Erik Voorhees and Cobie on Why FTX Loaned Out Customers’ Assets - Ep. 419

Transcript

Hey everyone. This has been the biggest news week in crypto, quite possibly for all of crypto history. Sympathies to everyone who has lost money or has had their funds stuck or who simply feels betrayed. I hope that all of this gets resolved for all of you very quickly. The Friday show on Unchained is typically a short interview followed by a recap of other news, but this week we have an hour-long discussion between Jordan Fish, aka Kobe, of UpOnly TV and Erik Voorhees, founder of ShapeShift. It's a fantastic discussion unpacking the FTX fiasco, how this could have happened, and what it all means. One note that there were some technical difficulties, so Kobe's portion cut out a bit and we didn't know until after we

wrapped. He was gracious enough to re-record those answers and we did our best to edit it all to be as seamless as possible. After the interview, we have a briefer than normal news recap and then a truly special fun bits, a stand-up comedy special with comedian and author Jenny Hogan, all about the FTX-Binance drama. Be sure to listen to the end for that. Just a quick note before we begin. Unchained is doing its annual survey. Head to surveymonkey.com/r/unchained2022 to tell us how you think we're doing and how we could improve, whether it's on the podcast, in the newsletter, or in our premium offering. Looking forward to hearing your thoughts. Again, the link is surveymonkey.com/r/unchained2022 and you can also check the show notes

for the link. And now on to my conversation with Kobe and Erik. Hi everyone. Welcome to Unchained, your no-hype resource for all things crypto. I'm your host Laura Shin, author of The Cryptopians. I started covering crypto 7 years ago and as a senior editor at Forbes was the first mainstream media reporter to cover cryptocurrency full-time. This is the November 11th, 2022 episode of Unchained. DeFi Saver is an all-in-one management app with unique automation options for top lending protocols such as Ave, Maker, Liquity, and Compound. Check them out on Ethereum mainnet, Arbitrum, and Optimism.

Avalanche was built to provide a robust Web3 infrastructure with flexible tools. So, you can build anything you want, any way you want. Visit avax.network to discover how you can. With the crypto.com app, you can buy, earn, and spend crypto in one place. Download and get $25 with the code Laura. Link in the description. Today's topic is the collapse of FTX. Here to discuss are Eric Voorhees, founder of ShapeShift, and Jordan Fish, aka Kobe, crypto investor and host of UpOnlyTV. Welcome, Eric and Kobe.

How's it going? Hello. So, let's just start by processing the recent news, meaning like what broke in the last several hours. To give readers some context, since events are essentially changing by the minute, we are recording at about 11:00 a.m. on Thursday. And to give a really brief recap of events this week for listeners who may have missed the blow-by-blow, which was happening kind of in real time, mostly on Twitter. This week, there was a bank run on FTX. SPF himself, Sam Bankman-Fried, the founder and CEO, said that they saw about $5 billion in withdrawals on Sunday, Sunday alone. At a certain point, it became clear they could not process all the withdrawals, which just should not happen in an exchange. That

just should not be possible. An exchange should put your coins in cold storage, keep some of them in the hot wallet, maybe for day-to-day operations, but otherwise, their job is to keep that secure. So, apparently, this is not what happened because Tuesday morning, FTX revealed that they did need to ask Binance to try to acquire them. Wednesday, we found out that the size of the hole in FTX's balance sheet was $8 billion. So, Binance ended up pulling out. They said, you know, the financials and obviously all this regulatory risk was not something, you know, that was suitable for them to acquire the company and it kind of looked like FTX was headed toward bankruptcy. Maybe still looks that way. Late Wednesday night

Justin Sun tweeted, "Further to my announcement to stand behind all Tron token holders." And he listed a few of them. "We are putting together a solution together with FTX to initiate a pathway forward." And Sam actually did reference that negotiation as well both in a internal Slack message which Kobe posted but also in some tweets that he posted. So who knows what will happen but, you know, bankruptcy probably is maybe the direction this will go. And then like I said, we're recording Thursday morning but when I woke up at least I found out that Reuters reported that Alameda got loaned some unidentified amount of money from FTX after it lost $500 million due to the Voyager bankruptcy which you

might recall was triggered by the implosion of Three Arrows Capital. So Eric and Kobe, let's just start with all that. I'm curious you know, with this Reuters piece actually. I'm curious, do you think that the Voyager bit and this loan that happened after that was the start of any kind of co-mingling or do you think that FTX and Alameda had been co-mingling funds previously? I don't have any specific knowledge on this. Co-mingling is an interesting word. I'm very curious like what was specifically happening. The most likely seems to be that a loan was made from FTX to Alameda collateralized with FTT and on the surface that looked sound until you

realize that FTT is a relatively small cap token that can go up and down drastically whereas the debt was probably denominated in dollars. And that's a really good recipe for a disaster. So that's that's I guess what unfolded this week. But I think a lot of the specifics are still to come out. We don't We don't really know. Yeah, I mean I would have been surprised if they were coming in previously, but I was surprised that they weren't solving at all. Like I thought there was a sub 1% chance that that this would be like the outcome when the rumors began.

So, maybe my opinion doesn't have that much weight but Alameda and Sam used to be the CEO of Alameda, right? Like he Alameda and SBF were kind of the same entity and like SBF and FTX are also the same entity so I imagine at some point they were they were extremely close and then maybe for regulatory reasons they tried to distance them a little bit. Sam stepped down from CEO of Alameda and was FTX only and I guess how distant did they ever really get is the question to answer.

I would not have thought in a million years that they would be like just sloshing the bucks around together and I think that is likely in the Luna to Celsius to 3AC meltdown, Alameda got really hurt and they patched it up then. It aligns with like Brett leaving FTX US and Sam Trab leaving Alameda around a similar time to that FTT transfer that Eric mentioned. But you know, like sometimes people have the confidence to do this because they've successfully done it a few times before, so they don't think about it.

