Crypto investors have had their share of market meltdowns this year. Last month, all eyes were on the cryptocurrency exchange FTX, whose founder and former CEO, Sam Bankman-Fried, was recently arrested by Bahamian authorities in connection with multiple fraud charges involving FTX.
The FTX collapse has sent shockwaves through the crypto space and will likely continue to do so for some time. But how exactly did a once multi-billion dollar company implode so spectacularly?
In the last episode of this four-part series on cryptocurrency, Dylan attempts to make sense of the dumpster fire that is the FTX collapse. Who is Sam Bankman-Fried? Where did things go wrong for FTX? What are the broader consequences of this fiasco for the cryptocurrency industry? And what can we learn from all of this?
- [03:29] On Sam Bankman-Fried’s background
- [07:54] What FTX is
- [09:58] Why it’s not unusual for startups to be dumpster fires
- [13:38] On Alameda Research and Caroline Ellison
- [20:23] On the relationship between FTX and Alameda
- [23:06] The beginning of the end for FTX
- [28:12] Why the FTX collapse gets compared to Enron
- [31:00] On Sam Bankman-Fried admitting to fraud in YouTube interviews
- [38:07] Takeaways from the FTX scandal
Links & Resources
- Part 3: Down the Rabbit Hole: A Decentralized Finance Primer
- Part 2: Making Sense of Bitcoin and the Blockchain
- Part 1: Money Talks: What Money Is and How It Works
- Fiscally Savage
- Fiscally Savage Tools
- Fiscally Savage on Instagram
- Fiscally Savage on Facebook
- Fiscally Savage on Twitter
- The Big Short: Inside the Doomsday Machine by Michael Lewis
[00:00:00] Intro: Forget the civilized path. It’s time to break the chains of debt and dependency, take control of our financial lives, and live free. This is the Fiscally Savage Podcast.
[00:00:15] Dylan Bain: Welcome to Fiscally Savage. I’m your host, Dylan Bain. And today, oh, ladies and gentlemen, today, we’re going to be talking about FTX finally. And I know this is the last Friday before Christmas. So, this, ladies and gentlemen, is my gift to you because man, this definitely falls under the category of Dylan reads shit, so you don’t have to. This has been quite a journey to get here on our four-part cryptocurrency series. And I could easily make it a six-parter but, no, this is gonna be the last one. So, we’re gonna end this series with this particular podcast. And I know that this is coming out on Friday before Christmas. So, if I forget by the end, Merry Christmas, ladies and gentlemen, happy holidays, and that I hope that you are all safe as you’re listening to this. And you know it would tickle, nothing would tickle me more pink if you all like listen to this as a family as I tell you the epic tale of FTX.
[00:01:14] So, let’s just kick it right off and say, why am I talking about FTX? Well, because FTX is a cryptocurrency exchange that has collapsed, taking billions of dollars with it. And it has been the talk of the town in certain circles. And, quite frankly, ladies and gentlemen, as I’ve been reading about this, it’s one of these things where like, man, you couldn’t make this shit up. And I’m so excited because one of my favorite authors, Michael Lewis, will be writing a book about the FTX collapse. And so, this might be round two of Margot Robbie in a bathtub explaining to us all complicated financial topics. I am, of course, referencing The Big Short. If you have not seen the movie and read the book, I’d recommend you do both because you’ll go and take away very different things from each one of those. So, let’s just state right here at the top. This is a primer on crypto and it is likely to be a four-part series, which is definitely gonna be a part four-part series, mostly because I want to talk about other things. And if you’re listening to this episode, you should go back and listen to the previous three on the Fridays. This is a primer, not a doctoral dissertation, so I’m gonna gloss over and oversimplify a lot of things, and I’m not gonna apologize for that because today’s episode will be longer than normal.
