Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast.
Speaker 1: I'm Joe Wisenthal and I'm Tracy Alloway. So, Tracy, we're
Speaker 1: continuing to talk about the implosion of f t X
Speaker 1: and Alameda the Sam Bankman Freed empire. Yesterday we talked
Speaker 1: to two people who are involved in the story in
Speaker 1: different ways, one who is a market maker who had
Speaker 1: used and got caught out on the f t X site,
Speaker 1: another one who had attempted to blow the whistle. But
Speaker 1: of course we're still just sort of like beginning to
Speaker 1: understand the story, right a very fast moving story. But
Speaker 1: one of the things that people are talking about right now,
Speaker 1: with the benefit of hindsight, of course, is the infamous
Speaker 1: Sam Bankman Freed episode of Odd Thoughts. And in that
Speaker 1: episode we had him on with Bloomberg opinion columnist Matt Levine.
Speaker 1: We're talking about how DeFi works, and of course he
Speaker 1: described it as the sort of magical money making box, right,
Speaker 1: and so in retrospect, and at the time, of course,
Speaker 1: people were pretty you know, in shock by those comments.
Speaker 1: But now everyone's going back and listening to that in retrospect,
Speaker 1: and it also helps explain perhaps certain aspects of the
Speaker 1: f t X balance sheet, particularly the tokens that it
Speaker 1: used to capitalize its balance sheet. Anyway, so we have
Speaker 1: to have Matt Levine back on. He's been writing a
Speaker 1: lot about this story. It's been a must read his coverage,
Speaker 1: and of course he was there with us on that episode.
Speaker 1: So Matt Levine, thank you so much for joining us.
Speaker 1: Let me start kind of with a simple question, which is,
Speaker 1: what is your summary or how would you describe why
Speaker 1: f t X collapsed. What's the basic model of what
Speaker 1: happened here? So it's a little bit unclear, but basically
Speaker 1: what seems to have happened is that f t X
Speaker 1: has a affiliated cryptoh called Alameda h Alameda seems to
Speaker 1: have made some bad bats somehow or other, it ran
Speaker 1: into trouble, and to prop it up at some point
Speaker 1: over the summer, probably ft X started sending a lot
Speaker 1: of ft X customer money to Alameda, which Alameda then
Speaker 1: posted to its own lenders or otherwise lost. And then
Speaker 1: last week, uh, there were some doubts about fd X
Speaker 1: in the market, and customers started withdrawing their money from
Speaker 1: fd X, and ft X realized that didn't have their money,
Speaker 1: and it went bankrupt in about twenty minutes m um
Speaker 1: that it did so prior to recent events. What was
Speaker 1: your impression of the relationship between f t X and Alameda.
Speaker 1: I have to say I didn't really have much of
Speaker 1: an impression one way or the other. Obviously, there are
Speaker 1: a lot of conspiracy theories about what ft X and
Speaker 1: Alimata were doing because they were run basically by the
Speaker 1: same group. Would be the same people who kind of
Speaker 1: were ball roommates and a big apartment in the Bahamas Um.
Speaker 1: They were founded by the same person. They were clearly connected,
Speaker 1: and there were sort of these vague representations about them
Speaker 1: being separate, but like you know, not a lot of
Speaker 1: necessarily enforceability to that, so I didn't really know. I
Speaker 1: assume that alimated as a market maker on the Atactic exchange,
Speaker 1: and that you know, it may or may not have
Speaker 1: had some benefits from being the affiliated market maker. When
Speaker 1: you hear people complaining about these things, you often think
Speaker 1: that the essential complaint is Alameda has some advantage in
Speaker 1: making markets on ft X. It makes too much money
Speaker 1: by trading against FTX customers because it knows something that
Speaker 1: everyone else in the exchange doesn't know. You know, I
Speaker 1: I never find those stories that like, that's the story
Speaker 1: in in standard equity market structure, and I don't find
Speaker 1: it like that exciting. Might be true, but it's not
Speaker 1: that exciting to be like, oh, they can see the order,
Speaker 1: but a little bit faster than everyone else. That can
Speaker 1: be an advantage. But um, but I I don't know
Speaker 1: that those stories aren't that compelling. But it seems increasingly
Speaker 1: likely that that is not at all what was happening here,
Speaker 1: because the basic problem here was very much not that
Speaker 1: alimadd was making too much money Elamated it was losing
Speaker 1: too much money. So the actual like problematic relationship here
Speaker 1: is pretty much that Alamada lost a bunch of money
Speaker 1: in fd X just bashed over its customer money to Alamada.
