The FTX Collapse

Cryptocurrency exchange FTX spectacularly imploded over the last two weeks. What happened? How did SBF go from crypto wunderkind billionaire to having assets in the neighborhood of $0? Is Binance CEO CZ the Lex Luthor to FTX's Clark Kent? Plus more!

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Episode Transcript

Speaker 1 (00:04):
Welcome to tech Stuff, a production from I Heart Radio.
Hey there, and welcome to tech Stuff. I'm your host,
Jonathan Strickland. I'm an executive producer with I Heart Radio.
And how the tech are you? So recently I mentioned
in a tech News episode of tech Stuff that cryptocurrency

(00:25):
exchange f t X was in deep trouble, which honestly
was putting it lightly, and I mentioned that the founder
of that exchange, or co founder I should say, a
guy named Sam Bankman Freed but more commonly referred to
as s b F was making the rounds, taking responsibility

(00:46):
for the whole thing. He subsequently resigned as CEO of
f t X. That happened on Friday, last Friday today,
by the way, being November twenty two. So for those
of you listening from the future you can you're gonna
be referring to that calendar a lot. Anyway, Uh, that catastrophe,

(01:06):
the f t X catastrophe, is far larger than I
could cover in a typical tech News segment, so I
thought I would explain it in greater detail here, so
much detail, and we'll also talk about the ripple effect
we're seeing as ft X goes through this existential crisis,
which I think even that is being generous. I think

(01:28):
ft X is is just uh seeing the end of
its days. But first, let's talk about cryptocurrency and exchanges
in general so that we can understand the foundation of
what's going on before we get into the details of
what happened at f t X. So let's think back
way back to the origin of bitcoin. In two thousand eight,

(01:50):
someone using the name Satoshi Nakamoto published a white paper
that was titled Bitcoin, a Peer to Peer Electronic Cash System.
That white paper laid out the details for Bitcoin's operation.
That this was going to be a decentralized digital currency,
that it would have a community of participants who would

(02:12):
track transactions through a shared ledger that was on top
of a blockchain. That this community would compete against one
another to validate blocks of transactions, and the winner would
take uh some newly minted bitcoin as a reward. That
the supply of bitcoin itself would be finite, That eventually

(02:34):
all bitcoin that will ever exist will be on the market,
and that every couple of years, the number of bitcoins
that are awarded to the successful system that verifies a
block of transactions will be cut down by half, that
the system itself would adjust the difficulty of the verification
task based on the amount of computational power dedicated to

(02:55):
solving it. This is called proof of work. It's a
version of UM cryptocurrency validation and minting that is used
not exclusively but by a lot of different cryptocurrencies, including bitcoin.
And that's the thing that feeds into people making increasingly
powerful computer systems to attempt to mine bitcoin. But what

(03:21):
wasn't really laid out was how people were going to
get bitcoin outside of just mining it. The peer to
peer nature would allow one bitcoin holder to transfer bitcoin
to someone else via some form of forum such as
bitcoin talk. That was one that Satoshi Nakamoto founded in
early two thousand nine. Two thousand nine is also when

(03:43):
bitcoin officially launched. The white paper came out a year earlier,
or early a few months earlier, at the end of
two thousand eight. In January two nine, was when bitcoin
became something that people could actually participate in. Now you
could use bitcoin in a personal transaction peer to peer,
but that was really about it. And the peer to
peer method worked, but it was also risky because there

(04:05):
was no guarantee that the person with whom you were
trading was on the up and up, or that whomever
held the bitcoin would actually transfer the bitcoin at the
conclusion of the transaction. However, bitcoin at the time was
also virtually worthless. It would take thousands and thousands of
bitcoin to amount to enough money to buy a pizza,

(04:26):
for example, and it would take a year before bitcoin
was worth even thirty nine cents per single bitcoin. So
what I'm saying is that while it was technically risky
to engage in a peer to peer bitcoin transaction, the
value of the currency was so low that even a
bad experience would likely result in the loss of at
most a few bucks. Now today, a bitcoin is worth

(04:50):
around sixteen hundred bucks as of the recording of this episode.
That is, that level of risk is a bit too
steep for most folks to just trust a peer to
peer transaction, though those can still happen. But by late
we started to see the first exchanges. So in exchange
does what it says on the ten. It's an entity

(05:11):
that can exchange one form of currency for another. One
of the first exchanges was Bitcoin Market, and here's how
it would work. Let's say you wanted some bitcoin, but
you weren't interested in mining for it. You just wanted
to purchase some You want to exchange some let's say
U S dollars for the equivalent value in bitcoin. Well,

(05:32):
you could arrange to purchase bitcoin from someone else who
has it in their own digital wallet to do the
peer to peer transaction, but again that's risky. The other
ways you could go with a bitcoin market exchange approach,
where the bitcoin owner would place the appropriate amount of
bitcoin in escrow and it would sit there in escrow

(05:53):
until your payment of the equivalent in U S dollars
or whatever currency you're using cleared and got to the seller.
Once the seller received the money, the bitcoin would be
released from scrow to your digital wallet, whether that was
on the market or your own personal digital wallet. That's
you know, that can be pulled offline if you want,

(06:14):
and the transaction is concluded. One bit that is important
to remember cryptocurrency exchanges typically require a transaction fee to
cover this process. The reason that's important is that there's
really no incentive to use cryptocurrency for very small transactions
because you end up paying more in transaction fees than

(06:35):
you would for whatever the actual purchase was. This would
be like if you walked into a store and you
wanted to buy some gum and you had a credit card,
so you buy it. You know, you got a pack
of gum that's I don't know, a dollar, and you
want to pay with your credit card, but the merchant
charges a five dollar minimum for any credit card purchase.
So do you really want the gun where you're gonna

(06:57):
pay five bucks for a one dollar pack of gum?
I mean, alternatively, I guess you could buy a bunch
of other stuff so that you at least feel like
you're getting value for your money. But that's the point, right, Like,
you're not going to use a cryptocurrency if there's a
if the transaction fee amounts to a significant percentage of
whatever you're purchasing in the first place. Well. Another early

(07:19):
cryptocurrency exchange that launched was uh Mount Cox. It launched
in Mount Cox was empty period g o X, and
that name was actually an initialism for magic. The gathering
exchange is referencing the the trading card fantasy game. This
name is one of the most infamous in cryptocurrency history

(07:41):
because not only did it become the dominant exchange in
the crypto world, handling something like sevent of all bitcoin
transactions by early but that same year saw Mount Cox
go under, so like they were on top of the heat,
and in that same year they went extinct. Is not

(08:03):
that different from what we're going to talk about with
ft X, At least the outcome is not that different.
The actual events that led to it were a little different.
The exchange, which again was the dominant entity on the
crypto market, found for bankruptcy and we would learn that
Mount Cox had been hacked, with assets stolen and hundreds
of millions of dollars worth of bitcoin disappearing from the exchange.