[00:02:27] So, as I’ve already stated, this is from the files of Dylan reads shit, so you don’t have to. But that’s actually okay, ladies and gentlemen, because anyone who knows me knows that I really enjoy a really good dumpster fire. In fact, it’s kind of my specialty. When I joined the ranks of public accountants in the Big Four, one of the things that I did was I volunteered for everything. And what this meant was I started getting a reputation as a firefighter. That is to say, oh, that engagement is a dumpster fire. Call Dylan. He’ll help you out. And man, ladies and gentlemen, I ended up in a lot of weird places, but I ended up with a lot of really good stories, which is why if for some reason the people unwinding FTX were to call me tomorrow and say, “Hey, Dylan. We would like to pay you a lot of money to come out here and do a whole fuck ton of work trying to figure out what the hell happened here,” 10 out of 10, I would jump on a plane and go do it because this story involves outlandish egos, YoloCash, sultry wood nymphs, QuickBooks, and bro finance.
[00:03:29] And we’re gonna start with the biggest bro of them all. I’m talking about Sam Bankman-Fried, also known as SBF. And I will be referring to him as that. Let’s just start at like right off the bat and say like how ego-driven do you have to be on some levels if you’re using your initials? Because he’s not the only one in the crypto space that does this. And for the life of me, I’m not entirely certain why. But at any rate, Sam Bankman-Fried was born to two Stanford law professors. He himself then went to the Ivy League at MIT, where he majored in physics and minored in mathematics. And what’s really important to me here is that that to me sets up and explains a lot because if you’ve ever met physics people — particularly like one of the things — My wife was an undergraduate engineer. And one of the things she used to say was that like in physics and in engineering, in math and computer science, if you were a female, well, you know, the odds were good because there were so many men, but the goods were odd because they were all, you know, physics guys and engineers and mathematicians. And if you go and look at Sam Bankman-Fried or listen to any of his interviews, you really see my wife’s point pretty quickly with that statement. But it’s noticeable that this person ended up running a multi-billion dollar financial enterprise with no real understanding of finances but a very good understanding of mathematics and how the math actually works. That’s gonna be pertinent here in this story in a little bit.
[00:05:00] He then went to work for a company called Jane Street. Now, what is Jane Street? Jane Street is a company that specializes in high-volume trading, so think bots, which means that they are creating algorithms for these bots to look for inside of the pattern in the stock market to take advantage of short-term fluctuations in price. He was there, Sam Bankman-Fried, SBF, was there for about three years. Let me unpack what it means to work in the finances field for three years and then quit. And I saw this from the inside because, like I said, I went and became a public accountant auditor because it was the fastest path from teaching to be in the room where it happens. At about three years is the point in which people understand how to actually speak the language of the industry that they are in. That doesn’t mean that they know fuck all about that industry. It just means that they can make it sound like they do. And again, that’s gonna be important here. Sam Bankman-Fried was a trading monkey. He was designing algorithms to trade international ETFs. And so, not only could he create bots that could do stuff in the finances market, but he also understood how to talk finance and make himself sound really intelligent.
[00:06:22] After he left Jane Street, he founded Alameda Research in 2017. Now, this is another part that’s important, and I’m gonna talk about this a little bit later, but I’m gonna start it off here. What SBF was actually doing with Alameda Research was that he was trading various cryptocurrencies on different exchanges. What he noticed was that the price on one exchange was different than the price on another exchange, meaning there’s an inefficiency in the market and the price discovery is actually taking place at different times. So, what he was doing was he was buying the cryptocurrency on the lower market and then selling it on the higher market. This process is called arbitrage, and it made him a lot of money. But, of course, in any type of arbitrage situation, the second one person makes a lot of money, another person comes in. And so, these gaps tend to close pretty quickly. But what was interesting here was that he was able to make a lot of money virtually out of thin air and thought that it could go on forever. But SBF did not stay in Alameda. He had bigger plans, so he turned over the reins of Alameda Research to Caroline Ellison in 2018. This is the sultry wood nymph that I was referring to. She was termed that by Sequoia Capital, which is a VC fund, but we’ll come back to this in a bit. Sam Bankman-Fried then went and founded FTX.