Speaker 1: There are other possible stories that are even worse, and
Speaker 1: I don't want to talk too much about them because
Speaker 1: they're all sort of, you know, speculative. But some speculations
Speaker 1: are basically that Alamada was more or less in the
Speaker 1: business of losing money on fd X, that rather than
Speaker 1: Alimated being too good at trading on fd X, Alamated
Speaker 1: was bad at trading on ft X. And so if
Speaker 1: you went to FDx as someone else, as as a
Speaker 1: crypto hedge fund, or even as a retail customer and
Speaker 1: you traded on FX, you've got really good prices because
Speaker 1: Alimated was making really bad prices because they were losing
Speaker 1: money on every trade. And if you believe that, then
Speaker 1: you could tell a story that's like, well, ft X
Speaker 1: became a very popular exchange and made a lot of
Speaker 1: money in trading fees because it offered this really good
Speaker 1: trade getting experience to customers by basically having its affiliated
Speaker 1: hedge fund lose money on every trade. And you know,
Speaker 1: that's a great story, except that if the way that
Speaker 1: the affiliated hedgehund can afford to lose money on every
Speaker 1: trade is by taking the customers money, then it becomes
Speaker 1: a really bad story, becomes you know, effectively a Ponzi scheme.
Speaker 1: So I don't know that that's what happened. There is
Speaker 1: certainly since speculation about that. But in any case, the
Speaker 1: sort of standard story of like Alameda has too many
Speaker 1: advantages and makes too much money by trading on ft
Speaker 1: X does not really seem to be true. I want
Speaker 1: to just that point is really key because when I
Speaker 1: talked to sort of like professional crypto traders prior to
Speaker 1: all this, like back up the summer or earlier this year.
Speaker 1: They really liked f t X and they you know,
Speaker 1: the liquidation engine, which I think we talked about on
Speaker 1: one of the episodes with you and SPF was something
Speaker 1: they really liked it. They really liked the professional It
Speaker 1: seemed very professional, worked really well for them. And so
Speaker 1: this idea that again we don't really know for sure,
Speaker 1: that maybe some of this was only sustainable because of
Speaker 1: the loss making trading arm of the SPF empire. Again
Speaker 1: we don't really know, but that would sort of explain
Speaker 1: many things at once at once potentially. Yeah, Like there's
Speaker 1: sort of two points there. One is is, yeah, the
Speaker 1: liquidation engine is one possible avenue that people have pointed
Speaker 1: to as a way that alimated could be like losing
Speaker 1: money to provide a good customer experience on ft X
Speaker 1: and then through the back door of taking customer money
Speaker 1: like you know, that being a bad story. But the
Speaker 1: other thing is that like you know, investors like ft
Speaker 1: X because like it had good technology and it had
Speaker 1: like good products, and it was you know, there's a
Speaker 1: lot of like sort of finger pointing it, like venture
Speaker 1: capitalists and and and sort of everyone who dealt with
Speaker 1: ft X saying like, you know, they were bamboozled by this,
Speaker 1: but like there was something there, you know, like the
Speaker 1: exchange was good. Now, part of why the exchange was
Speaker 1: good might have been, you know, sort of deeply problematic
Speaker 1: financial dealings, but part of it was, like, you know,
Speaker 1: it was a good exchange that I built it well.
Speaker 1: Like I often find myself in crypto thinking like there
Speaker 1: was so much money to be made, Like why did
Speaker 1: you have to make money in bad ways when like
Speaker 1: you could have just taken fees and gotten super rich.
Speaker 1: So I think there's there's an element of that too.
Speaker 1: So maybe now is a good time to bring in
Speaker 1: the infamous Box episode of All Lots, where we had
Speaker 1: Sam Bankman Freed plus Matt Levin on talking about the business.
Speaker 1: Matt asked Sam to describe yield farming to him, and
Speaker 1: he famously described it as basically a magic box that
Speaker 1: you put money into and more money comes out. And
Speaker 1: I think, you know, all of us were there when
Speaker 1: he when Sam said this, and we were all pretty shocked. Um,
Speaker 1: we were shocked to hear someone describe defy basically as
Speaker 1: a pond z. But in retrospect, the really surprising thing
Speaker 1: about all of this was that it seems like Sam
Speaker 1: was basically describing what he ended up doing with two
Speaker 1: tokens so f t T and serum or SRM. Yeah.