(08:25):
In fact, at the time, the thefts amounted to seven
percent of the total supply of bitcoin in the world.
Like when you can when you can look at a
bank robbery and you can contextualize that as a percentage
of all the money in the world. That's a big
bank robbery. And most of the the money that was

(08:48):
stolen didn't belong to the exchange itself. It belonged to
customers who were keeping their money on digital wallets that
were on exchange accounts. Again, not a good look when
a bunch of people lose their money, not through any
fault of their own but because the exchange that held
their accounts got hacked. Now, Mount Gox's implosion sent a

(09:12):
shock way through the bitcoin community and the value of
the currency dropped more than But despite the massive and
public collapse of this exchange, cryptocurrency was able to stick
it out and recovered Alright. So there's a lot more
to the history of cryptocurrency as well as cryptocurrency exchanges.

(09:32):
But that really gives us a foundation that we can
work from. So we're not gonna dive into that anymore.
Let's talk about f t X in particular. Now, that
story begins with Sam Bankman Freed or SBF. This young
man had worked for a while on Wall Street, and
in sen he co founded a company called Alameda Research.

(09:55):
This was a quantitative trading firm. And that phrase, will
we have at least some of you say in what now?
If you didn't say what, you should at least know
that I did say what when I encountered it, Because
the world of investment is one that I'm not particularly
well versed in, but I'll give it a shot. Generally speaking,

(10:17):
a quantitative trading firm relies heavily on math, statistics, and probability.
Estimations to determine where markets are most likely heading, So
you can sort of think of it as feeding a
whole bunch of variables into a computer model and then
projecting out what will happen from there. This, of course,

(10:39):
is predicated on the assumption that financial markets will generally
behave according to the value of these variables, which is
an assumption that not everyone agrees with. This quantitative approach
is heavily disputed in the investment world. I personally think
it might be somewhat unreliable, but again, I hadn't even

(11:00):
heard about this approach until today, so you could very
legitimately argue that this is just my skeptical nature coming out,
and I don't know what I'm talking about when it
comes to validity of the theory. Anyway, Alameda Research specialized
in cryptocurrencies, so the firm would leverage cryptocurrency markets to
make itself and its clients money. So that could include

(11:24):
stuff like arbitrage. This is where you attempt to leverage
a difference in price for something like a commodity or
some asset and you try to make a profit. So
if you wanted, like an oversimplified example, let's say you
know that apples are super cheap near you at the supermarket,

(11:45):
like you can buy them for super super cheap, but
you also happen to know that apples are twice as
expensive across town. So you might buy up a bunch
of cheap apples near you and then go across town
and sell them for a profit, you know, lower than
what the local markets are selling, but higher than what
you paid for them. That kind of thing is what

(12:07):
arbitrage is about, except you know, with crypto, and in
much larger amounts than a few apples. So yeah, crypto apples.
Alimator Research did more than arbitrage deals, however, but we
can really think of it as a company that relied
on computer models to make market based decisions related to cryptocurrency.
Alimator Research is going to play a huge part in

(12:30):
our story moving forward. So SPF founds Alimator Research. In
two years later, twenty nineteen, SPF partners with Gary Wong,
who used to be a Googler. He worked for Google. Uh.
They in turn founded the ft X Cryptocurrency Exchange. So

(12:50):
now they've got a company that is an investment company
that's entrenched in cryptocurrency and a cryptocurrency exchange, so two
very closely related entities here they do different things, but
it's all in the world of crypto now. F d X,

(13:10):
like a lot of cryptocurrency exchanges, had its own exchange token.
This is a type of cryptocurrency that's created by the
exchange itself, and it's meant to be used in all
sorts of transactions and as an award and an incentive.
So exchanges often use these tokens to encourage users to
cover transaction costs and that kind of thing, or they

(13:33):
might do it to raise the company's liquidity in the exchange.
It may also be used to hold a stake in
the exchange, so users can purchase exchange tokens in order
to have kind of a seat at the table when
it comes to blockchain governance. This is kind of the
decentralized approach of crypto, the idea that governance does not

(13:56):
fall to some centralized entity, but instead is made up
of the community itself. So by putting a stake in,
you have a seat. It's kind of like owning stock
in a company. Right. If you own stock, that gives
you the right to vote in various um stockholder meetings.

(14:16):
Throughout the year. So yeah, that's kind of what these
tokens are used for in general. And the f t
X exchange token is the f t T And yes,
I apologize, we're getting into alphabet suit territory here, right
because we've got SPF the guy, the human being who

(14:36):
co founded this company, and then you've got f t
X the company, and then f t X meants the
f t T token. Yeah, you know me, I'm down
with f t T. Not really, I'm not down with
f t T at all. F t T is down though. Um,
we're not done with initialisms. We're going to have more
before this is done. But you know, this is kind

(14:59):
of the way that the crypto community communicates. They do
it in a lot of like idioms and initialisms and acronyms,
and it gets to a point where you start to
wonder if anyone knows what they're talking about, or can
even you know, explain the content of their sentences. I
don't know, it's all Greek to me. Before everything went

(15:21):
pear shaped, you could buy f t T on f
t X, but there were also other cryptocurrency exchanges that
bought and sold f t T, so it was available
on exchanges across the crypto world, not just f t
X is and I mentioned ft T because that's also
going to play a very important part in our story later. Okay,

(15:44):
we've been going for a bit. Let's take a quick break,
and when we come back, we'll talk more about what
went down at f t X. All right, So SBF
and Wong co founded f t X in two thousand nineteen.