[00:07:54] So, let’s — now that we understand some of the players here, let’s start laying it down for FTX. What is FTX, like what actually was the company? So, simply put, and this is extremely simply — see my note at the top about this not being a doctoral dissertation, although there will be many doctoral dissertations written on this — FTX is an exchange to trade cryptocurrency, not unlike Coinbase or Binance, okay? Crypto.com is thrown in here and there’s a whole bunch of these different exchanges that are out there. On a really complicated level, FTX is exactly what would happen if you gave the D&D crowd billions of dollars because the VC firms started to believe that the spells in the book were real. And in the middle, between those two places, FTX was a conduit for financing and funds on an exchange that was devoid of any type of regulation or anyone who actually knew how to run a company of that size.
[00:08:49] Now, this is where my position as a former Big Four auditor is somewhat interesting. FTX was a startup, and crypto as a general industry is also like basically a startup. Crypto doesn’t know what it wants to be or how it’s going to function. And what I’ve said on previous episodes is that, as it stands right now, cryptocurrency itself cannot function as money. It’s not a medium of exchange, it’s not a unit of account, it’s not a store of value. Okay? But I’ve also stated that it could be and that this is an engineering problem at this point in order to be able to have cryptocurrency, be able to consume all three of those attributes. And whichever protocol, so that is to say whichever cryptocurrency, figures out how to make this work and can actually get it accepted in the general population is going to win a trillion-dollar prize. And there are companies that are competing for it. FTX was an exchange where you could trade, but they also started to believe that they could pick and choose the protocols that were going to be successful and the ones that weren’t. It’s noticeable that they thought that because you can’t, and I will get to that in a little bit.
[00:09:58] The other thing that I wanna say, though, is that this whole startup idea, it’s not unusual for startups to be dumpster fires. And I know this because I worked with a lot of them when I was on the public accounting side. It was not unusual for me to show up to a startup and say, “Hey, can I see your expense register?” And they would hand me a bankers box full of receipts and tell me “Good luck.” That is to say, ladies and gentlemen, the fact that FTX was handed just an insane amount of money was really just people yolo-ing a lot of cash into it because the upside was so huge and the downside for these VC firms was so small compared to the rest of the money that they have at their disposal. So, it’s really a mistake on a lot of levels for us to be able to read into this idea that like just because they had a lot of money, they knew what they were doing. Like I think one of the biggest things that’s gonna fall out of this is that Sam Bankman-Fried will forever be an example of why the phrase of, “Well, he must be smart. He’s got billions of dollars” actually makes no sense because it’s very clear he had no idea what he was doing and nor did anyone else in this company. Because in the middle, it’s this conduit of billions of dollars run by a guy with a physics degree — very little actual finance experience — and then he handed the reins over to Caroline Ellison, who also only had a couple years of finance experience, and they hired a risk manager who only had two years of risk management experience at Credit Suisse, a company famous for being really, really bad at risk management. But, ladies and gentlemen, that’s actually kind of par for this course on a lot of startups. So, yeah.
[00:11:51] In addition, and this is gonna be important, FTX also thought of itself as competing in this same space. So, once again, and when I say same space, it’s the protocols trying to make themselves into a form of currency. And as a result, it had its own blockchain that issued a token called FTT. Now, there’s a couple of things to note. Number one, this is an example of FTX being a market maker — that is, creating a market in which buyers can find sellers — and then also being a competitor in that same market. This is not illegal to do. Although if you sat there and went, “That sounds horrible,” well, Amazon functions the same way as does everyone else. If you’ve ever heard me rant about GameStop and meme stocks, you’ll know that this is something that’s very common and I absolutely hate it. But anyway, back to FTX. FTX is issuing a token called FTT, and it’s their own token that they totally did not treat like a security, right? Well, that’s gonna be for the courts to decide. But when you’re issuing a token that they say, well, you don’t have voting powers, but you have advisory powers and, by the way, you get special insider perks for having our token. Oh, and also, just so you all know, when we profit, we’re gonna buy back the token to be able to pump the price, and if we take losses, we’re going to sell the token to depress the price so that the token’s value will fluctuate on the profits of the company. You know, like stocks do. And this is probably gonna be one of the biggest fallouts of this is we’re all gonna have to start actually asking the question: Is cryptocurrency a currency, a commodity, a security, or a fourth thing that we haven’t defined legally yet?