They just go, "Oh, we'll just do that thing again that worked for us last time." Um and get out of the hole, so who knows. Yeah, one thing I you know, without going into names, I would just say let's let's not speculate on why people left. Let's wait for them to to make those. But I think some of them have publicly said like, you know, I didn't leave for anything related to this. I think some some people that you mentioned maybe truly had no idea actually. But anyway, one other thing though is just what you were saying about how you just never would have expected that FTX would even be in this kind of position. I am curious about that. Like there's there's a few different kind of versions of SBF out there, right? It's

like the one who, you know, is constantly testifying in Capitol Hill and, you know, just is sort of chummy with the regulators and um you know, it just like you would imagine someone like that it let's put it this way. If you're actually doing something shady, you're probably not going to want to get too close to people like that is maybe a way to put it. That's That's an interesting assumption. Yeah, actually right when I said it, I I just realized because of course people have been tweeting at me that he was like trying to buy himself protection. But then, you know, there's this other side of SBF that everybody has been pointing out in recent weeks, which is this is just a real conflict of interest. There were a number of situations where FTX or Alameda

participated in deals with um projects that were launching and got coins on the cheap and then the exchange might open, you know, I guess it was perpetuals or something on these like you know, coins that really had no volume and then people suspected that Alameda was was trading on that and making money on on these coins that they got cheaply. Um basically dumping on retail is essentially what a lot of people implied. I looked at a number of these things. It It's one of those things where like it's hard to prove, right? But there were a lot of insinuations, a lot of Yeah, I I think that also distracts a little bit from like the really egregious behavior here.

So, pri- private parties trying to get good deals and make a profit on the deals with their own property is is one thing and I'm not so concerned about like a conflict of interest between those two firms. There clearly was cuz they were owned by the same people to a large degree. The problem here is lending out customer money without telling the customers. And then going a step further and acting as though you're not and and um dismissing others in the industry for doing the same thing that was being done at that moment.

That's that's the egregious behavior here. It is appalling that Sam would be speaking to regulators about like counterparty risk and the safety of customer deposits while at the same time being insolvent with his own customers. That that's like um sociopathic behavior. And and is just downright fraud. Yeah. Yeah, I 100% agree with Eric. Like the the other stuff you mentioned, you know, like opening markets so that Alameda or other entities close to FTX like friends um can hedge these bags that they've got cheaply. They can, you know, effectively

proxy sell on perps kinds that they have locked and not supposed to sell for 4 years to take advantage of, you know, this high FDV type low float setup is maybe anti-customer or the markets are much more useful to insiders than they are to uh like retail traders. But it's just a totally different degree of thing than just stealing customer deposits and lying about stealing customer deposits. And part of the reason I'm who say this would I would have never have guessed they were insolvent is they sort of had the game rigged in their favor, right? So like they were able to do these things with these markets

that allowed them an advantage over any other market participant such that they should just be printing so much money all of the time. Like they had the exchange, they owned the venue. They had all the data for people's positions on the venue. They had markets that they wanted to hedge their own positions like were off venue. And somehow they still managed to lose $10 billion. Like it doesn't make sense. They must have been the worst traders of all time. Um so that's why I was so shocked. If you have a exchange that prints eight to nine figures of fees per day, you raise $2 billion, like there's a $10 billion hole, but it

means they must have lost like $14 billion or something in the last year. So that that's why I would never have expected it, I think. A mixture of it is just a an it's a a different degree or a different magnitude of fraud to the behavior that could have been seen as like, you know, a bit sharky and maybe not ethical, but, you know, um welcome to crypto. And then literally just like lying and being so incompetent that despite all your advantages, you still managed to like lose 10 yards. It makes no sense. Yeah, and let's talk about that first bit where when I said that he was kind of the face of crypto to regulators and people like like I tweeted that um

it's like the person that you thought was Hermione ended up being Voldemort. And to my mind, Hermione's like the goody-two-shoes, you know, kind of like kissing up to the teachers and whatever. And so in that that's why I said SPF appeared like that. But I was curious, you know, what your take was on what he was doing with regulators if he was actually, you know, doing what it looks like he was doing. It's clear that he doesn't come from the same ethos as many in the crypto world who believe that what we're doing is is antithetical to you know, federal regulations and and they have all sorts of um philosophical, economic, moral reasons for that.

He was not of that cloth. He was and he and he didn't, you know, lie about that. He He was very pro regulation or as people like to euphemistically say, you know, pro regulatory clarity. And he was willing to sit in Washington and invite down these regulations, you know, with a smile on his face and and um putting forward that the industry supports it because he has this huge exchange. He's very well known, millions of customers. And so he can say like, yes, the industry will support this. The regulators want that because then it to them it feels like they're doing good.

And they get a bunch of his donation money. And um in in return he gets to help craft that legislation. And what was really worrying a couple weeks ago when I had that debate with him was how how readily he was going to sacrifice uh DeFi essentially, sacrifice decentralized finance such that the centralized financial regulations would be more in his favor. That was super concerning and I think that's why the community was so outraged with what he was saying there.

But no one no one at that point thought he was also committing like a multi-billion dollar fraud. Um so that's that's new and surprising. Yeah, it it's just it's just a such an order of magnitude different. Like I can even understand someone being like having different regulatory opinions and like fighting for the things that they believe are best but I just end up speculating and going to conspiracy theory when I think about these things now like, you know, his parents are from like a deeply political elite background. They're both like lawyers.

Apparently his mom's friends with Elizabeth Warren and stuff. And I wonder how much of this egregious fraud that was happening influences what you do in those in those venues. Like do you fight for what you really believe in if you know you have this hole and you have this thing coming up? Or do you cozy up to regulators a little bit more? There's this video of him in Congress testifying about um the financial crisis and how there was this opaque debt that was being, you know, borrowed against and repackaged and borrowed against and all these, you know, this this daisy chain of debt and how that kind of happen on um on FTX that like a you know, it is impossible is

like transparent in crypto blah blah blah blah blah. And at the same time he's doing the exact same thing that he described in Congress as like being bad and then not possible with um crypto. And ironically is possible with FTX a centralized exchange that acts somewhat like a bank but is not possible with DeFi, this thing that I guess allegedly um I still don't know the details but allegedly he was uh arguing um to to regulate more strictly and uh and stuff but again, a rumor and conjecture.