Speaker 1: I mean, in some ways, it's not that shocking that
Speaker 1: the head of a centralized exchange would say a lot
Speaker 1: of stuff and defies Bonzi schemes, right Like, in some
Speaker 1: ways he was you know, he wasn't talking about crypto
Speaker 1: as a sort of broad concept. He was talking about
Speaker 1: a specific element of defy where you know, in some
Speaker 1: loose sense, defy as a competitor to centralized exchanges like FTX,
Speaker 1: and he might not like them just you know, they
Speaker 1: might be a you know, he might he might have
Speaker 1: incentive or you know, he might have reason to talk
Speaker 1: to say bad things about them. So that's one thing.
Speaker 1: The one thing I did take away from that was
Speaker 1: just like a sort of general level of you know,
Speaker 1: in hindsight, i'd say cynicism, but like I would have
Speaker 1: said something like agnosticism about crypto, right Like, what he
Speaker 1: said was not that, you know, every cryptocurrency is this
Speaker 1: brilliant project that will change the world. What he said
Speaker 1: was like, look, you can abstract away from the claims
Speaker 1: that are made about these cryptocurrencies and just sort of
Speaker 1: talk about like their financial characteristics, and you know, at
Speaker 1: the time, the financial characteristics were kind of that they
Speaker 1: went up. And so you know, as the guy running
Speaker 1: in exchange who is making money from crypto volatility and
Speaker 1: from from interest in crypto, you know, I I interpreted
Speaker 1: that as sort of like this clear eyed, like I
Speaker 1: am making money because people keep putting their money into
Speaker 1: into this asset class and I don't fully understand it,
Speaker 1: but I'm gonna keep making money for it, which is like,
Speaker 1: when I put it that way, like a cynical view.
Speaker 1: But like, I also think that a lot of people
Speaker 1: in traditional finance are not, you know, necessarily vouching for
Speaker 1: the business model of every company who stocked their trade. Right.
Speaker 1: It's just like, you know, you're a market structure guy.
Speaker 1: You don't worry too much about the underlying business. So
Speaker 1: I sort of I was not you know, I was
Speaker 1: I was shocked that he said it, because it was
Speaker 1: great tape, But I wasn't like, oh my god, this
Speaker 1: guy is running upon the scheme, right. I sort of
Speaker 1: was like, this is the market structure guy. But yeah,
Speaker 1: as you said there, you know, f t X had
Speaker 1: its own token, and the token you not entirely just
Speaker 1: a magic money box, right, I mean, the token is
Speaker 1: sort of like shares of stock and f t X.
Speaker 1: It's not really f t X as a company has
Speaker 1: SHOs of stocks that did raise money, but like the
Speaker 1: f t T token is kind of like a tokenized
Speaker 1: version of, you know, a bet on the future cash
Speaker 1: loose of f t X. And there's also another token
Speaker 1: called Serum, which is sort of a weirder case. Sirium
Speaker 1: is like this decentralized finance, like a decentralized exchange protocol
Speaker 1: on the Salona blockchain that you know, it's not exactly
Speaker 1: owned by f t X, but is you know, it's
Speaker 1: kind of started by f t X and Alimta and
Speaker 1: like clearly has ties to them, and it's sort of like,
Speaker 1: you know, I had interpreted as kind of like FTX
Speaker 1: is bet on like if everyone really wants decentralized exchanges,
Speaker 1: then they won't want to trade on ft X, but
Speaker 1: like sirium will be sort of like the f t
Speaker 1: X of decentralized exchanges. And fine, he started these companies
Speaker 1: or whatever, these you know, these entities and issued these
Speaker 1: tokens because like you know, you do that in crypto.
Speaker 1: But it turns out that when he was sort of
Speaker 1: shopping for a rescuer last week, he was circulating this
Speaker 1: balance sheet and it basically showed that, like to exaggerate slightly,
Speaker 1: basically everything at ft X they were all they had
Speaker 1: was like these tokens. So they started these companies or whatever,
Speaker 1: these like you know, f t X and Serum are
Speaker 1: like you know, trading it to these exchanges. They issued
Speaker 1: these tokens SERUM and ft T and like that's fine,
Speaker 1: that's sort of part of the crypto business. But then
Speaker 1: it turned out this balance sheet that circulated last week
Speaker 1: when when SPF was was shopping for rescue financing for
Speaker 1: fd X, like most of their assets are like a
Speaker 1: lot of their assets, certainly more than their net equity,
Speaker 1: were in these tokens, and at like really implausible evaluations.
Speaker 1: Basically they would issue like a little bit of these tokens.