[00:13:38] So, what happened with FTX? Alright, so this is where we gotta go back to Caroline Ellison, our sultry wood nypmh. She’s in charge of Alameda Research, which is 90% owned by Sam Bankman-Fried, who also has a majority stake in FTX. And Caroline Ellison is running Alameda as a quantitative hedge fund that, by her own admission, doesn’t use a lot of math. Now, if your brain is having a hard time processing the idea of a quantitative hedge fund not using math, you wouldn’t be alone on that. Because, essentially, what I’ve just said is, well, I have a McDonald’s franchise, but I don’t sell burgers. These don’t actually make any sense. Like the literal words themselves don’t go together. And this is where the side note has to come in on what Alameda originally was doing versus what it eventually decided it was trying to do and why that couldn’t happen. Alameda originally was taking advantage of arbitrage, but arbitrage opportunities close very quickly because there’s money to be made and other people figure it out. Which means that if you’re gonna try to quantitatively analyze stocks like they were doing at Jane Street, which remember both SBF and Caroline Ellison, our sultry wood nymph, both came from Jane Street off the trading desk. And so, they’re looking for something to be able to analyze, to be able to give them an idea of which way the price of a particular cryptocurrency is going to go.
[00:15:13] The problem with trying to do this is that unlike stocks and bonds, the crypto asset itself is the only thing that exists. There’s no price-to-earnings ratio. There’s no dividend history. There’s no sales volume. There’s none of the things that you would be able to price in actual security with — except volume. What is volume? Volume is the total amount that’s traded and changes hands over a given period of time. So, you can track it. And with cryptocurrencies, if you’ve ever opened up a cryptocurrency exchange, they’re gonna show you this whole thing about the volume — well, how many people are buying and selling relative to this? Blah, blah, blah, blah. Now, you might stop and think for a second. Well, hold on a second, if that’s how we’re pricing this, then higher volume must mean higher interest, right? And then higher interest wouldn’t inherently mean higher price. And you would be right because we do this in the stock market all the time. The problem is that unlike the stock market, the crypto market is non-regulated. Why is that important? Well, because almost half of all crypto sales are wash sales. That is, you have somebody with two wallets who’s selling it from his own wallet to his other wallet, meaning that nothing actually changed hands.
[00:16:31] And if you’re sitting there thinking, “God, that sounds shady as hell,” you would be right. And if you did it with stocks, you would also go to jail because it’s illegal. Why? Because people did this with stocks and it pumped the price, and then people lost a bunch of money. And if that’s sounding familiar, it should because that is exactly what is probably going to end up happening here. Other ways in which things get manipulated, I mean, take Dogecoin for example. Dogecoin was literally set up as a meme coin, as a joke. And it didn’t really become of any real value until Elon Musk tweeted out about it because he likes to do shit like that and it pumped the price. That would be stock manipulation, except cryptocurrency isn’t stock. And then when he tried to do it with Tesla stock, he ended up under investigation by the SEC because that type of shit is illegal. And you can kind of see where this is going. There’s a lot of shady shit that happens in the crypto markets that is not technically illegal because they want to remain this unregulated thing. But if they were in any type of traditional markets, people would be going to jail really, really fast. This is also, you know, on a side note to our side note, why Elon Musk probably never really intended to buy Twitter in the first place. He probably ended up having to do it because he shot his mouth off and then ended up in a legally binding contract because that otherwise would have been market manipulation, so his choices were really hefty fines or just buy the goddamn company. Okay, so side note to the side note is done and the side note now is done.