Um So yeah I I don't know, man. I just wonder how much the fraud influences what you do in those venues and how you behave with um uh regulators and stuff. I I I don't know. I mean, if if crypto prices had had rallied over the last 6 months, this would this wouldn't have happened. Right? Like, this would have been covered up and the solvency would have regained itself and it could have been worked out. But of course to run a company of that size and to be holding billions of dollars of customer money, that can never be your assumption. You have to assume quite the opposite.

And if you wanted to be loaning out customer funds like, just tell the customers you're doing it, you know, and give them some of the yield. Tell them what you're doing. That's all it requires. The fraud isn't doing it without telling them. And then the double fraud is in doing it and then saying you're doing the exact opposite. Yeah, some of the um the you know, stuff he was saying uh you know, in his now-deleted tweets were, "FTX is fine. Assets are fine. FTX has enough to cover all client holdings." And it you know, it's so interesting to me, like if you ever deal with little kids, like trying to explain to them how important it is to not lie.

And then like as an adult, so you like all you guys are saying is like if he had been transparent, you know, if he hadn't lied, it's really the lie that is actually what is the crime here, which you know, it's it's interesting. Um and I actually this goes back to the Theranos comment, cuz I also followed that very closely, and just in all the stuff that I learned about what she was doing, it's interesting, I know this kind of maybe sound crazy, but I don't know if you guys remember, her her voice is fake. Like it's it's a normal like she has a normal voice, but she like fake made it deeper, and you know, people who knew her before said like, "Yeah, it didn't used to be like that."

And some employees were like, "Oh, like at the company party, she sort of fell out of her voice and we heard her real voice and stuff like that." And for some for it's like for such a little lie, like like that's when you cross the line. It's just like at any moment that you're going to like when you're willing to lie, then it's like, you know, then the lies like you can't ever just do one lie because you essentially have to keep creating stories around the lie and just keep going. And it almost feels like maybe, you know, obviously we don't know all the facts here, but it seems like maybe something like that happened. Um but even when Eric was like, "Oh, they could have potentially uh traded out of this or whatever if the price of the coins had had gone up." You

know, it's like just what you were saying, like no, you when you have that moment where you're like, "Okay, one of my entities is in trouble." You know, you know that you are not supposed to touch the funds of your customers in the other entity, but he crossed that line. And it's like from that moment forward, like you know, it it then then all the other lies just go from that one, you know? And I And yeah, like Kobe, I feel like you mentioned this earlier, like he could have very well been like one company maybe won't be successful, the other one like is going to be a great company. I can make money off the trades, whatever. And you know, who knows? Maybe he was like if they're both successful, I can give away more to all the, you know, people

that deserve my effective altruism, but Yeah, what what I I just don't understand is how you can have this exchange which is worth 40 odd billion dollars and prints eight figures, nine figures in fees per day and yet risk all of that in order to bail out the failing hedge fund, right? Like you have a hedge fund that you're also co-founder of and is maybe contributes more to your net worth than the exchange does even.

But it's failing. It's not doing well, whereas FTX is doing well. FTX is succeeding. But you risk the the thing that's winning in order to like prop up the thing that is clearly not able to like perform in the market if it needs, you know, this bailout. I just don't I can't see a world where a person decides to do that and says, well in order to save half of my net worth, I guess, I will risk everything. I will risk customer funds. I will risk the successful business, investor relationship, everything in order to prop up a failing hedge fund. I I can't imagine.

I just can't imagine how you end up in that place. Yeah, Eric, since you have experience with exchanges, I was kind of curious for your take on all on all this. You know, I don't know if you saw Jesse Powell tweeted he had a It was such a great thread, but I'm just going to quote one of them. He said, "Red flags, acting like you know everything after showing up to the battle 8 years late. Nine figures buying political favor. Being over eager to please Do you see? Huge ego purchases like nine-figure sports deals. Being a media darling seeking out puff pieces." Which by the way, I I don't know if you guys saw the Sequoia thing. I mean, I know they're they're they invested in him, but it was

just I was like, "Oh, boy. This is embarrassing." Um EA virtue signaling. And then the last one was of course FTT. Yeah, I was curious for your your thoughts as an exchange owner or previous. I mean, it's hard to not be super pissed. And what I'm pissed about is So like with with ShapeShift, when we created it, it was in the wake of Mt. Gox collapsing, which like almost took down the industry. They were 80 or 90% of the entire exchange market. And we were so dismayed because like it had been years of work trying to get Bitcoin credible, trying to get people to take it seriously. And then the most important exchange through some combination of incompetence

or actually insider stealing money $500 is is lost. And that was that was so much money back then. And we built ShapeShift to not ever hold customer funds. We weren't like, "Oh, you know what the problem is? Um Mark Karpelès isn't trustworthy. We are. So we will take all the all the deposits of customers." That's a recipe for just repeating the same mistakes. And so we built ShapeShift to protect customers by not holding the money at all. And and this is this is like the magic of crypto that you can do that.

You you can never have a non-custodial exchange system in the fiat world. They can't exist. And crypto blockchains come along, suddenly you can build these amazing tools that systematically remove risk from finance, systematically. And then we we at ShapeShift get nothing but hell from regulators. Get nothing but hell from the Wall Street Journal. Get nothing but hell from like the financial establishment that doesn't like us because we actually provided privacy to users. And we actually protected them systematically.

And then FTX comes along, donates millions of dollars to the politicians, and is like this darling in DC, where he then goes and is invited to like speak and craft regulation. And the corruption of all of that is so so blatant. And And my hope for this for this example and tragedy, as bad as it is is is like wake up to what crypto can actually do. Wake up to how DeFi works, where you you simply remove the need for trust. Like we don't need a licensing regime, cuz that's just meant to like improve trust. We've we've removed the need for trust. This is a huge breakthrough for humanity.