(16:08):
One early investor in the company was a rival cryptocurrency exchange,
the number one cryptocurrency exchange in the world, called Binance.
So yeah, the biggest cryptocurrency exchange out there. Now, this
story is going to unfold a little bit like a
superhero and their arch nemesis kind of both coming of

(16:31):
age at the same time. You know, they start off
as friends, the old Clark Kent and Lex Luthor or
buddies at first, but then things take a turn and
one of them wants to see the end of the other.
You've got your supervillain. So if ft X is our superhero,
Binance is our supervillain, or if we want to talk
about founders, SBF is our superhero. And Chong Peng Zhao

(16:55):
also known as c Z because again more initialisms, is
our supervillain, and spoiler alert, and this superhero story, the
bad guy wins. Now, for the record, I actually don't
want to cast Binance or c Z as the villain,
partly because the more we learn about fd X and SBF,

(17:16):
the less heroic those seem as well. And I think
this is more of a story of a bunch of
supervillains working against each other in a way. Alright, So
Finance puts in a significant investment into this young f
t X cryptocurrency exchange company. Two years later in fd

(17:39):
X is ready to pay back Binances investment. You know,
the whole point of an investment is to get a return.
So this is ft X saying, okay, we've made our money.
We're paying you off. Here's what you gave us plus more.
Finance was essentially cashing out and ft X paid Binance
in ft T. Again, that's the exchange currency for f

(18:02):
t X, right we talked about just a minute ago.
So in all, Finance received twenty three million f t
T tokens and it had a value around that time
of five nine million dollars. So Binance has a big
old stash of FTT sitting in the exchange in June,
f d X holds a round of funding that accumulates

(18:25):
nearly one billion dollars in investments. That's billion with a B.
The company's value is projected at eighteen billion bucks. Not
bad to go from being founded in twenty nineteen two
hitting nearly twenty billion dollars in value in just two years.
That's crazy. But hold onto your proverbial hats because we're

(18:50):
about to get crazier. In fact, hold onto your hats
and since your socks tight, because I'm gonna knock both
of them off if you're not careful. So in October
of twenty twenty one, just a few months after being
valued at eighteen billion dollars, f t X went up
to being valued at twenty five billion dollars, a boost

(19:11):
of seven billion dollars in just a few months, and
f t X was leveraging this valuation to raise even
more money from investors. That's one of the reasons why
you want to tout your valuation, as you're telling investors, hey,
look at how quickly we are growing. You want to
get in on this, so pour your money into it.

(19:31):
So you might wonder, well, what is f t X
doing with all the money it's making, you know, because
I mean, obviously a lot of it's going into the
operation of the exchange itself. But f t X was
getting so much cash, so what was it doing with it? Well,
one thing he was doing was promoting f t X
in various extravagant ways. For example, in September one, ft

(19:53):
X signed a sponsorship deal with a Formula One racing team,
so they started putting the logo on the cars. And
in April one, ft X signed a sponsorship deal with
the home arena for the Miami Heat basketball team, calling
it the f t X Arena. And this was a
nineteen year deal to have that naming rights. But f

(20:17):
t X wouldn't last nineteen years. And if I remember
to come back to this, I'll give you an update
on what's going on at the home of the Miami
Heat and also that Formula one team spoiler alert. I
will remember because I know I wrote it down. Meanwhile,
f t X is operating as a cryptocurrency exchange and
becomes the second largest crypto exchange, only behind Binance. So

(20:43):
Binance helped f t X get started, and now f
t X is number two behind Finances number one and
SPF started to make some really big moves, some of
which would sour his relationship with Binance and its CEO
c z you know, Chong Pang Zhao. Alright, so first
let's talk about SPFS moves to help companies that were
affected by the collapse of cryptos value. Now, I'm pretty

(21:06):
sure in a recent news episode I talked about cryptos
value crashing a couple of years ago. But that was
my brain misfiring, Like it hit me later that day
that I said something that was wrong, because I think
I said, you know, a couple of years ago when
bitcoin was worth sixty dollars. That wasn't a couple of
years ago. That was this year. That crash actually happened

(21:26):
earlier this year, in the spring of this year. It
just feels to me like this year has lasted five years,
which I guess I could say about the last couple
of years have felt that way. But anyway, so this
past spring, and again that's the Spring of two for
any of you listening from the future, we saw crypto
values in sharp decline. In a May two article titled

(21:49):
Cryptocurrencies melt down in a perfect storm of fear and panic,
The New York Times reporter team spelled it all out,
all right. So towards the beginning of the Panto back
back in, there was a spike in cryptocurrency adoption. This
increase in demand caused cryptocurrency values to increase. You know,
the more people want something, the more expensive it gets.

(22:12):
And these included not just your regular old folks dipping
their toes into doge coin or whatever. You had these
massive financial companies, including banks and hedge funds that were
purchasing large amounts of cryptocurrency and a bet that those
coins would continue to increase in value to the moon.
As the crypto bros would say. Um side note, crypto

(22:35):
bro is a pretty common, somewhat dismissive term for cryptocurrency enthusiasts,
but obviously anyone of any gender can be interested in crypto,
so crypto bro, as far as I'm concerned, should be
considered a non gendered term. But whether you agree with
that or not, it is the term that a lot

(22:56):
of folks use, all right. So the value for cryptocurrencies
in general goes up and up. Bitcoin reached a peak
of around sixty grand for a single unit of bitcoin.
In turn, the rising value of cryptocurrencies had lots of
other consequences. Proof of work cryptocurrencies like bitcoin, you know,
those are the ones that require participants to dedicate enormous

(23:20):
amounts of compute power to have even a hope of
mining a block of transactions. Well, that meant that collectively,
people were spending the same amount of electricity just to
mind cryptocurrency as certain countries would use in an entire year.
That in turn has an impact not just on electrical grids,
but on carbon dioxide emissions. So for any coal powered

