances being
Speaker 1: run on the up and up. It might be, but
Speaker 1: the lack of governance creates suspicion. So there's this fear
Speaker 1: that Finance could be engaged in, you know, similar activities
Speaker 1: that f t X was engaged in, and that it
Speaker 1: could be gambling with user funds. Now, maybe that gamble
Speaker 1: will pay off and everyone will be fine, or maybe
Speaker 1: it could come all crashing down, which would be a real,
Speaker 1: super hard blow to the crypto industry as a whole.
Speaker 1: So we've seen crypto take a hit in vow you
Speaker 1: with ft X as fall. I'll talk about that again
Speaker 1: in the second. So if Finance, the number one cryptocurrency exchange,
Speaker 1: went down, it would be true chaos, and that's what
Speaker 1: a lot of people are worried about. Now. Maybe Finance
Speaker 1: isn't gambling at all. Maybe these suspicions that some analysts
Speaker 1: have are completely misguided. You know, maybe it's totally fine,
Speaker 1: it's just impossible to say because it's offshore exchange that
Speaker 1: has very little governance and there's no transparency. So with
Speaker 1: that comes this suspicion that cannot be allayed. Right unless
Speaker 1: you change the operation of the organization, people are just
Speaker 1: going to continue to be suspicious. Now, maybe nothing goes
Speaker 1: wrong and everything's fine, or maybe someone goes really wrong
Speaker 1: and nothing's fine. Uh. I don't know how legit those
Speaker 1: suspicions are, Like, I don't know how well founded they are,
Speaker 1: because I would need to look much more deeply into
Speaker 1: Finance to give my opinion. Maybe I'll do a full
Speaker 1: episode on Finance Leader and kind of say what at
Speaker 1: least the experts are thinking, because obviously this is above
Speaker 1: my pay grade. But I will say cz the CEO
Speaker 1: of Finance strikes me as a little bit of a bully. Um.
Speaker 1: That doesn't necessarily mean that the organization is rotten or
Speaker 1: anything like that. Uh, it just it doesn't help the
Speaker 1: case because sees these very good at getting people's hackles up,
Speaker 1: and that I think feeds into this suspicion. Finally, let's
Speaker 1: talk about f t x is collapse and it's broader
Speaker 1: impact on crypto in general. So in one week, the
Speaker 1: market cap for crypto fell around twenty as f t
Speaker 1: X smoldered and then collapsed and just became a burning
Speaker 1: trash fire. So again, if finance sold off its f
Speaker 1: t T stock as a business decision, like it was
Speaker 1: solely for business, and they thought ft T is not safe.
Speaker 1: H f t X is in trouble. We want to
Speaker 1: get out of this before it goes bad. This is
Speaker 1: just business, there's nothing personal about it. Well, that decision
Speaker 1: did precipitate a series of events that saw binances overall
Speaker 1: investments decrease in value by about a fifth. So again,
Speaker 1: if it's a business decision, it's a business decision that
Speaker 1: costs them a huge amount of wealth um. And maybe
Speaker 1: it was just purely a business decision. Maybe it in
Speaker 1: fact was the best out of a bunch of bad
Speaker 1: possible choices. Again, it's hard for me to say. I
Speaker 1: will say that f t X and its collapse and
Speaker 1: that drop, it's pretty much in line with what we
Speaker 1: saw with Mountain Cox years ago. Now, mount Gox was
Speaker 1: the number one cryptocurrency exchange when it went under, and
Speaker 1: that ended up being a thirty percent drop in the
Speaker 1: crypto market. The crypto market in general was way way
Speaker 1: smaller than what it is today, but yeah, it was
Speaker 1: the number one dropped in value. Now the number two
Speaker 1: goes down, we see a twenty value drop. It's rough.
Speaker 1: I don't know what's on the horizon for crypto. I
Speaker 1: don't know if and when it will have a turnaround.
Speaker 1: I suspect there will be a turnaround at some point.
Speaker 1: Not every cryptocurrency is gonna make it. I don't think.
Speaker 1: I think some other cryptocurrencies are going to completely fold
Speaker 1: before we see the end of this year, maybe definitely
Speaker 1: before we get too far into next year. But I
Speaker 1: don't know that they're all going to go away. And certainly,
Speaker 1: Bitcoin has had periods where its value has dropped significantly
Speaker 1: only for it to return to being even stronger than
Speaker 1: it was before, so it's entirely possible it will be
Speaker 1: able to do that again. But as events like this
Speaker 1: happen and people begin who lose confidence in the crypto
Speaker 1: market overall, um, it's bad news for everyone in the
Speaker 1: crypto game, because, as some people have put it, the
Speaker 1: real value in crypto comes in people's belief in crypto,
Speaker 1: and if people stop believing in crypto, then it stops
Speaker 1: having value because there's nothing else to back up the
Speaker 1: value of the cryptocurrency except people's belief that it has value. Uh.
Speaker 1: It strikes me kind of as similar to the way
Speaker 1: Terry Pratchett treated gods in his Discworld series. The gods
Speaker 1: of Discworld have a presence and power that is equal
Speaker 1: to the amount of belief that is placed in those gods.
Speaker 1: So as as people stop believing in God's those gods
Speaker 1: become less and less powerful until they're barely there at all.
Speaker 1: The same thing could be said about cryptocurrencies, because there's
Speaker 1: nothing else underneath them. Two dampen the effect of people
Speaker 1: losing confidence in the currency. So we'll have to see
Speaker 1: how or if the cryptocurrency market in general recovers from
Speaker 1: the f t X scandal. I'm sure we're still really
Speaker 1: in the early stages of those consequences. I mean, like
Speaker 1: I said, most of the stuff I talked about in
Speaker 1: this episode happened over the last two weeks. Who knows
Speaker 1: what's going to happen in the next two weeks. Besides
Speaker 1: Thanksgiving America. Thanksgiving is going to happen in the next
Speaker 1: two weeks, so you know, have a slice of turkey
Speaker 1: for me if you eat turkey. If you don't, then
Speaker 1: don't eat turkey for me. That would just be selfish
Speaker 1: on my part. Okay, that's it for this epic long
Speaker 1: episode of tech Stuff. I hope you enjoyed it. I
Speaker 1: hope this has given you insight into what was going
Speaker 1: on with f t X, with its co founder SPF,
Speaker 1: with its arch nemesis c Z and finance and uh
Speaker 1: the token f t T you know me. So we're
Speaker 1: done with all that for now. I'm sure I'll have
Speaker 1: to follow up on this story as more develops, but
Speaker 1: I wanted to get this down while it was all
Speaker 1: very fresh. If you have suggestions for future episodes of
Speaker 1: tech Stuff, there are a couple of ways you can
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