[00:18:05] So, now, let’s talk about what Alameda shifted to under Ms. Ellison’s guidance. Under her guidance, Alameda just bought a fuck ton of cryptocurrencies as broadly across the market as they possibly could in hopes that a few of them would shoot up and go to the moon. This goes back to what I’ve been saying from the beginning. Whichever cryptocurrency figures out how to become a currency, be it by being a medium of exchange, a unit of account, and a store of value, will win a trillion-dollar prize. So, Alameda is betting by buying a whole broad base part of the market, and they’re gonna be holding the one that actually hits it and therefore, they’re gonna make a bunch of money and the losses on all the rest of them are going to be negligible compared to that upside. This is not actually a bad plan. This is actually how VC firms work. That’s venture capital firms, VC. They do this all the time. They buy stakes in companies, which to those companies is a ton of money but to the VC firms is actually pocket change and they buy a bunch of them because if one of them is really successful, the upside for that one company will more than cover the losses for everything else. So, Alameda was just basically buying everything they possibly could and hoping for the best.
[00:19:18] And this is the point in which history actually starts to count because we’ve seen a lot of really good upside for crypto. But crypto has only existed in permissive monetary environments. That is, environments with low interest rates and easy money. And when the Fed decided that they were going to jack interest rates in order to fight inflation, that permissive monetary environment disappeared and therefore, we’ve started to see a huge part of the crypto crash. As money stopped being free, people stopped yolo-ing into crypto, causing the market to start to decline. That and the fact that there were so many people who were using this as a spec investment now expecting a recession, pulling their money out, but that’s a story for a completely different time. The point being is that Alameda had bought up all of these very, very high-risk, we’ll call them “assets” for now. And suddenly, all the values crash, which means Alameda, which was once a billion-dollar hedge fund, is now desperately in trouble because they’re underwater.
[00:20:23] And so, what happens? Well, this is where it starts to all go wrong because Alameda is 90% owned by SBF and is run by Caroline Ellison, who is in some type of relationship with SBF. It’s very confusing. This part was weird because I heard of, you know, terms like “polyamory” and “Chinese Harem” and “drug party” were all thrown around. And I’m not entirely certain, but I think it’s highly probable that there was a non-arm’s length transaction occurring between the two of them. And in either case, when Alameda reached out to FTX, FTX the company lent Alameda a bunch of cryptocurrency in cash. And it’s important to note here that FTX was involved in many other different transactions very similar to this. But Alameda, unlike all the rest of them, had a special set of rules that meant that they weren’t auto liquidated like they were supposed to be, which means that now not only do the CEOs of FTX and Alameda have a non-arm’s length transaction going on, but the companies they control have a non-arm’s length transaction going on. Again, in any other traditional financing environment, there are regulators and auditors who would be throwing red flags all over this and chances of them ended up being shut down by a regulator and unwound in a safe manner are extremely high.
[00:21:53] And what’s more to the point is that Alameda’s holding a lot of FTT tokens because that’s what they were lent. They were lent FTX’s own cryptocurrency essentially, and then was owned by the same guy who basically lent himself his own stock. Now, if you stop and think about that, like stop and think about what would happen to a stock price if I lent out, if I got a loan and used my stock as collateral against that loan because now the value of the company is bumped up by debt that is collateralized against stock that no longer counts. It’s a wash. The company doesn’t increase in value, which will tank the stock price. So, under normal market conditions and in a transparent and efficient market, FTX should have collapsed right then and there. And this is why no bank would actually do this type of transaction where they get a bunch of cash in exchange for the company’s own stock against the debt that they owe because it’s a dumb way of doing business. But when you’re both the lender and the lendee, I guess the rules don’t count because Sam Bankman-Fried at the end of the day was both sides of the transaction.
[00:23:06] And all of this probably would’ve been okay. I mean, it wasn’t okay, but we probably could have skated longer than we did if it wasn’t for the fact that people found out. What ended up happening is that Binance, another crypto exchange and a competitor — also a partial owner of FTX — announced two things. Number one, that it doubted that FTX could actually cover its liabilities and consumer deposits; and that Binance would be dumping all of its FTT onto the market. Why is this important? So, ladies and gentlemen, this is the point in which if you’re really into this story, you might wanna just pause for a second and grab a cup of coffee because man, we’re about to get right down into it. When Binance made good on their threat to dump FTT on the market, it crashed the price because that’s of course what would happen. When you dump a bunch of anything on the market, it crashes the price due to the laws of supply and demand. The fact that FTT was what was floating Alameda Research means that Alameda immediately collapses. FTT now lost its entire loan, and FTT and Alameda were also both carrying unmined FTT on their balance sheets by which they were being able to finance themselves by other means. When all of that crashed and everything started coming down, what do you think the market’s response was?