And the politicians, the regulators, do not appreciate this at all, and they continue to vilify it wherever they can. It was disgusting to see Sam inviting that down on DeFi, and then to see to see what he did with this customer money is so ironic and tragic, and I hope it wakes some people up. Yeah, I actually want to ask you two follow-up questions to that. The first one is about I mean, you kind of referenced the Wall Street Journal piece that ran that implied that um you know, I don't remember all the details. It was like maybe like terrorists are using ShapeShift, or people were like money laundering using ShapeShift. I I am really curious about this because um I just feel like we see this tension so much in crypto in general, where um you know, I obviously like I think it's a

good thing if criminals don't use crypto to launder their money and and whatever. And yet at the same time, I totally agree with you about like customer privacy and you know, protecting their funds and not creating a honeypot and all that. So, I was just curious to hear kind of like what you think is the best way to resolve the tension between those two. I think the way you resolve it is to recognize like a first principle, which is the presumption of innocence. Customers are not criminals. Therefore, if they're not even accused of a crime, they should be permitted the decency of privacy.

I don't know why this makes me like some radical. This should be a fundamental part of American culture that if you haven't been accused of a crime, you have the right to privacy. I mean, I thought there was like an amendment, you know, like the Fourth Amendment that guaranteed that, that enshrined it. And um it's violated every single time someone goes to an exchange and has to surrender their personal identifying information just because some regulator wanted to capture it. The regulators want to make their job easier and in so doing, they are happy to violate fundamental rights of an entire population.

Yeah, I think it's, you know, what is the default cuz like at the beginning of your statement you said customers are not criminals, but sometimes they are. But absolutely. And so allege a crime and go after the criminal. If if there is a suspicion of wrongdoing, allege it. Like this is how the court system works, right? You you get some evidence and you allege that a crime happened and then when people are accused of crimes, there's a reasonable argument that some of their freedoms start getting stripped away while you figure that out. But that's like a case-by-case basis.

You You find the criminal, you go after them, you accuse them and if you have done a good job as the authority, you bring convincing evidence and you convict them. And we have such a backwards system now where the government believes that exchanges, that all financial intermediaries, for example, should be spying on everyone. Everyone and reporting all that information back to the government. When when none of those people are even being accused of a crime. That's so different and and for all the people that care about law and order, like where where is the law and order in that?

That's not That's not law and order. That That is tyranny. And um I It's just sad that it's such like an extreme position these days. And then the other thing I wanted to ask you about was when you were talking about how Sam, you know, was going to DC and being all buddy-buddy with the regulators and lawmakers. Um I was curious, you know, you only mention it in the context of the DCCPA and how that obviously was going to make DeFi not really DeFi. And um I was wondering, did you have any inkling that um he was a bad actor for crypto when it came to regulation before that time? Or or you know, either of you or or in general did the crypto community feel that way?

I didn't I didn't really know. I only got aware of his position when he posted his blog about, you know, his suggestions for regulations in the industry. And there were some big red flags in that. So, that's what I That's what I was calling out. I mean, I I Let's just say I was a little suspicious of him when I learned that he's like the second largest donor to one of the political parties. That's not good. You know like So, something was already amiss there. But um the degree to which he was causing bad things to happen was not apparent until uh until that discussion.

Yeah, I mean, I don't know I I don't know man. Like I I didn't think Sam seemed very well in the debate with you, Eric. I Like I It was so one-sided and kind of awkward to watch after a while. It seemed like, you know, he he seemed like a little bit sick or something. Um Clearly a lot of stuff going on. So, I I don't really um I don't really know. Um and I I'm certainly not an expert on the the reg stuff and I think it's extremely complicated. Um So, that's I don't really know what to say.

Have the regulators ever actually prevented an exchange from collapsing? Like, is there a single example where they came in and were like, "Hey, we discovered the fraud and we're shutting these guys down cuz we are the government, we're here to help." Has that ever happened? There was no There was no insolvency there. No, they shut down BTC-e because they didn't like where it was coming from. They called it money laundering. No, no, but actually the uh the stolen funds from Mt. Gox were laundered through BTC-e, so I think that's why it got shut down. Yeah, uh allegedly.

Allegedly. But, I mean, it's I think But, that wasn't a case that wasn't a case where they were stealing customer money and there wasn't an insolvency. So, the question is like, have have the regulators ever prevented a collapse of an exchange on insolvency grounds? I don't think there's a single example. No, but theoretically they should be able to do that. Because, you know, like like for instance, um I did So, I did get Chainalysis to send me the balance sheets of ETH on ftx.com and ftx.us and you can see that FTX was in the red on ETH. Actually, interestingly, it showed that they were in the red on ETH back in January for a short period um and then of course again just in the last few days.

But, when you look at the balance, there is a there's a big drawdown in um June. And Where were the regulators then? Too busy taking photo ops, I guess. I think you know, look I mean, the charts I have they're not interactive, so I couldn't look too closely, but um it looked like around the time that Voyager announced that they had the exposure to 3AC and I saw another chart showing that around the same time FTX and FTX.us received a huge influx of FTT.

So, um just everything that Reuters mentioned checks out when you look in that regard. But, you guys, so we're going to take a quick break to hear from the sponsors who make this show possible. DeFi Saver is an all-in-one management app for the top lending protocols on Ethereum, including Aave, Maker, Liquity, and Compound. They have dedicated protocol dashboards with options for quick leverage adjustment and self-liquidation, as well as automated liquidation protection options with stop loss, trailing stop, and automated unwinding options. They also have loan shifting tools for collateral and debt swaps, and instantly moving positions between different protocols.

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To learn more about Avalanche, visit avax.network, or follow on Twitter @Avalancheavax. Explore the platform millions are using for its speed, stability, and scalability. Avalanche, create without limits. Back to my conversation with Eric and Kobe. So, some other bits of news that broke this week are that the SEC, CFTC, and now DOJ are all investigating based on what we're talking about, you know, the deleted tweets, the actual facts that are coming out versus what he was saying.