Speaker 1: They trade a little bit in the market. It's unclear
Speaker 1: if anyone other than all I made it was actually
Speaker 1: trading them, but they had a market price. And then
Speaker 1: you take that tiny bit you know, there's like a
Speaker 1: hundred millions circulating it, and you multiply that by the
Speaker 1: you know, millions more tokens that held in reserve, and
Speaker 1: you say, oh, we've got like two billion dollars of
Speaker 1: room token. It's very hard to imagine anyone putting a
Speaker 1: two billion dollar valuation on all those tokens. And so
Speaker 1: in some sense, like what happened at FTX was kind
Speaker 1: of what he described to us on that add box
Speaker 1: where he got a lot of money against the box,
Speaker 1: and what was in the box was these tokens that
Speaker 1: turned out to be worthless, and now the money has come.
Speaker 1: There's a lot of people in crypto who talked about
Speaker 1: changing the world, and you sort of have like, you know,
Speaker 1: whether it's like the Bitcoin view of the world about
Speaker 1: you know, monetary disorder and the FED. I think there's
Speaker 1: a different world. I don't know how to articulate vitalis philosophy,
Speaker 1: but like crypto itself can sort of reorganize society in
Speaker 1: a positive way. And my interpretation of the box comment
Speaker 1: was kind of like yours that he saw. Basically, crypto
Speaker 1: is a way to make money, and of course SBF
Speaker 1: has his own vision or head or his own vision
Speaker 1: of how to change the world through the effect of
Speaker 1: altruism philosophy but that basically my read at the time
Speaker 1: was he more or less cynically saw a huge opportunity
Speaker 1: to make money from all of these de facto ponzis
Speaker 1: to filter money through his own causes. Now on the
Speaker 1: tokens Serum and F T T here's something that I'm
Speaker 1: like a little confused about. But and you've written about
Speaker 1: this a lot, so okay, No, there they were holding
Speaker 1: these tokens of their own creation on their books at
Speaker 1: these multibillion dollar evaluations, which they almost certainly couldn't get
Speaker 1: in the market. Who was that for? Because they're not
Speaker 1: a public company, so it wasn't like they needed to say,
Speaker 1: show these two investors per se, Like what would what
Speaker 1: do you think the purpose of these this uh, these
Speaker 1: sort of inflated marks on a private balance sheet? Where
Speaker 1: who are they trying? If the point was was it
Speaker 1: self deception about the strength or balance sheet? Was about
Speaker 1: the auditor? Like what what what purpose did this serve? Yeah,
Speaker 1: it's a good question. I don't know the answer, Um.
Speaker 1: I mean, I think part of the answer is, like
Speaker 1: the place where we immediately see this is this excel
Speaker 1: sort of rough balance sheet that they circulated to rescue financers, Right,
Speaker 1: so that was the that's that's the audience we know
Speaker 1: of right where they were like, we need rescue financing.
Speaker 1: We actually have positive net equity, so if you rescue us,
Speaker 1: you know you'll do well. And you know, if you
Speaker 1: look at the totals on the balance sheet, it's like, yeah,
Speaker 1: there's more assets than liabilities. And then you like look
Speaker 1: at the actual you know, entries, and you're like, oh,
Speaker 1: these are all just these weird tokens that you can
Speaker 1: never monetize. That So the immediate audience is like the
Speaker 1: people who might provide bailout financing, where the audience for
Speaker 1: for like these inflated numbers. But you know, that doesn't
Speaker 1: really answer your question because like, you know, the whole
Speaker 1: like they had they created these tokens before last week,
Speaker 1: you know, and like presumably they were thinking before this
Speaker 1: like oh, you know, we have billions and billions of
Speaker 1: dollar was both of these tokens. So I do think
Speaker 1: that part of the answer and I don't know here,
Speaker 1: I'm really speculating, but part of the answer seems to
Speaker 1: be that the f T T token, which is really
Speaker 1: the thing that brought this down, right, like like what
Speaker 1: triggered or crisis of confidence in f t X was
Speaker 1: basically coined us publishing a story about how much ft
Speaker 1: T tokens Alameda had, and then CZ and Finance tweeting,
Speaker 1: you know, we're going to dump our our f t
Speaker 1: T token and that kind of collapsed everything. So, like
Speaker 1: the ft T token was was doing some work, and
Speaker 1: I think the basic work that it was doing was
Speaker 1: that presumably Alameda was using it as collateral for loans,
Speaker 1: and I think it's a reasonable guest to say that
Speaker 1: it was using it as collateral for loans from ft X,
Speaker 1: you know, possibly of f t X customer money, and
Speaker 1: that the you know, use of this inflated amount of
Speaker 1: f t t is collateral was designed to sort of
Speaker 1: like make everyone feel a little bit better about it, right,
Speaker 1: Like you can sort of I don't know if you
Speaker 1: can necessarily tell your orders we got fair value back
Speaker 1: in collateral, but you can, like you can tell your
Speaker 1: junior employees that, you can tell yourself that you can
Speaker 1: sort of like point to that. I'm not really sure
Speaker 1: that's what going on. What's going on, but clearly like
Speaker 1: somebody is posting f tt is collateral for something and
Speaker 1: having an inflated market value of FTT made that possible.