[00:24:35] If this were a traditional company, say a bank, I would be using the term “bank run.” That is, ladies and gentlemen, our entire financial system, whether it’s backed by gold or by fiat or by crypto, is always gonna be dependent on our trust in the players, at least on some levels. There is a reason why I bank at local credit unions because I don’t trust big banks. But even my local credit unions have to trust the big banks and therefore, I have to trust the big banks, at least on some level. When I don’t, people panic and they want all of their money back. And that is exactly what starts happening with FTX because now the FTT token that now the public knows was backing both Alameda Research and FTX is now dramatically reduced in price. They’re now also looking at the tweet by the same person who dumped all that FTT on the market, saying that they can’t make good on their liabilities to their customers. And, again, this is an unregulated space, so it’s not like a normal bank where normally your money in the bank is insured by the FDIC. And if you’re at a credit union, there’s another one. And even if you’re at an investment bank. Up to $250,000, if that bank were to go down due to malfeasance, there isn’t again another insurance company that will pay you back your deposits up to a certain amount.
[00:26:01] But the crypto exchanges are not banks. They’ve, in fact, defined themselves as not banks. They wanna be this unregulated thing. They wanna be a decentralized financial system, which means no insurance for you. But SBF really suddenly wanted them to be right up until the FDIC itself sent him a cease-and-desist letter saying, dude, you ain’t a bank. Stop telling people that we’re gonna bail them out if you go under. And that was back in June of this year. He knew. SBF knew. He knew as far back as then that he was in trouble and was desperately starting to shop things around while customers are pulling the deposits, FTT is crashing, the crypto market in general is crashing. And suddenly, all of these pieces of code that he’s held as collateral that he has claimed are worth billions of dollars are now worth pennies compared to what he paid for them. And as people were pulling out their funds, it was the speculative traders who pulled their funds first and for the most part, were made, well, if not whole, pretty close to it. And FTX then froze the accounts because everything was in crypto and all the cash was gone and FTX had no choice but to seek bankruptcy protection as a last ditch effort.
[00:27:22] Now, ladies and gentlemen, if you are sitting there going, holy shit, that sounds just like a complete dumpster fire. Well, ladies and gentlemen, they say that the strongest steel is forged in the fire of the hottest dumpster, and I honestly believe that we are just getting this party started into figuring out just how hot those flames were. Because in the aftermath of all of this, and this story as of recording it is currently the 14th of December as I’m recording this, we know a lot of things and I am certain that this situation has evolved between the point in which I’m recording it and the point in which you are listening to it. So, I’m certain there’s more out here. So, I’m gonna just give you the facts, and they are going to be one right after the other. Every one’s more shocking than the last.
[00:28:12] Now, when FTX filed for bankruptcy, Sam Bankman-Fried was removed as the CEO. Caroline Ellison was removed by the CEO of Alameda by SBF’s replacement. Now, my boy, Johnny Ray III, who we will call JR III because a lot of my other sources I’ve seen him referred to that way on a lot of other forums. My boy, John J. Ray III, is a specialist who specializes in the liquidation of failed companies. And you might have heard one of his greatest hits. That’s right, ladies and gentlemen. JR III is our boy who unwound Enron after Enron collapsed. And if you don’t know what Enron was, Enron was a power company that was involved in speculative trading in the early 2000s. And its stock was trading in a hundred dollars a share one day and zero the next because it turns out they were using a whole bunch of weird accounting things to just make it appear as if they had a bunch of money. And it turned out that it was all speculative and it was only going to hold up to the extent that no one looked at it. That kind of sound like FTX? That kind of sounds like FTX to me. That is to say, I think that we’re playing at least in the similar area here. And this is gonna be important because one of the defenses that the people in Enron used was that they didn’t know. This is why corporations have what are called internal controls. And my job as a corporate auditor is to test these internal controls and make sure they’re functioning so that we don’t have a situation where the CEO and the CFO of a multi-billion dollar company can sit before Congress and go, “Well, I didn’t know what was going on in my own company,” which was exactly the defense the people from Enron used.