You know, am I wrong in thinking this is likely to end in criminal charges? I don't know, but it seems like CZ did a better job investigating than any of the regulators did. Although, of course, crypto Twitter crypto Twitter was aware of the problem based on like service level blockchain forensics. And the regulators come in after the collapse. Where where is the accountability here? I know, but but did you read CZ's tweets cuz he was just as shocked as everybody else? The at least the way he told it in his tweets was that it literally was just like, "Oh, Alameda's balance sheet looks a little bit risky. Like we should, you know, get this FTT off of our balance sheet to cover our risk." And then he had no idea that all of this would end up in Sam

calling him Monday night or Tuesday being like, "Hey, the SEC, CFTC, and now DOJ are all investigating. And as we were talking about, he has these deleted tweets in which what he was saying doesn't comport with the facts that have emerged since." So, I was curious, do you guys think this will end up in criminal charges? I mean, I I hope so, right? It's like egregious fraud if it doesn't. What is the point of the system at all? At least what it was Mt. Gox, it felt like at least the what I understand of Mt.

Gox it was like a technical mistake which Mark then tried to cover up to make users whole, right? So, like a hack or like some like bad code somewhere which then Mark was not honest about. Whereas this this just seems to be like, "We stole customer deposits and then we just continually lied about it because stealing customer deposits is not good and people would use it not use our exchange anymore." So, I mean, I hope so.

Eric, before you even answer that, I was just wondering like what do you guys think of the fact that, you know, blockchains and transparency show a lot of this stuff and actually could be used to prevent these kinds of situations and yet most likely at the moment just based on everything that's happened, my sense is that regulators are going to want to do the traditional type of regulation and not go with this more technological solution and I was curious what you thought of that, too. Yeah.

It's really frustrating when the technology for complete transparency, real-time auditability is here and the regulators not even like won't adopt it, but they actively vilify it. And then aren't themselves solving any of these fraud issues. Like uh what probably happens here is years of court cases and depositors getting some tiny fraction of their money back many years from now. And like whether whether Sam goes to jail or not, I don't really care. Like what I care is people learning the lesson to to stop using custodians, to stop using like centralized financial services

where this kind of thing can happen and has happened over and over and over again. The solution is like right in front of us. These decentralized protocols solve these very problems. We don't have to care about people's intentions. You don't have to care about human mistakes in the moment. Like we have to care about code mistakes, but that can be viewed and and audited and fixed. And there's just such hesitancy for people to like step into the actual promise of crypto because they're comfortable in these little walled gardens um especially when they say that they're you know, the safe regulated way to buy and sell Bitcoin.

Um which was which I think was literally FTX's slogan for all of their advertising. It It reminds me of like that underwater fish with the little light. Like the light of regulation. The deep sea fish and then everyone's like, "Ooh, they're safe and regulated." And they go toward it. And um it's uh it's just kind of tragic. Hopefully people learn. What do you think of the fact that the FTX US and in general, you know, like any of these US entities don't have these problems because there are such strict regulations in the US like They also don't have the customers. It doesn't vindicate anything. I mean, the the reason that nine out of 10 FTX customers are in the offshore one is

because the US regulatory burden is so high that no one actually wants to use the US version. Right? Is that true that nine out of 10 of like US FTX users I made that I made that number up, but I know that the international one I'll I'll disclaim that I made that stat up. The number of international customers and the volume of FTX international was dwarfing US, right? So um same same thing with Binance, right? There's a Binance US. How does that compare in terms of volumes to the the real Binance? It's it's almost insignificant. The reason customers go elsewhere is because they prefer those services cuz they're not burdened with all the garbage that the US regulatory system puts down.

Where's the accountability for that damage done by the regulators? And then how do you account for the success of Coinbase, which obviously is, you know, mainly US and has what, more than 100 million customers or something? Coinbase is the exception that proves the rule. And they've done a very good job over a very long period of time and they've you know, they've worked tooth and nail over a decade to to gain that customer base. And I know it's frustrating to them that so many customers leave to other jurisdictions. I remember back when like all the ICOs were going on and Coinbase felt they needed to be too conservative to list a lot of the assets. And so Binance would list everything and the customers all went went out there because people wanted to trade these things.

So Coin- Coinbase has done an amazing job given the constraints of the regulatory system in the US. But they're at a constant disadvantage. Let's also now talk about this little news bit which broke uh shortly before we started recording, which is that Tether has frozen $46 million of USDT held by FTX following a request from law enforcement. What you guys make of that? And oh, and people were saying that it looked like FTX might have been doing something with a curve pool to try to break the USDC peg or something. I'm not sure. Yeah, my my hope is that like Circle or or Tether would freeze these accounts based on their own judgment.

Like they they see these flows better than anyone, and if they see a big blowup, they have at their discretion the ability to freeze these things. You know, I hope they're not waiting around for some um law enforcement to suggest it, cuz that could come way too late. But again, it's a good reminder that these centralized stablecoins are um not permissionless. So, everyone that uses them needs to know that. Um one other thing that we have uh referenced a few times is the existence of FTT itself, and I was curious what you thought of exchange coins.

You might have seen there was like a little um dustup with, you know, Alex Gladstein saying that this sort of proves like, you know, Bitcoin versus all the other coins, blah blah blah, and then other people are fighting back saying like, "No, it's just about you shouldn't kind of have these exchange coins." Yeah, do you do you feel that this vindicates that Bitcoiner notion that when people kind of create this funny money and it's like a little bit more centralized that it leads to these shenanigans, and really it just shows the power of Bitcoin or what's your take on it?

The maxis trying to make this into like a Bitcoin versus crypto thing is kind of gross. This isn't a Bitcoin versus crypto thing. This is a custodian versus non-custodian thing. This is a trust versus trustless system thing. This is a centralized versus decentralized thing. There's nothing wrong with an exchange making its own token. Absolutely nothing wrong with it. As long as they're being honest about what it is, how it works, all that kind of thing, there's nothing wrong with it. Um and even though FTT now has a huge black mark on it, Bitfinex created their Leo token years ago and actually solved their own um exchange hack through some very clever financial engineering with their token. That whole project doesn't get enough attention, but like they

basically solved a hack that was existential to them. Um it wasn't the government that did it, it wasn't a regulator that came in and made those people whole. They did it and they did it using their own token and they they've been, you know, very successful through that. So, creating a token is fine. Like this let the markets be free. Anyone should make whatever tokens they want and they can market them as long as they're being honest. There's nothing wrong with that. What was wrong here was giving away customer money to another party and then lying about doing that. Yeah, the the focus though just needs to remain on the the real crime here, which was the giving away of user assets and saying that they weren't doing that.