(23:43):
power plants out there, I mean that increased demand just
meant we were dumping more CEO two in the atmosphere
because people wanted to mine Bitcoin. Then, for less valuable
cryptocurrencies like Ether, a lot of the miners were scooping
up powerful graphics cards like Bitcoin at this point had
graduated well beyond graphics cards. You could have the best

(24:05):
graphics cards on the market and not even make a
dent in the sophisticated bitcoin mining systems out there. But
for stuff like either where it wouldn't make financial sense
to go so hard on your mining rig. You know,
GPUs were a big asset, and it made it very
hard for anyone else to get hold of those graphics

(24:26):
processing cards, which really irritated a lot of gamers. Anyway,
this trend could not continue indefinitely, and eventually values began
to dip a bit. Now there were a lot of
external forces that would have a big impact as well.
The world began to enter into economic uncertainty. I guess
I still can't say recession. Um. You started to have

(24:49):
issues with inflation, you had interest rates going up, investments
and stuff like crypto started to look increasingly risky. Then
you know, Russia invaded Ukraine, which may economic uncertainty even worse,
and that led to some folks pulling out of the
crypto market. So they were selling off their crypto so
that they could walk away with a nice little profit,

(25:10):
and then the value would dip a bit. Then you
had folks getting nervous, So some folks began to sell
off their's because they're like, well, it's starting to go
down and I don't want to be left holding the bag,
so I'm getting out too. Now, arguably these cryptocurrencies were overvalued,
so there was a need for a market correction. But
this actually became a casscade because more and more folks

(25:32):
began to try and claw back their money, and crypto
in general saw a really tough decline that meant that
some companies in crypto got into financial difficulty. They had
extended deeply into the crypto market. The crypto market drops
out from under them and they are drowning and in sweeps. SBF,
who may or may not be a superhero or supervillain

(25:54):
now SPF really believed in his vision of crypto, and
he has an altruistic streak, a sile wide. I mean
he genuinely has talked a big talk and put a
lot of money towards philanthropy. But for crypto to succeed,
you know, he felt we really needed these various crypto
companies to stick around or else all confidence is going

(26:14):
to go out of crypto and the whole thing dies.
So rather than let these companies go out of business
while companies like Alameda, ft X and Binance may or
may not be able to weather the storm, he directed
his companies, which he owned like seventy of them, to
acquire and bail out some of the smaller crypto companies

(26:35):
that were in trouble. For example, this past July July
of two thousand twenty two, ft X signed a deal
with a company called Block five, which was a crypto
lender company. That deal had an option to buy Block
five at reportedly around two hundred forty million dollars, but
the actual deal involved providing a four hundred million dollar

(26:57):
credit facility for Block five to use. We'll get back
to that at the end of this episode. Later in July,
f t X reached out to a different crypto lender,
one that was in the throes of bankruptcy, so this
one wasn't just teetering it was in chapter eleven. This
one was called Voyager Digital, so the offer was for

(27:18):
a partial bailout. The Voyager Digital dismissed the offer as
a low ball bid, but the bankruptcy proceedings continued, and
eventually Voyager Digital essentially went up on the auction block
and f t X ended up winning the auction, so
it outbid all other competitors and f t X was
expected to bring Voyager Digital out of bankruptcy, which is

(27:39):
not going to happen. Spoiler alert. F t X started
to run into trouble later in the summer of two
for one thing, UH the f d i C a
U S Bank regulator issued a stern warning to ft X,
claiming the company had made misleading statements regarding whether it's
funds were ensured by the US government. Specific the f

(28:00):
d i C called out a tweet by Brett Harrison,
who was a leader at f t X. The f
d i C argued that Harrison's tweet made it sound
like customers who held funds at f t X and
who were purchasing stocks through f t X had the
benefit of those transactions being f d I C ensured,
which was not the case. Harrison would subsequently delete the tweet,

(28:23):
and folks assume that the whole thing was a poorly
worded message in the first place that was intended to
reassure people that crypto really isn't as risky as some
folks were saying. Keep in mind, this is happening in
the wake of the crypto market decline that began back
in the spring. Then we get to early November. Now,
for those listening from the future, I'm recording and publishing

(28:45):
this in mid November two. So everything I'm going to
talk about next happened in the last two weeks, and
a whole bunch of things happened in rapid succession. On
November two, the crypto news site coin Desk posted an
article about Elite balance sheet regarding Alimator Research, and the

(29:07):
implications were troubling, to say the least. According to the
balance sheet, Alimator Research was taking assets from ft X,
the cryptocurrency exchange, and then using those assets to fund
trades that Alimator Research was was making Those f t
X assets belonged to f t X customers, So one

(29:28):
of sbfs companies was essentially dipping into one of his
other companies in order to fund trades. And moreover, it
was doing this without the consent of f t X customers. Okay,
that's a lot to take in, but we've got so
much more. We're going to take another break, and when
we come back, I'm going to talk about some of
the really crazy stuff that's happened in the last two weeks.

(29:51):
But first let's take a break. Okay, So Alimator Research
is taking ft X money, which is provided by f
t x is customers who are part of this cryptocurrency exchange.

(30:13):
It's taking money out of those accounts in order to
fund investments. You might be thinking that doesn't sound like
it should be legal, and in most places it's not.
US securities law requires that companies be very transparent about
this sort of thing, and that they secure the consent
of customers before doing anything like this with those customers funds.