[00:30:05] The other interesting thing about Enron was these guys would get up and talk to their investors and talk to these rooms of people and they would use terms and they would make things so confusing that everybody else just assumed that they were the smartest guys in the room. Didn’t wanna look silly and so, never questioned them. Now, we think about Sam Bankman-Fried and crypto in general and it works out a lot of the same way. Maybe this is one of the reasons I’m so skeptical of a lot of crypto stuff is because I am an auditor, which means that by nature I’m skeptical. But the fact that these people sound a lot like the Enron guys to me gives me the heebie-jeebies. So, it is just of with no end of giggles that I look that SBF, Sam Bankman-Fried, is replaced by John J. Ray III, JR III, my boy who unwound Enron. And we’re gonna come back to him in a second.
[00:31:00] The next thing that happened is SBF has admitted in interviews that he co-mingled the funds of speculative traders who were doing so on merger, that’s with debt, and retail traders who just put their money in deposit and bought crypto with it. He put them all in the same bucket. So, when he was lending money to Alameda Research, he was doing it out of one common pool of funds. That means that the dollars and crypto that he was lending from one place to another were unidentifiable as to what belonged to whom, which is in direct violation of the user agreement of FTX. Now, when did Sam Bankman-Fried admit this? On an internet conference call with a bunch of YouTubers. That’s right, ladies and gentlemen, Sam Bankman-Fried is emphatically an idiot. He might actually be really good at coding and finding arbitrage and crypto. But when it comes to anything with common sense, he’s a moron. Why? Because the number one rule when you find yourself at any legal trouble is shut the fuck up. Like this is your free tip. I have a lot of friends who are lawyers. And every one of them is a pro-law enforcement, pro-department defense, pro-police, back the badge people all the way. And every single one of them tells me, never under any circumstances talk to the police. Admit to nothing. Say nothing. Plead the Fifth and then shut the fuck up. And Sam Bankman-Fried did none of that. He continued to tweet and it was just like, it was comical of like his lawyers haven’t like held him down and broken his fingers yet. And he even went to conferences and told people, well, my lawyers wouldn’t want me to be here. Ha ha ha ha. Well, he fucked himself. Why? Because he should have never admitted that. And he really should have never admitted that on a conference call with a bunch of YouTube people that make their money on a platform that is designed to fuel outrage. That is what the YouTube algorithm is designed to do. Like I listened to it and I just thought to myself, this has gotta be fraud. And I, again, this is from the, you know, the files of Dylan researches shit, so you don’t have to. But, no. No. He actually like admitted this. And, ladies and gentlemen, it was at that point where like the record scratch, like up until that admission, up until that admission, I didn’t think they were actually gonna charge him. But the second I heard that, I turned to my wife and said, “That boy’s fucked.”
[00:33:34] And this is what led to him being arrested in The Bahamas just a couple of days ago. They are arraigning him on a number of charges, including wire fraud, wire fraud conspiracy, securities fraud, securities fraud conspiracy, and money laundering, which would carry with it a maximum sentence of 115 years if he is convicted on all eight accounts. Man, I hope that interview was worth it and that sultry wood nymph was also worth it because holy shit, that’s a lot. But it’s also interesting because if you think about it, that securities fraud one is really interesting because you can’t actually fraud something that’s not a security. So, we’re gonna be litigating this and we’re going, by the time we’re done, my speculation is that we’re actually going to have a definition of what cryptocurrency is in terms of the financial system. But it’s still fascinating to me. But it’s also come out recently in the last couple of days that they were using communication platforms like Signal, where they would auto-delete and that one of the Signal groups they had was called “wire fraud.” Like, bro. Bro, don’t do this. And this is the other thing and for those of you who don’t work in financial markets, again, I work as an auditor. And you can kind of hear it in my voice of how animated I’m getting, but like if a financial firm is not keeping records, that is the reddest of red flags imaginable. Under any other financial system in the United States, you go to jail for that automatically. Like there’s just the, you literally go, well, Your Honor, I deleted all the records. Why did you do that? Because I’m a dumbass. Congratulations, you got a one-way ticket to jail. That is how that conversation would more or less go. Yes, it would be done in legalese, but that’s how it would go. But this, again, isn’t a traditional finance entity, so we’re gonna have to litigate our way through that.