Speaker 1: The serum stuff, it's less clear to me that how
Speaker 1: that was done, you know what what what purpose that served,
Speaker 1: And it might be just you know, we shopped that
Speaker 1: serum around desert looking for valad financing. So, Matt, one
Speaker 1: of the things that you hear from crypto proponents even
Speaker 1: now is this idea that, well, the f t X saga,
Speaker 1: it doesn't show that there's necessarily a problem with crypto.
Speaker 1: It shows that there's a problem with bad actors in
Speaker 1: the crypto space. And f t X wasn't a truly
Speaker 1: decentralized exchange. It was a centralized one. And not only that,
Speaker 1: but it was performing all these different market functions all
Speaker 1: wrapped up in one entity, so you know, brokerage, custodian um,
Speaker 1: all of that. Is that like a valid excuse at
Speaker 1: this point. Is the problem here a market structure one,
Speaker 1: or is the problem something fundamental to the crypto business? Well,
Speaker 1: I don't know that you can completely separate those things.
Speaker 1: Insofar as like, I think it's true that like bitcoin
Speaker 1: as like a concept is not really affected by this, right,
Speaker 1: But I also think that like crypto is you know,
Speaker 1: sort of refers to a broad ecosystem and it's just
Speaker 1: clearly the case that big centralized exchanges are a big
Speaker 1: part of crypto, right, And certainly there are people who
Speaker 1: do not use centralized exchanges and who sort of self
Speaker 1: custody their coins and use decentralized finance and are very
Speaker 1: boulish on decentralized finance and think everyone who uses f
Speaker 1: t X or coin based or binance or any other
Speaker 1: centralized exchanges is a chump and is not sort of
Speaker 1: true to the true meaning of crypto, And like that's fine,
Speaker 1: but like it is hard to imagine a world where
Speaker 1: crypto is really big and really mainstream and really you know,
Speaker 1: big institutional investors are putting money into crypto and there
Speaker 1: are no centralized exchanges and everything occurs on the blockchain.
Speaker 1: I just think, like that is a world where you
Speaker 1: can do some stuff like that, right, and where where
Speaker 1: people are building stuff on that, But it's not the
Speaker 1: world of sort of like mass mainstream adoption. The world
Speaker 1: of mass stream mainstream adoption is like there's a company
Speaker 1: with a website and you you know, you have a password,
Speaker 1: and you can trade on a centralized platform that is
Speaker 1: fast and not run on the blockchain, and you have
Speaker 1: like allegible entity that a black rock can custody its
Speaker 1: coins within all these things. And so like when one
Speaker 1: of the biggest and most respected and most sort of
Speaker 1: like compliant seeming of the big the big offshore crypto exchanges,
Speaker 1: I'll talk about that, But like when when at the
Speaker 1: extra was like sort of viewed as a good actor
Speaker 1: turns out to be very much not a good idea,
Speaker 1: Like you, I think that it is fair to say, like,
Speaker 1: you know, the crypt cryptosystem broadly needs to do some
Speaker 1: introspection about that. And I think that like some of
Speaker 1: that is like you have these giant levered financial institutions
Speaker 1: that don't have public balance sheets and don't really have
Speaker 1: a regulator, right or like sort of have a regulator,
Speaker 1: but they have a million different entities and no one
Speaker 1: knows which one runs the exchange, and the regulator is
Speaker 1: like you know, the Bahamas, and like they're like one
Speaker 1: of the bigger you know, contributors. You know, like there's
Speaker 1: a lot of like what you don't have is like
Speaker 1: an ecosystem where the biggest players are headquartered in like
Speaker 1: you know, the US and Europe and have like a
Speaker 1: regulator who has you know, fifty examiners in their offices
Speaker 1: every day looking over their books, and who have capital
Speaker 1: regulation and stress tests and public balance sheets and all
Speaker 1: these things. And I don't. I mean, I know, Joe,
Speaker 1: you are. You're skeptical about the future for crypto regulation.
Speaker 1: And I am too, because I think, like the path
Speaker 1: of cryptos, that these big firms have sort of grown
Speaker 1: up in a sort of like you know, jurisdictional limbo,
Speaker 1: where like they all live offshore and are sort of
Speaker 1: you know, get to choose their own regulation a little bit.