(30:36):
This practice actually even goes against f t x is
own terms of service, So even if it weren't illegal,
it would be against the company's own policy. And yet,
according to this leaked document, this is what was happening.
The balance sheet showed the Alimator Research had a lot
of assets in f t t that's that exchange coin

(30:59):
that's used by f t X. Now by itself, that's
not immediately a problem necessarily, but it brings up some
red flags because if your investment firms assets are made
up mostly of a cryptocurrency that you also happen to
have invented, it begins to sound a little bit like

(31:19):
you're printing up your own money and you're trying to
live like Emperor Norton of San Francisco. If you don't
know who Emperor Norton was, look him up. Because it's
a crazy story that's genuinely entertaining. There's some tragedy there there,
but it's it's got a lot of quirky fun stuff
in it. You should look that up anyway. The biggest

(31:41):
asset held by Alameda Research was a whopping three point
six six billion dollars worth of quote unquote unlocked f
t T. Third place, the third biggest asset was another
two point one six billion dollars of f t T collateral.
And then much further down you had another two million

(32:03):
dollars of locked f t T. And this got a
lot of folks saying, huh, it kind of looks like
you're robbing Peter to pay Paul that Alimator Research. This,
this quantitative investment firm, was leaning heavily on the funds
within f t X, a cryptocurrency exchange, in order to

(32:25):
pay for investments. Now, if this balance sheet had not
been leaked, and f t X customers remained unaware that
their money was being used to fuel Alimator Research, maybe
everything would have remained more or less stable, or at
least not obviously unstable. Maybe f t X would still
be operating just fine today. But Coin Desks report changed

(32:50):
all of that. For one thing, it showed that Alimated
Research had billions of dollars of debt. So that is
a big risk if this organization is in debt to
the tune of around eight billion dollars, and if it's
dependent upon funds from a totally different company, that other
company as at risk too. So a few days later,

(33:14):
on November six, Binances CEO ol c z Chong peng
Zhao said his company would liquidate their FTT holdings. Now
do you remember those because Binance was an early investor
into f t X. Then fd X paid off Binances

(33:34):
investment with twenty three million f t T s. Well,
now Binance was saying, yeah, we're gonna cash those out.
We would like to cash out our ft T holdings
for you know some other form of currency. Well, if
you flood a market with any asset, you typically see
that assets value drop. Right in the example I gave

(33:57):
early on, if you were to buy a bunch of
cheap apples and you were going across town and selling
your cheap apples at a profit, eventually you had flood
the market on the other side of town with apples,
and they wouldn't be valuable anymore, right they would, they
would the prices would be closer to evening out. So
you flood the market, the value drops. Well, finance dropping

(34:19):
all of its f t T was about to flood
the exchange with f t T tokens. So then you
had all these other people who owned f t T
tokens and they said, well, I don't want to be
left holding the bag. I don't want my f t
T tokens to be valueless. I'm going to cash out too. Well, now,
f t X was in a bind because it had
been apparently funneling money over to Alimta Research, and it

(34:43):
didn't have enough cash to cover all the requests as
people were trying to cash out. It was a liquidity crisis,
and f t X didn't have enough to cover all
of these requests. So the company ends up being in
serious trouble. Like if people here, hey, there's not enough
money in the bank to cover everyone, then there's often

(35:05):
a run on the bank. That's exactly what happened. There
was a run on the bank, except in this case,
the bank is a cryptocurrency exchange. Now, before I explain
what happened next, I need to talk a little bit
about CZ and his ongoing feud with SBF. Yes, it's
the War of the initials. Now, as we learned, CZ's
company was one of the earliest investors in SPFS company.

(35:28):
So what the heck happened to turn these two collaborators
into bitter rivals. Well, no one has really documented the
whole thing, but my guess is one really big reason
comes down to the concept of government regulation. See, governments
around the world have been debating on how or if
to regulate the crypto market, and of course, the crypto

(35:50):
market was set up in a large part as a
way to sidestep stuff like government regulation. SPF testified before
US Congress about do and even worked with them to
sort of draft recommendations for regulations that would end up
affecting the crypto industry, and c Z just wasn't having

(36:10):
any of that. C Z definitely does not want regulation
entering into the conversation at all. It's a four letter
word in his mind. Now, you could argue that SBF
saw that regulations are on the horizon and that by
becoming part of the conversation he could help draft regulations
that would have a relatively light touch on the crypto market,

(36:33):
so he could kind of steer the government's approach to crypto.
But his involvement in even talking about regulations made him
persona non grata to folks like c Z who just
don't want to even entertain the thought of it, whether
it's you know, somewhat favorable to crypto or not. Now,
did c Z see an opportunity to go for SPF's

(36:57):
jugular by selling off to any three million f T
T tokens and tanking and overextended cryptocurrency exchange? Moreover, it's
a cryptocurrency exchange that is second only to his own, right,
It's it's one that's run by a guy who's working
to draft crypto regulations with the US government. So you

(37:19):
could say that c Z has a whole bunch of
access to grind against s BF. Like, you've got the
number two cryptocurrency exchange out there, so it's the biggest competitor.
You've got this whole potential regulations thing looming on the horizon. Uh,
you know, all these sort of ideas. But according to
c Z, none of that even factored into his decision.

(37:42):
He said that Finance was divesting itself of f T
T tokens because of quote unquote recent revelations, which he
did not elaborate upon, but folks took it to mean
that balance sheet stuff that leaked on coin desk. Now,
I get the feeling some of this decision may have
in fact been personal and not just business. But again,

(38:04):
that's just my opinion. I don't have anything to back
that up apart from you know, various tweet streams that
came out, so you can't really call that evidence. It's
just the feeling I get. Anyway, whatever the motivation was,
finances move of selling off this f t t directly

(38:24):
led to a financial crisis for f t X, the
cryptocurrency exchange. And then two days later, because I told
you this stuff moved so fast, c Z and Finance
announced an intent to acquire f t X. So now
the number one cryptocurrency exchange says it's gonna buy the
number two cryptocurrency exchange because the number two one is

(38:48):
in trouble. The following day, so at this point we're
at November nine, c Z says, yeah, no thanks, I'm
good and backed away from the deal. And that was,
you know, legally fined because the two entities had not
entered into any sort of binding agreement. So Binance said

(39:10):
it was going to acquire fd X and the next
day said you know what, no, we're not, and they
walked away and things got even uglier at f t X,
and some wonder if that was in fact the point,
like if Finance ever actually intended to acquire f t X,
And I don't know the answer to that either. So
f t X halted withdrawals on November ten, so people

(39:33):
could not take their money out of f t X
starting November ten. They also stopped accepting new clients so
they wouldn't let anyone else get a get an account
with the exchange, and SPF indicated he was seeking alternative
saviors now that Binance had bailed out of the bailout,
so SPF needed more than nine billion dollars to stop

(39:55):
f t X from collapsing, along with Alimta Research. He
did not get his nine billion dollars. He reached out
to coin base CEO Brian Armstrong among others, and no
lifelines were thrown. So on November eleven, which was last Friday,
f t X entered into Chapter eleven bankruptcy proceedings here

(40:18):
in the United States. SBF also stepped down as CEO.
He was replaced by do you know what? You just
can't make this stuff up? He was replaced by John
Jay Ray the third This guy was the lawyer who
was brought in to oversee the liquidation of the Enron
Corporation in the wake of that company's scandalous self destruction.