Yeah, by the way. else is is somewhat important details, but like that is the real fundamental breach of trust here. Yeah, and actually um while we were talking, my assistant put in the document that the Wall Street Journal reported that SBF told an investor this week that Alameda owes FTX about $10 billion and that all in all FTX had $16 billion in customer assets. So, that means that FTX lent more than half of its customer funds to Alameda. Which necessarily mean that.

No. Um for example, if FTX had a bunch of its own cash, the loan could have been part customer funds and part its own cash but point point still stands. It's a huge amount. Yeah. Yeah. So, where do you think uh this kind of ends up in terms of contagion issues? Um are there any other entities that you think might get hit? Like, are there any other Yeah, cuz obviously, you know, this all got kicked off way earlier from other entities and we saw that, you know, all of these have knock-on effects, so just curious to hear what you thought about that.

Yeah, the the answer is like, certainly there will be effects. The question is just how big and how how bad. Who who's affected? Lots of people in the industry, I'm sure, like trying to figure out counterparty risk right now. And the echoes of how this kind of thing works and how like the financial crisis happened in 2008 are pretty pretty loud. Again, I will sound like a broken record, but like in DeFi, you don't worry about this stuff cuz everyone understands where all assets are at all times and and contracts execute as the code is written.

In in fiat systems, in custodial systems, there's just this opacity that you can't get around. And then, but do you want to name who people seem to be kind of worrying? know. Yeah, I really don't know. Yeah, so if you have a financial relationship with Alameda in any way, such that Alameda owes you money, um, I mean, those are the obvious ones, right? So, who are the lenders that have lent um, money to Alameda? Um, I read somewhere that like obviously Alameda does a lot of market making for um, for projects, so projects will give a supply of tokens to Alameda and um, Alameda will use that to create market

depths, but they're supposed to give those tokens back at some point. Whether or not they'll give those tokens back, I guess is on the on the cards now. Um, uh, a lot of projects seem to loan money to Alameda, as well. So, like project treasuries, um, similar to the 3AC thing where if you got a if you were invested in by 3AC or Alameda, they would also say to you we'll we'll take a $50 million loan and we'll give you this 10% annually or something on that.

So, there there may be some maybe some contagion beyond just lenders. There may be some projects who lose their treasuries and need to raise in a very bad raise environment. Obviously, everyone that has money on FTX, I saw Multicoin has like 20% of assets under management or something on Yeah, I think it was 10%. on on FTX. So, there's a lot of balances there, probably industry balances and again like crypto company balances. So, I think those are the main things like the lend a few lenders might go bust. People that had a relationship with Alameda like how many of the other big exchanges or user-facing crypto companies were lending to Alameda? Obviously, FTX were because they're really close, but

Alameda had a reputation as being like money printers, right? Like a similar to 3AC where they were like all these guys are extremely profitable. So, was exchange B, C, and D also saying they're a safe place to put some some of our money, whether that's just money that the exchange owns or maybe someone else is also lending out customer deposits. Those are the things I think are worth watching and in these times when something starts blowing up and you don't know what what the daisy chain of who's relying on who to pay back money is, I think the best thing to do is just to withdraw anything that you have on any custodial exchange to like something where you own

the keys. So, you know, no matter where you have money really. Maybe Coinbase is the only exception because they're like a public company and like you can go read their book like financial books and and stuff like that. But yeah, I think those would be the main places. I also saw something that Sollet the Solana like wrapped Bitcoin and Solana wrapped assets are issued by FTX or Alameda. So, there may be even some contagion in Solana DeFi, too. Yeah, great point.

Yeah. Yeah, we wrote an article about that on Unchained that came out Thursday. So, people can check that out. Um Kobe, you can tell me do you have sort of an inside line into what things look like inside FTX because you were the one who posted, you know, the Slack message from Sam and stuff. Do you have any insight into what happened? I'm in I'm in I'm in Sam was effectively lying to my face right up until the day before this broke because someone um someone was talking to him about this and said, "Will you go on my podcast? Will you go on Unchained TV's the podcast to talk about this?" And he said, "Yeah, well, I'll go on it." And

this was maybe the 7th or the 8th. So, we started a group chat with Sam, and we were arranging a time, and it's like, "Cool, right, I'll have a nap, and then when I get up, we'll do it." And then when I woke up, it's like, "Oh, we're going to delay it now. We'll we'll definitely do it this week, but we're delaying it." So, um like right up until this whole thing blew up, he was pretending things were fine and was I guess going to come use our podcast to like tell some more tell some more lies about how things were fine, perhaps. Um but I yeah, I like for some reason everyone knows my Telegram handle, and I tweet information. So, people just keep sending me um snippets, and then occasionally a couple of

uh uh crypto journalists, when they don't feel like they can publish the information perhaps for political reasons, just say, "Um we verified this. What do you think?" And then I normally I just leak those things. Um which is what happened with the Slack thing. A crypto journalist sent me it and um I verified it was real. you had verified that it did actually come from you. the anon was a crypto journalist and I verified it was someone that um works at FTX. Um was like is this Slack message real basically.

Um but beyond that like no, not really. Um like as in the dark as everyone else is apart from reading the room email. Typically when a lot of this stuff happens, there's a bunch of Telegram chats of like deeply crypto native people. Right, but so but your sense is what's mostly being reported which is like even that all of this was kept to a small number of people at an extremely high level to the point where a lot of high other high-level people just didn't even know. Is that what your sense is?

I'm dismayed to hear that someone like Zane would have 50% of his net worth on any custodian. Like why do people leave so much money with custodians? I mean, he he's worked at so many exchanges. He's worked at OKX and Binance and or or he worked with maybe not at Binance but It's it's depressing how much risk people expose themselves to. And and the noob I get, right? The noob is used to their bank account. They'll leave all their money on FTX. I get it, but like come on, people. We got to we got to do better than this. Do not leave half of your net worth among any set of custodians.