Speaker 1: There's an advantage to a bank of being an American bank, right,
Speaker 1: and the advantage is like the FED, but also like
Speaker 1: the sort of market confidence that comes of like you're
Speaker 1: an American bank, You're listed on the New York Stock
Speaker 1: has change, like your balance sheets are audited by American auditors,
Speaker 1: like all the like US regulatory apparatus is helpful for
Speaker 1: banks that want to raise money and trade and in
Speaker 1: crypto like that doesn't really exist like it is. It's
Speaker 1: a little bit, right, there are some you know, crypto
Speaker 1: entities that make the choice of we're gonna be in
Speaker 1: the US, We're gonna try to be regulated by the US,
Speaker 1: we're gonna try to be US public companies because that
Speaker 1: is going to be really onerous and annoying, and I
Speaker 1: think they all find that because US crypto regulation is tough,
Speaker 1: but also it's going to in the long run lead
Speaker 1: to more confidence because we are going to be more
Speaker 1: trustworthy than people who form their exchanges offshore and don't
Speaker 1: publish their balance. I guess it's sort of like you know,
Speaker 1: when any financial entity implodes, you know, you can just
Speaker 1: in finance, you can implode for sort of like benign reasons.
Speaker 1: You make bets, you thought they were going to go
Speaker 1: one way, they go the other way. You have to
Speaker 1: close up shop, and then there's fraud. Like it is
Speaker 1: weird when it's an exchange because we don't think of
Speaker 1: exchanges as making bets and typically you know, they say
Speaker 1: or holding our or holding your money and they don't
Speaker 1: take positions, etcetera. Yeah, I do want to push back
Speaker 1: on that a little bit, just because like like crypto
Speaker 1: exchange is not as a broker dealer. So I was
Speaker 1: so this is this is basically the question I was
Speaker 1: going to ask, which is like, is the version of
Speaker 1: this story that I don't know not benign because people
Speaker 1: are destroyed and like you know, they may have a
Speaker 1: million people have lost money and you know, massive damage.
Speaker 1: But is there a you know you talked earlier about
Speaker 1: like there's this sort of like worse version of the
Speaker 1: mainstream narrative. Is there like a better version of the
Speaker 1: mainstream narrative that we perhaps aren't thinking about. It's tough.
Speaker 1: I mean, you know, as I was saying, like, the
Speaker 1: crypto exchanges are not just like people use the word exchange,
Speaker 1: and so they think of like this neutral thing that
Speaker 1: doesn't like that just matches buys themselves, right, I mean
Speaker 1: the crypto exchanges are broken dealers. They hold their customers
Speaker 1: money for them, They provide leverage to their customers. And
Speaker 1: so if you're a futures exchange, like you're sort of
Speaker 1: taking risk, right, You're taking market risk, and so there
Speaker 1: are versions of the story where you get sort of
Speaker 1: mismatched on that risk and then you implode and it's
Speaker 1: a series of understandable but bad market judgments. I think
Speaker 1: that the reporting about this has been pretty bad. I'm sorry,
Speaker 1: I don't mean the reporting is bad. I mean, like
Speaker 1: the sort of effects that have come up seemed pretty
Speaker 1: bad for for fd X, right. I mean I think
Speaker 1: that you know, fd X is terms of service as
Speaker 1: we can't use your crypto deposits for our own purposes,
Speaker 1: and SPF tweeted that we don't invest customer deposits even
Speaker 1: in treasuries. And then it turns out, as far as
Speaker 1: I can tell, in fact, customer deposits a ring center
Speaker 1: over to Alimata to make some sort of bets that
Speaker 1: lost money, right, so that's bad. You could tele aversion
Speaker 1: of the story that's not so bad, right, where it's
Speaker 1: like Alimated as a customer on the exchange, we made
Speaker 1: a reason possibly biased, possibly you know, unfortunate decision to
Speaker 1: extend credit to Alamada, as you know, part of our
Speaker 1: function as a as a crypto exchange, and like you know,
Speaker 1: the crypto exchange, that exchange that extends leverage to customers,
Speaker 1: Alimada as a customer extended leverage to that customer, and
Speaker 1: it blew up and took all of you know, took
Speaker 1: all the exchanges capital with it, and the exchanges capital
Speaker 1: is usually in some ways anonymous with the with the
Speaker 1: other customer deposits, Like I don't know, in the abstract,
Speaker 1: you can tell a story like that, but it's not
Speaker 1: not the most likely explanation at this point. So I
Speaker 1: have one more question, and it's kind of a process question,
Speaker 1: but with your former lawyer's hat on the complicated structure
Speaker 1: of the f t X empire, and I think there
Speaker 1: was a sort of a diagram floating around recently that
Speaker 1: showed something like a hundred thirty corporate entities, and I
Speaker 1: think in the diagram they mixed up some non f
Speaker 1: t X entities with actual f t X entities. But
Speaker 1: that just shows how confusing it all is. The fact
Speaker 1: that there's f t X U S and f t
Speaker 1: X International and you know, one of them is based
Speaker 1: in the Bahamas, and Alameda itself is based in Hong Kong.