(40:43):
So if I ever do a podcast series about businesses,
going to put kind of like business on the BRAINK
if I ever did that again, I could spend a
full season just covering what happened at Enron. Anyway, I
just think it's safe to say that John J. Ray
the third is an expert at dismantling companies that have
collapsed in on themselves. But wait, it gets worse. So

(41:06):
on November twelve, Reuters issued a report saying that f
t X was missing money, a lot of money. So
we're talking about around a billion dollars of customer funds
missing from ft X, maybe as much as two billion,
with certainly prompts a question, which is, where the hell
is my money? I'm assuming people who had accounts were

(41:29):
saying that I don't have an account with them, so
but I could just that's what I would be saying
if I did, I'll move. On that same day, f
t X moved customer funds into offline wallets a k
A cold storage, meaning that there's no way for customers
to access those funds. They are disconnected from the exchange,
but it also means that nothing else happening at the

(41:52):
exchange can pull money from those digital wallets. And ft
X then announced that there had been a string of
quote unquote unauthorized transactions and that these had drained fd
X funds. You might wonder, well, how much money was taken,
and that depends upon whom you believe. On the low end,
we're looking at around four hundred seventy three million dollars

(42:13):
that were drained or stolen. It could be as much
as six hundred fifty million or maybe even more. That's
a huge range right at. F t X definitely did
not need this on top of everything else. It really
is kind of like beating a dead horse, and it
might even be worse because one fd X admin allegedly

(42:33):
posted to the company's Telegram accounts saying quote f t
X has been hacked. All funds seem to be gone
end quote yikes. Immediately there were folks online speculating that
perhaps someone within f t X, maybe SPF or one
of the ten people that cohabitate with him in the Bahamas,

(42:56):
had done this, had siphoned off the cash and they
were trying to make a quick getaway, but there have
been no reports to suggest that's actually what is going on.
Investigations are ramping up. In fact, a few investigations began
before f t X even announced the theft. For example,
so you have the Royal Bahamas Police Force. That's one
entity engaged in investigating ft X. You might wonder, well,

(43:19):
why the Royal Bahamas Police Force, And again it's because
last year ft X relocated it's HQ to the Bahamas UM.
These crypto exchanges frequently choose offshore locations to avoid stuff
like those pesky government regulations we keep mentioning. Anyway, the
Bahamas Police have stated that they're looking into f t
X for any signs of criminal activity in the wake

(43:41):
of this collapse. Then the Wall Street Journal reports that
the US Department of Justice, as well as the US
Securities Exchange Commission or SEC, are also investigating f t X.
And in fact, these investigations started before we learned about
the theft. Okay, so investigations are ramping up. We'll probably

(44:04):
learn more about what was going on and potentially who
was responsible. But let's also talk about some of the
other effects this fallout has had beyond f t X
going into bankruptcy. So just a few months ago, SBF,
the co founder, had a personal worth of around twenty
six billion dollars billion with a b billionaire. Now, at

(44:27):
the beginning of the f t X debacle, that value
had plunged by more than nine billion dollars. To lose
nine billion dollars instantly is that's got to be a
heck of a thing. But obviously things just kept getting worse.
So toward the middle of last week, SBF was said
to have lost ninety four percent of his wealth. Now,

(44:48):
remember he had seventy ownership of his companies of f
t X and Alimated Research, so a lot of his
wealth was actually tied up into the value of those companies.
It's not like he had a Scrooge McDuck style vault
filled with cash. So with those companies imploding, his wealth
went up in smoke. And this is where we remember

(45:09):
that wealth and money are two different things. I'm not
sure how SPF is doing now, but on paper, he
essentially went from being a billionaire to being broke in
just a couple of weeks. I don't know if I
could manage that, but I'm willing to give it a try.
Someone just has to give me a few billion dollars first,

(45:31):
any takers. And yeah, I'm being a little flippant, but
we should also remember SPF Diden genuinely want to help others,
or at least he said he did. So let's talk
about some of the companies that f t X moved
to bail out before ft X had its own crisis.
There was Block five, which has recently announced it has
ceased business as normal. It has cited a lack of

(45:53):
clarity regarding the situation at f t X as the
reason to put a freeze on withdrawals. In addition, the
company had wise customers not to put more money into
their digital wallets connected to the company's accounts, So that's
a big old ouch. Voyager Digital, the company that f
t X purchased at auction, is looking for a new
buyer to bail out the bankrupt broker and lending company.

(46:16):
So the life preserver that f t X through to
Voyager Digital has transformed into an anchor, so they're back
at square one. The cryptocurrency called Solana is in free
fall at the moment. Salona has connections to SPF, as
it is the native token to the Salona blockchain, which
in turn has ties to another SPF project called Serum.