It's just foolish and it's not at all what the whole point of crypto is. If you're doing that, you you are you're doing it wrong. So, that's a good message for everyday listeners. I was curious, you know, we kind of have been addressing what takeaways regulators should have, but I know a bunch of regulators listen to my show. So, if you want a platform to send them a message, what would you guys say to them? Yeah, okay. Thanks for the platform. I'm sure all the regulators are going to be salivating over this because they see crypto company loses billions of dollars and they want to solve that by making a bunch of laws.

To any regulators out there who can think about what they're doing before they regulate, consider that this is an issue of custodianship. That this only happened because a custodian run by people could make subjective judgments about the assets within it. This happens in the banking system. This happens in the custodial crypto system just the same. And if you want to put regulations on those people, I get that. Do not put regulations down on DeFi assuming it is the same model.

Like DeFi solves these very problems. It solves them at a code level that can be audited by anyone in the world in real time. And we have that technology now. So, if you care about the billions of dollars that was lost from this and you don't want that to keep happening and you're not familiar with the magic of DeFi, you owe it to everyone to go learn about that and understand that stuff and please do not assign a bunch of regulations that just pull DeFi back closer to the fiat financial system that we already have. It was hard for me cuz I I had to like focus the whole time on what he's saying because I have to be ready to address anything and he just went off on these crazy tirades and to me to me it came across as someone

who like actually has not considered the first principles of what crypto's all about, which isn't surprising for someone who only arrived like 3 years ago and is in Washington D.C. trying to get everything regulated. But with all this now coming to light, I think there are some other stressful things going on under the surface that are kind of obvious when looking at it now. Yeah, and I know you have to go Eric in a minute, but this is just the last point was um I I asked him this when I last interviewed him because when I was doing research on him and I realized he was making all these political donations, I asked him, "Oh, so when you make your donations, is your purpose more of your like effective altruism philosophy or is it more to further the interest of crypto?"

And, you know, it was interesting when I was like listening to your conversation with him. I I'm not a video person. I actually uh, like listen to things mostly and even though, yes, I had seen the screenshots, but, you know, I could hear in his voice that he, yeah, sounded kind of agitated and um, it really felt like, um, you're right that he hadn't kind of like thought of a grand vision and already got like too worked up in the details and was trying to figure out, like, "So, if we use this language and are you okay with this or that?" Like, like not just taking a step back and thinking about like, "Okay, when I go into this, what am I going to stand for? What am I not going to stand for?" But, already just like trying to like just, you know, mark

up the paper without like thinking, you know, beforehand what he was willing to do. So, His positions were not based on any consistent set of moral principles. And when you get into a debate about ideology and you don't have a consistent set of moral principles, you're you're screwed. And he walked right into that one. Yeah. Yeah, um, you could hear it, like I said, just in his voice. He was too caught up in all the details and not thinking big picture. All right, well, I know you have to go. You guys, this has been amazing. Thank you both so much. Is there any last thing you want to say about where can people find you or what you want them to know or think about this?

I'm on Twitter sometimes at Eric Voorhees. And, um, yeah, just for everyone who's suffering out there from losses or risks or worries, just move through it step by step. It's never as bad as you think it is. You'll get through it. Many of us who are OGs in the space have suffered immense losses as well and, uh, just be strong and use it as a learning opportunity and move forward. Nothing's more important than your own life and well-being. Don't forget next up is a brief weekly news recap plus the most fun fun bits we've ever released. Stick around for the rest of this week in crypto after this short break.

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The Department of Justice seizes $3.36 billion in Bitcoin. The US Department of Justice seized 50,000 Bitcoins from James Zhong, the hacker who stole from Silk Road, a dark web marketplace. The raid happened in November 2021 when the seized Bitcoin was worth $3.36 billion, which represents the second largest seizure in the history of the US government. Additionally, Zhong pleaded guilty to wire fraud and could face up to 20 years in prison. OFAC updates its Tornado Cash sanctions. The US Treasury's Office of Foreign Assets Control modified its sanctions against crypto mixer Tornado Cash, revoking the initial designation and redesignating to clarify what person Tornado Cash is. According to the

redesignation, the entity known as Tornado Cash is the unincorporated association of Tornado Cash's founders, associated developers, and the Tornado Cash DAO. OFAC has not, however, designated any of those individuals at this time. Coin Center's Peter Van Valkenburgh tweeted that these changes do not alter the advocacy group's strategy in its lawsuit. The SEC wins its case against Library Credit. The Securities and Exchange Commission wins its case against Library, a decentralized content hosting platform. A judge ruled that Library violated securities laws by selling its native LBC tokens as unregistered securities. Gabriel Shapiro, general counsel at Delphi Digital, tweeted, "The Library judge reasons that even if a

team is completely silent about efforts, no promises, no contracts, but pre-mines tokens, that alone creates a sufficient expectation of profits from their efforts in common enterprise to pass the Howey test. Very bad result." Miles Jennings of a16z had a very different take. "Results of the Library case should be the final nail in the coffin of the utility token approach for most projects. An ICO and no credible claims of decentralization doesn't work." USDT trades at a discount. Amidst the FTX crisis, Tether's stablecoin USDT slightly lost its peg to the US dollar.

USDT traded at a 3% discount and it dropped to 93 cents for a few seconds on Kraken. The Tron DAO announced a purchase of over $1 billion of USDT to safeguard the overall blockchain industry and crypto market. OpenSea respects creator royalties. OpenSea, the largest NFT marketplace by trading volume, announced it will continue to enforce creator royalties on its platform. The announcement comes after many marketplaces decided to move to an optional royalties business model and may represent a relief for many creators.

Miners are still in trouble. This week, Bitcoin miner Iris Energy defaulted on a $103 million equipment loan after the company disclosed it was in financial trouble. Moreover, Riot Blockchain, Marathon Digital, and Stronghold Digital Mining posted their third-quarter results. All of them missed analyst estimates and their shares decreased in value. Masih Alinejad's death, no evidence of foul play. Police in Puerto Rico have found no evidence of foul play in the death of Maker co-founder Nikolai Mushegian. Days before his death, Mushegian had tweeted that the CIA and Mossad will torture me to death.