Speaker 1: How much does that complicate I guess the resolution and
Speaker 1: potential prosecution of what we've been talking king about. It's
Speaker 1: a mess in terms of entertinuing. Like the thing that
Speaker 1: I'm really in the dark about is f t X
Speaker 1: U S, which is like the US entity which exists
Speaker 1: because U SCRIPTA regulation is really tough and so you
Speaker 1: can't do it. Like a lot of the products that
Speaker 1: are the bread and butter of f t X, you
Speaker 1: can't trade in the US because of some you know,
Speaker 1: interaction with either securities law or like futures law. And
Speaker 1: so fd X US offers sort of a subset of
Speaker 1: ft X products and as you know, possibly more regulated
Speaker 1: and possibly safer. And for a while the storyline was
Speaker 1: that fd X dot Com was bust and bankrupt, but
Speaker 1: that f t X dot u S was was like
Speaker 1: you know, walled off from that. And now there's you know,
Speaker 1: there seems to be some trouble at ft X u
Speaker 1: S two and it's just unclear like how intertwined these
Speaker 1: things are financially, but like, you know, regulatorily, they were different,
Speaker 1: you know, in terms of like prosecution and in terms
Speaker 1: of like like broadly speaking, like FTX dot com is
Speaker 1: in the Bahamas because it first products that would have
Speaker 1: required like regulatory like let's say registration in the US,
Speaker 1: like products that securities in the US and would have
Speaker 1: to get security registration and like require FTX to registers
Speaker 1: a stock exchange or products that would be like regulated futures,
Speaker 1: where the ft X would have to registers the futures exchange.
Speaker 1: There would be and and you know, the u S
Speaker 1: regulation is tough enough that it might be hard to
Speaker 1: actually do those things. And so f t X didn't
Speaker 1: trade those products in the U S. UM and ft
Speaker 1: X dot Com is not not I think, technically open
Speaker 1: to US persons. But if the question is, can the
Speaker 1: U s. Attorney's Office for the Southern District of New
Speaker 1: York go after x ft X dot Com for wire fraud?
Speaker 1: Which is like kind of the question here, like the
Speaker 1: answer is yeah, of course, like easy, like and I
Speaker 1: don't I don't know the exact mechanism, but basically, like
Speaker 1: you know, at some point someone's moving dollars from a
Speaker 1: bank into fd X dot com and probably a lot
Speaker 1: of the people his money got lost at FTX dot
Speaker 1: com or not, like you know, US retail invests. But
Speaker 1: are you know Cayman Islands crypto hedge funds that are
Speaker 1: run by New Yorkers or whatever? Right, Like there's enough
Speaker 1: like connection to New York that I don't think, you know,
Speaker 1: I think in general, like the the federal prosecutors are
Speaker 1: aggressive and creative about finding US jurisdiction for foreign companies
Speaker 1: doing things to foreigners abroad when they want to UM,
Speaker 1: and I don't think this is like this is like
Speaker 1: they're one of their harder challenges. Like I think there's
Speaker 1: gonna be enough kind of US stuff here that if that,
Speaker 1: like US prosecutors are gonna feel very comfortable looking into it,
Speaker 1: which is not to say that I'm you know, I
Speaker 1: don't want to pre judge whether they'll find any crimes,
Speaker 1: but like I think that they'll find jurisdiction they did.
Speaker 1: In other words, the problem won't be it's like, oh,
Speaker 1: they committed these crimes, but during the Bahamas, we can't
Speaker 1: do anything. If they conclude the door crimes, they'll find
Speaker 1: a way. Yeah, being in the Bahamas is a way
Speaker 1: to avoid securities registration requirements is not a way to
Speaker 1: record as criminal frog law. Matt Levine, thank you so
Speaker 1: much for your perspective. Great to have you back, and
Speaker 1: this was a very helpful conversation. Yes, thanks Matt. Obviously,
Speaker 1: Tracy talking to Matt is always helpful. And I want
Speaker 1: to start with actually just that last point. We don't
Speaker 1: know as of recording this right now on November six,
Speaker 1: whether there is going to be criminal charges ultimately brought
Speaker 1: in the f t X case, but it's sort of
Speaker 1: useful to know that simply by virtue of technically domiciling
Speaker 1: ft X. I guess not technically because that's where they
Speaker 1: were based in the Bahamas that that is not some
Speaker 1: sort of like escape card so to speak. Yeah, absolutely,
Speaker 1: certainly seems like it isn't. The other thing that's standing
Speaker 1: out to me as I think back to all of
Speaker 1: this is, I think the f t X LaMDA relationship.