(46:39):
So arguably because of SPF's association, Serum is in trouble
and so Lana's value is plummeting by association. The Miami
Heat Arena has now removed the f t X arena
name and said it will search for a new name
sponsor that we're still seventeen and a half years left
on the previous deal, but the arena had only received
a small amount of the hundred thirty five million bucks

(47:02):
that were said to be part of that deal, so
they're done now. Uh. The F one racing team owned
by Mercedes that f t X had sponsored, has similarly
removed at the ft X logo from their vehicles. Last week,
f t X is philanthropic organization, the f t X
Foundation and it's f t X Future Fund projects saw

(47:22):
a mass resignation as the entire staff quit due to
having quote fundamental questions about the legitimacy and integrity of
the business operations that we're funding. The f t X
Foundation and the future fund end quote. The organization had
previously committed to awarding more than a hundred fifty million
dollars in grants. And you know, it's rare that I

(47:44):
do this these days, because I don't tend to have
episodes last quite this long. But we're gonna take one
more break, and I'm going to talk a bit about
some of the other lasting effects that f t x
is destruction has had and will continue to have on
the crypto world. But first, let's take one more break. Okay,

(48:13):
thanks for sticking around. We are in the home stretch.
But man, just the the implications of this are so huge,
and so many different companies and organizations have been affected.
You know, we've already talked about the companies that f
t X was trying to bail out and how now
they're in as bad or if not worse place than
they were before that happened. H f t X, obviously

(48:37):
an alimated research, are both totally crumbling. SPF is on
the bricks. He's been kicked out or really he resigned
after saying that he uh done messed up, but he
used more colorful metaphors in his language. But the fallout
has also raised concerns that these crypto exchanges lack proper governance.

(49:00):
So the concern is that they're being run by people
who might be engineers, they might be investors, but they
aren't people who necessarily have a deep amount of experience
when it comes to running giant financial companies. And when
they're on the small scale, it might be manageable, but
as they get bigger and bigger, that becomes more difficult

(49:22):
to do. And typically these giant financial institutions have a
board of directors that pulls from a really diverse group. Uh,
maybe not racially diverse, as it turns out the finance
world is overwhelmingly staffed with white men, but it would
be a diverse from different areas of expertise, so that

(49:45):
you would have people who could guide an organization so
that it doesn't find itself in real trouble. But again,
like cryptocurrency, one of the big things that attracts people
to it is that it kind of has this bootstrapped,
almost techno anarchist approach to finance. It's certainly and evangelicized

(50:10):
as being decentralized. I would argue, effectively, it is not decentralized.
It's just kind of surface level decentralized, But effectively you
get a core of very powerful entities that control everything,
and so it still becomes centralized. It's just centralized in
a different way than you would find in traditional financial institutions. Anyway,

(50:33):
there's a real lack of governance for a lot of
these organizations, so when things go wrong, there's not really
anyone there who has the experience to kind of right
the course before things just escalate into an uncontrollable situation.
Allah F t X, and this has led to renewed
calls for regulating the industry. My guess is that any

(50:56):
regulations we actually see pasted to handle cryptocurrency and crypto
markets are not going to be the light touch approach
that SPF was advocating for. Like SPF wrote a a
white paper that was essentially crypto regulations for Dummies. In fact,

(51:18):
it was titled something similar to that. And you know,
his idea was that these are going to happen one
way or the other, so it's best if our voice
is represented during the formulation of these regulations so that
they don't kill the industry, because there's a legit fear
that could happen. Um And so now with this spectacular

(51:41):
implosion of FTX, along with SBF being revealed to perhaps
have been engaged in some uh at least questionable and
potentially illegal activities as far as Alimator Research and f
t X are concerned, that really means that I think
a lot of people who otherwise would have been receptive
to his ideas are now going to say no, no,

(52:04):
he's he was protecting himself, right. These regulations were meant
to allow him to continue to operate in a way
where he would benefit most, and so we can't trust it,
so we have to make much much more restrictive regulations. Which, Hey,
c Z, if in fact any of your motivations tied

(52:25):
back to a resentment about SBF arguing for regulation, I
got some bad news for you, Bud. Things are gonna
be way worse now than they would have been. If
in fact, Finance's decision to pull out was just business
and there was nothing personal about it. If in fact
what c Z said was true that Finance got out
because they saw this balance sheet or you know, quote

(52:48):
unquote recent revelations and realized that their their investment was
unwise and that's why they sold it off, well you
could argue that that move acipitated into this escalating effect
that has affected the entire cryptocurrency industry, including finance itself

(53:09):
and the value of their assets that it may be
viewed as a very self destructive business move in the
long run. Not that I think SPF and f t
X should have just kept getting away with allegedly misusing
customer funds either. I don't think that. But again, there
are no good guys in this story, y'all. It's all
a bunch of supervillains. Speaking of cz, he has also

(53:31):
gone on to throw shade at another cryptocurrency exchange called
Crypto dot Com. Crypto dot com got pulled into the
spotlight when it when it accidentally transferred around three hundred
sixty million dollars worth of cryptocurrency that belonged to Crypto

(53:53):
customers off of its own exchange and onto another external
public exchange. So what they intended to do was transfer
those funds into cold storage, in other words, into offline
digital wallets, which already was kind of like it raises

(54:15):
your bread flags again, like why are you moving money
off of your exchange and into cold storage where people
can't access it? Why are you doing that? Or are
you doing it in a way so that you can
protect it because you expect some form of intrusion attack
on your exchange, and this way the money is protected

(54:37):
from hackers trying to get access to those funds, whatever
it may be. It starts to raise concerns and uh,
you know crypto dot Com had accidentally moved these funds
onto a totally different exchange. Then they wrote to the
exchange and essentially said, uh, my bad, would you mind
handing that three hundred and sixty million dollars worth of

(54:59):
assets back to us please? Which is nice because you
know that exchange actually did do that. They returned the money,
but it was beyond embarrassing. I mean, you're talking about
more than a quarter of a billion dollars accidentally sent
to the wrong place. That is not the kind of
story you want to tell when you're desperately attempting to

(55:20):
reassure people that crypto is not a huge risk. Anyway,
c Z appeared to allude to Crypto dot Com and
said that if an exchange is moving large amounts quote
before or after they demonstrate their wallet addresses, it is
a clear sign of problems end quote. Now this also

(55:41):
ties into the pressure that a lot of these exchanges
are now feeling as governments and as customers are demanding
that the exchanges prove they have the liquidity, they have
the cash on hand to cover all the assets on
the change. So if you think of it like a bank,

(56:02):
you want proof that the bank has a dollar for
every dollar that clients have put into an account, so
that if people wanted to pull their money out of
the bank and everyone did it at the same time,
the bank would actually be able to cover that. That's
what people want exchanges to prove, and because of the
lack of governance, that's really hard to do. At least

(56:25):
it's really hard to do in a way that will
seem legit right, Like there's a real worry that someone
might just print out a piece of paper say yes,
we have all the moneys and not actually have to
prove that they in fact have all the moneys. So
fd X did not have this right that that company
had funneled its assets to alimator research, at least allegedly.