Inflation pushed crypto prices. During a negative week for the crypto markets, which lost over $200 billion in total market capitalization, the Consumer Price Index report was presented on Thursday. October's inflation came in lower than expected by analysts and crypto prices rocketed, but not enough to make up for this week's losses. All right, time for fun bits. This week, some of you may have noticed that I tweeted that I thought it would be great to have a comedian give their take on the FTX debacle this week. I ended up commissioning Jenny Hogan, a stand-up comedian and author of I'm More Datable Than a Plate of Refried Beans, to write and perform some jokes on what

has been an absolute humdinger of a week. Please enjoy. So, I didn't follow crypto all that closely until I wound up in a relationship with a crypto engineer. He worked in an Ethereum startup. Well, I say it was a relationship. We were never official and he wanted us to be. He would always ask me if I was dating other people and I was always like, "Josh, you of all people should understand the concept of an asset only having value because of how much other people want it."

Okay, I saw what happened to Luna. I'm not going to let that be me. Yes, I'm dating other people. Okay, so because of him, unfortunately, I do still pay attention to the crypto markets. Crypto winter, where we've been for the last 11 months, started to heat up the other night. Whenever I hear about the crypto world fighting, I feel like it's that scene in Mean Girls in the gymnasium where Lindsay Lohan realizes that every subgroup has its own drama. Even the huge, huge, huge losers. I'll say it up top, I think it's really fun when the crypto markets act like the regular financial markets. I don't like change, and it's kind of homey and comforting to know that a rerun of 2008 is coming up.

It's nostalgic, like let's put on the Friends finale. So, here's to FTX, the Lehman of crypto. Okay, let's get into it. What we have is a war between two men who both go by their initials, CZ and SBF. Both celebrities in the crypto world, and the guy you just swiped left on on Hinge in the real world. CZ is basically the bad boy of crypto. He runs Binance, which is not, as the name suggests, finance for bisexuals. And he would never talk to DC regulators. He's super anti-regulation.

He's in his mid-40s and left a traditional finance career to work in crypto, which I believe is what they call a lateral move. Think of him like James Dean, without the cool jacket, or cool personality, or cool anything. He's also, fun fact, partially responsible for funding Elon Musk's acquisition of Twitter, which I have mixed feelings about. I'm mad that he helped Elon buy Twitter, but I'm grateful that he's helping Elon go broke. SBF, the founder of FTX, was the good guy, which of course is how women can't get laid.

He's super young and was sometimes called a crypto savior. That's right, like the crypto version of an essential worker. He promised to give away his billions of dollars, which, well, he just might have done. We'll get to it. So, a week ago, he had $16 billion, which is insane, because I saw a photo of him, and I had no idea that getting a haircut cost $16 billion and $1. He's done a lot to raise his public profile, including a Vogue spread with Gisele, who he was told 5 minutes before the shoot began is a very famous model.

All of that is to say, no one suspected SBF was doing anything shady with money. Gisele has never made a bad choice in her entire life. It started on Sunday. CZ tweeted that Binance was liquidating any any remaining FTT, the coin issued by rival exchange FTX. Binance was once part of FTX, but it spun off like a malignant tumor. CZ claimed he had to dump the FTT. And listen, I think it's nice when crypto guys get to experience dumping things. Due to revelations about FTT, which we soon learned was that SBF was getting high on his own supply.

And by that I'm referring to crypto, not weed. They're very different. Weed is mostly legal. Someone discovered that Alameda, SBF's other firm, sometimes called its sister firm, making it one of very few women in crypto, held a huge amount of FTT, its own coin. And it turns out FTT was pretty illiquid. CZ said he needed to drop the FTT because he was learning from Luna, which is insane. I did not realize crypto people learn from their mistakes. Anyway, after Binance dumped all this FTT, 23 million coins, the price of FTT went crazy. Well, it went from $24 to $24.50 to $22.28 in just 1 day,

which is, to be fair, not all that unusual for a crypto coin. Alameda then offered to buy FTT for $22 each, which seems weird. Like, if you're getting in trouble for holding too much of your own currency, don't buy another 23 million of that currency. That's like when I told my ex he was sleeping with too many women and then he slept with 23 million other women. Just kidding. I've never had an ex who was successful at getting women to sleep with him. Did you miss the part about dating a crypto guy?

Anyway, then on Tuesday, Binance agreed to buy FTX. Yeah, it turned out FTX was totally insolvent and people couldn't get their coins out. I've dated a crypto guy, so I know what it's like when they just can't perform. It's not a good situation. CZ offered to save crypto for now and SBF got humbled. SBF, who once made his reputation bailing out troubled crypto firms, is now on the receiving end of the bailout. He lost 94% of his net worth. How's he going to keep himself afloat with a mere $994 million?

A lot of people who will never have as much money as him are dumping on him for being poor and honestly I'm here for it. But even just in the last couple days, it turns out that CZ scrapped the whole deal. I guess his offer hinged on Binance first performing due diligence, which of course, being a crypto exchange, meant they had to first learn what due diligence was. He said their problems were beyond his ability to fix and then he tweeted out a list of advice for crypto users, one of which was to ignore the prices, which seems much easier to say when you have a billion dollars on hand.

FTX is now on the brink of collapse and SBF said he needs $8 billion in emergency financing. I don't understand. Can't he just like mine for that? Anyway, recently, Justin Sun announced he's going to find a way to return FTX and Tron users to normalcy, but I've met a lot of crypto guys and I find that highly unlikely. A lot of people concerned that this means that the crypto markets will have to follow the same rules as the traditional financial markets. But, I assure you it's not that many rules.

Don't worry. You can still be SEC regulated and melt the entire economy, boys. The big banks do it all the time. Thanks so much for joining us today to learn more about the collapse of FTX, Eric and Kobe, check out the show notes for this episode. Unchained is produced by me, Laura Shin, with help from Anthony Yoon, Mark Murdock, Matt Pelcher, Juana Ravenovich, Sam Shriram, Pema Jimdar, Shashank, and CLK Transcription. Thanks for listening.