Speaker 1: I think there was always a perception in the industry
Speaker 1: that there was something there, that there was some sort
Speaker 1: of you know, beneficial relationship as Matt described it. Maybe
Speaker 1: they were getting like early info on tokens that we're
Speaker 1: about to list on f t X and then flipping
Speaker 1: them and things like that. But in retrospect, in retrospect,
Speaker 1: it seems like what they were doing was pretty simple
Speaker 1: and just going massively long various coins, Like there wasn't
Speaker 1: really a secret sauce. There wasn't necessarily like some amazing
Speaker 1: liquidation engine. It seems like they were just taking outside
Speaker 1: bets on digital tokens. Yeah, you know, there's the thing
Speaker 1: I think it's it's the James Street pedigree, Right, It's
Speaker 1: not just Sam, but others who he worked with who
Speaker 1: had gone through this sort of like famous quant trading
Speaker 1: shop Jane Street, which we talked about the same the
Speaker 1: first time, and so you sort of get the impression like, okay,
Speaker 1: Alameda is going to recreate Jane Street in some way
Speaker 1: but for crypto, but I mean maybe not. And this idea,
Speaker 1: you know, I think everyone writ is Matt was saying,
Speaker 1: and you know, one way or another, it seems like
Speaker 1: Alameda lost a ton of money. So either they were
Speaker 1: trying to do something sophisticated and they couldn't do it,
Speaker 1: or maybe they were taking bad directional bets, or they
Speaker 1: were spending badly, or it was sort of like this
Speaker 1: lost leader to make the ft X platform more attractive
Speaker 1: to institutional investors. But whatever it is, it does not
Speaker 1: seem to have been that sort of like super brilliant
Speaker 1: quawn shop that you would sort of expect from like
Speaker 1: Jane Street alone. No, and the other thing that stands
Speaker 1: out to me, and this has been a recurring theme
Speaker 1: on the podcast recently, but this idea of truly decentralized
Speaker 1: crypto versus centralized players and exchanges. And I've said this
Speaker 1: before on Twitter, but I very much agree with Matt
Speaker 1: this idea that like everyone is going to be running
Speaker 1: their own node and storing their keys in like cold storage,
Speaker 1: and no one's ever going to need to interact with
Speaker 1: a centralized player, I think is unrealistic because not only
Speaker 1: a not only is a lot of crypto stuff still
Speaker 1: very difficult for people to figure out and do on
Speaker 1: their own, but be people want to do stuff with
Speaker 1: their money, right, You want to get additional credit for it,
Speaker 1: you want to trade it, you don't want it necessarily
Speaker 1: just keep it on a wallet and never actually use it.
Speaker 1: And that's what a lot of the centralized entities and
Speaker 1: exchanges actually did. Yeah, I mean, look, you can trade
Speaker 1: and speculate on a defy exchange. But I think Matt
Speaker 1: is right, and it's I think it's a definitely true
Speaker 1: that in the last few years there is no way
Speaker 1: crypto would have gotten as big had it not been
Speaker 1: for numerous websites where you log in and you have
Speaker 1: a password and you move your money onto a website like,
Speaker 1: which is like the idiom of normal finance, right, And
Speaker 1: so maybe there is like an alternate scenario in which
Speaker 1: everyone in crypto like really adhered to like these sort
Speaker 1: of like defy principles, and maybe that would have been better,
Speaker 1: and maybe that would have been more you know less.
Speaker 1: I don't know, it's something, but I don't think there's
Speaker 1: any way in that world it would have gotten nearly
Speaker 1: as big or like attracted this sort of like money
Speaker 1: risk seeking behavior in such volume. Then I agree, al right,
Speaker 1: shall we leave it there for now? Let's leave it there.
Speaker 1: This has been another episode of the ad Thoughts podcast.
Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at
Speaker 1: Tracy Alloway and I'm Joe wi Isn't All. You can
Speaker 1: follow me on Twitter at the Stalwart. Follow our guest
Speaker 1: Matt Levine. He's at matt Levine. Follow our producers Carmen
Speaker 1: Rodriguez at Carmen Armon and Dash Bennett at Dashbot. And
Speaker 1: check out all of the Bloomberg podcasts under the handle
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Speaker 1: Thanks for listening.