(56:49):
And people want to know if they decide they want
to withdraw their money that the exchange is actually going
to have the money to pay them. That's what it
really boils down to, and it's it's a real crisis
for cryptocurrency exchanges right now that have been operating fast
and loose for a few years. Now. Some analysts are
even warning that Binance could fall into a similar situation

(57:12):
down the line, because like f t X, Finance is
also an offshore exchange with very little governance. So there's
not a whole lot of uh confidence that finances being
run on the up and up. It might be, but
the lack of governance creates suspicion. So there's this fear

(57:35):
that Finance could be engaged in, you know, similar activities
that f t X was engaged in, and that it
could be gambling with user funds. Now, maybe that gamble
will pay off and everyone will be fine, or maybe
it could come all crashing down, which would be a real,
super hard blow to the crypto industry as a whole.

(57:56):
So we've seen crypto take a hit in vow you
with ft X as fall. I'll talk about that again
in the second. So if Finance, the number one cryptocurrency exchange,
went down, it would be true chaos, and that's what
a lot of people are worried about. Now. Maybe Finance
isn't gambling at all. Maybe these suspicions that some analysts

(58:19):
have are completely misguided. You know, maybe it's totally fine,
it's just impossible to say because it's offshore exchange that
has very little governance and there's no transparency. So with
that comes this suspicion that cannot be allayed. Right unless

(58:39):
you change the operation of the organization, people are just
going to continue to be suspicious. Now, maybe nothing goes
wrong and everything's fine, or maybe someone goes really wrong
and nothing's fine. Uh. I don't know how legit those
suspicions are, Like, I don't know how well founded they are,
because I would need to look much more deeply into

(59:01):
Finance to give my opinion. Maybe I'll do a full
episode on Finance Leader and kind of say what at
least the experts are thinking, because obviously this is above
my pay grade. But I will say cz the CEO
of Finance strikes me as a little bit of a bully. Um.
That doesn't necessarily mean that the organization is rotten or

(59:24):
anything like that. Uh, it just it doesn't help the
case because sees these very good at getting people's hackles up,
and that I think feeds into this suspicion. Finally, let's
talk about f t x is collapse and it's broader
impact on crypto in general. So in one week, the

(59:45):
market cap for crypto fell around twenty as f t
X smoldered and then collapsed and just became a burning
trash fire. So again, if finance sold off its f
t T stock as a business decision, like it was
solely for business, and they thought ft T is not safe.

(01:00:08):
H f t X is in trouble. We want to
get out of this before it goes bad. This is
just business, there's nothing personal about it. Well, that decision
did precipitate a series of events that saw binances overall
investments decrease in value by about a fifth. So again,
if it's a business decision, it's a business decision that

(01:00:29):
costs them a huge amount of wealth um. And maybe
it was just purely a business decision. Maybe it in
fact was the best out of a bunch of bad
possible choices. Again, it's hard for me to say. I
will say that f t X and its collapse and
that drop, it's pretty much in line with what we

(01:00:49):
saw with Mountain Cox years ago. Now, mount Gox was
the number one cryptocurrency exchange when it went under, and
that ended up being a thirty percent drop in the
crypto market. The crypto market in general was way way
smaller than what it is today, but yeah, it was
the number one dropped in value. Now the number two

(01:01:10):
goes down, we see a twenty value drop. It's rough.
I don't know what's on the horizon for crypto. I
don't know if and when it will have a turnaround.
I suspect there will be a turnaround at some point.
Not every cryptocurrency is gonna make it. I don't think.
I think some other cryptocurrencies are going to completely fold

(01:01:30):
before we see the end of this year, maybe definitely
before we get too far into next year. But I
don't know that they're all going to go away. And certainly,
Bitcoin has had periods where its value has dropped significantly
only for it to return to being even stronger than
it was before, so it's entirely possible it will be

(01:01:54):
able to do that again. But as events like this
happen and people begin who lose confidence in the crypto
market overall, um, it's bad news for everyone in the
crypto game, because, as some people have put it, the
real value in crypto comes in people's belief in crypto,

(01:02:15):
and if people stop believing in crypto, then it stops
having value because there's nothing else to back up the
value of the cryptocurrency except people's belief that it has value. Uh.
It strikes me kind of as similar to the way
Terry Pratchett treated gods in his Discworld series. The gods

(01:02:37):
of Discworld have a presence and power that is equal
to the amount of belief that is placed in those gods.
So as as people stop believing in God's those gods
become less and less powerful until they're barely there at all.
The same thing could be said about cryptocurrencies, because there's

(01:02:59):
nothing else underneath them. Two dampen the effect of people
losing confidence in the currency. So we'll have to see
how or if the cryptocurrency market in general recovers from
the f t X scandal. I'm sure we're still really
in the early stages of those consequences. I mean, like

(01:03:21):
I said, most of the stuff I talked about in
this episode happened over the last two weeks. Who knows
what's going to happen in the next two weeks. Besides
Thanksgiving America. Thanksgiving is going to happen in the next
two weeks, so you know, have a slice of turkey
for me if you eat turkey. If you don't, then
don't eat turkey for me. That would just be selfish
on my part. Okay, that's it for this epic long

(01:03:44):
episode of tech Stuff. I hope you enjoyed it. I
hope this has given you insight into what was going
on with f t X, with its co founder SPF,
with its arch nemesis c Z and finance and uh
the token f t T you know me. So we're
done with all that for now. I'm sure I'll have

(01:04:06):
to follow up on this story as more develops, but
I wanted to get this down while it was all
very fresh. If you have suggestions for future episodes of
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