[00:35:34] But this brings us right back to the whole thing of like this is basically Sam Bankman-Fried with his college D&D buddies who got handed a bunch of money because the VC firms decided the spells were real and then decided to invent bro finance. And you couldn’t have put a finer point on that when JR III reveals that not only did FTX not have an accounting department, like how do you run a billion-dollar company and not have the thought of, you know, we should hire some accountants to help us keep track of all this shit and if nothing else, tell us when we’re, you know, sticking our dick in a door. But, no. They didn’t do that. Instead, they outsourced it because that was a smart idea, and then they used QuickBooks for it. And I’m not throwing shade against QuickBooks. It’s a great platform for small businesses. A multinational multi-billion dollar cryptocurrency pseudo financial industry’s platform emphatically should not be using QuickBooks. Okay? Like that alone should have been enough to laugh these guys out of town. And when JR III, my boy who unwound Enron, the collapse of an energy company that triggered a recession in the early 2000s that then created contagion in the market that took Fortune 500 companies; that spawned the Sarbanes-Oxley Act that it now governs the internal controls of publicly traded companies; when the guy who unwound that makes this statement, and I’m gonna read it verbatim, you know you fucked up. RJ III has said, and I’m quoting, such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here, I have never seen in my 40 years. Holy shit! Like this guy unwound Enron — that literally made up companies called Chewbacca Corp and Death Star Enterprises in order to hide at debts and off balance sheet financing and just straight up lied about values of contracts that didn’t even exist — that was less bad in this guy’s mind than what he’s looking at at FTX. It blows my mind. It just blows my mind.
[00:38:07] And like, ladies and gentlemen, here’s the deal. I could talk for another four hours on this if I wanted to really run down all the nooks and crannies that I have gone through. I’m trying to keep this under 40 minutes. And as I’m looking at the timer go up as I’m recording, I’m gonna fail, but I cannot stress enough that if you’re interested in crypto markets at all, and if you are interested in finances at all on a broader term or you’re looking at the things in the news and going, the fuck is that? This story, like we don’t write fiction this good. Like we just don’t. But the bottom line, the bottom line that I think is worthwhile for my audience to take away is that much of what happened here in any other firm is regulated by government agencies across the world in every market in the world and is audited on a continuous basis. And while those government agencies are not perfect, whether they’re the ones in Japan, the EU, the United States, and while the auditing system is not perfect, it’s better than what we got in crypto right now. And this entire thing is an example of how the crypto industry is stumbling towards understanding why we have the financial regulations we do one scandal at a time. If you are somebody who believes in cryptocurrency and like myself, I’ve said it a number of times, I believe cryptocurrency has a future. Is it the one you’re holding? I have no idea. But if we’re gonna take control over our financial lives and live free, this is the type of stuff that’s going to promise us the world and deliver us nothing.
[00:39:53] And so, ladies and gentlemen, I hope that you have enjoyed this four-part series because with this, we’re done. I’m not gonna be talking more cryptocurrency for at least a month. That said, ladies and gentlemen, if you made it this far with me, thank you so much for listening. I’m so excited to be bringing in the new year with you. I know that Christmas is in a couple of days, so thank you so much for listening. Thank you so much for hitting the subscribe button. Thank you so much for listening to the other podcasts that I’ve been on. Really at this time and Christmas, I’m grateful for each and every single one of you because this is why I do what I do. I love talking to this microphone and telling you guys stories on Fridays and teaching lessons on Tuesdays. So, with that, Merry Christmas. Happy holidays. Spend time with family, have intensely human experiences. I love each and every single one of you. And that’s it for today. I’ll talk to you soon.
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