How the FTX Meltdown Happened—explained by Castle Island's Matt Walsh

Transcript

foreign hey bankless Nation here's a big question on our minds where were the adults I mean all of this FTX stuff was going down SBF seemed to get away with murder this happened under a lot of people's noses David that's going to be the subject today I think we're on a mini theme this week um I guess back with a vengeance as crypto gets its breath a little bit and uh we're asking this very important question in the aftermath of the FTX collapse how did this happen where were the adults who do we have on today and what are we about to discuss yeah we're bringing on Matt Walsh from Castle Island Adventures the Castle Island podcast uh and uh little known fact a little known secret the bankless Friday

weekly roll-up was actually inspired by The Castle Islands podcast Friday weekly Roundup uh David means stole we stole that Crystal sorry yeah uh but like Matt and Nick over at that podcast it's like a breath of fresh air quite frequently it's just yes informed experienced people talking talking like adults and adult things uh Matt used to work at Fidelity yeah crypto Fidelity for a while right and so uh the broader question is like yeah where the hell who why did we as an industry just allow Sam to use FTX as a slush fund and I think Matt just brings some really uh just seasoned and experienced perspective to the table and in crypto when things are just insane

all of the time I think we lose sight of how insane some of the stuff we do is uh and so um I mean Matt's pissed he wrote an article that I was pretty sure titled I'm pissed uh and what we're going to do about it and so I want to just bring Matt on to get his perspective as to like how crazy some of this stuff was and how we go move on from here yeah that's a big question how did we let these drug adult children uh mismanage 10 billion worth of funds right and become friends with our Senators represent us yeah DC and give us a major black eye and what can we learned from this episode so I'm hopeful Matt as always gives us a breath of fresh air as we talk to him guys we'll be right back

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that you can get and it also does poapps and mintable nfts any kind of money that your wallet can claim earnify will tell you about it and you should probably do it now because some airdrops expire and if you sign up for earnify they'll email you anytime one of your wallets has a new airdrop for it to make sure that you never lose an airdrop ever again you can also upgrade to earn five premium to unlock access to airdrops that are beyond the basics and are able to set reminders for more wallets and for just under 21 a month it probably pays for itself with just one airdrop so plug in your wallets at earnify and see what you get that's e-a-r-n-i dot f-i welcome bankless Nation today we're bringing on Matt Walsh Matt Walsh is a GP at Castle Island VC and also like I

said in the intro the co-host of the on the brink podcast and I would once again consider Matt on adult which is apparently something this industry is in a short supply of Matt welcome to bank list my man thanks for having me David and Ryan it's great to be on big fan cheers man uh dude uh are you pissed you angry I am pissed I I mean I've gone through so many levels of being upset about this over the past few days uh I mean I'm pissed from a lot of different reasons I mean I spend my entire day listening to entrepreneurs that are trying to build great things that protect people's sovereignty over their money protect people sovereignty over their data um and I just feel like this is a black eye for everyone you know I run a business in the space I'm getting

questions from people that think the whole industry is over so I I'm pissed that we allowed it to get to this point frankly who are you most men at like who's at fault for this I think clearly the Sam and the extended group of people that perpetrated this fraud um are to blame I mean there was a critical decision here along the way to take money from FTX from the customers and put it into his own Prop Shop and so whenever that decision was made there was a line that can't be crossed and it was crossed um you know and unfortunately it's one of how many how many of these were gonna do like this is just the latest and greatest exchange Heist it's the biggest one we've ever had but you know we're not immune to this in the crypto industry and I just can't believe we're

still doing it do you think that the social layers to blame it all like Beyond Sam which is an obvious villain I mean not all stories have obvious villains but I think it's pretty safe to see us to say after everything that's been revealed so far we have an obvious villain in the story um but how about maybe those that that let it happen um does the entire crypto industry have a role here are there other parties more responsible than um you know are there some more responsible than other others I think look there's there's blame everywhere and there's a lot of different Pockets I think you can let's talk about the investors though you know to start and I think the investors that are in this deal are

going to get a lot of heat and I think some of that is going to be unwarranted but some of that is is going to be certainly warranted it's not um it's unfortunately not uncommon to have fraudulent things happen in the Venture Capital industry you know you invest in a company and CEO ends up embezzling money or CEO ends up having an affair and it's a scandal I mean that type of stuff happens unfortunately in this industry there's been sort of this temptation to say well crypto is different like we just need to trust this new market structure and go with it and so that has led to things that just would never happen in the world of financial services and so where I think a lot of blame has to be laid is the people that allowed this Market

structure to grow if you look at traditional Financial Services we learned in the late 1920s that owning a prop shop and owning an exchange was a massive conflict of interest that would result in taking capital from one entity and putting it in the other we learned this in the 1920s I mean the Great Depression was a great learning experience for the way financial markets work and so there's been a bifurcation of roles in traditional financial services such that by now you cannot have a proprietary trading arm owning an exchange it's a blatant conflict of interest this was happening during the 1920s there were bucket shops and if you read this book uh reminiscences of a stock operator I think it's a really interesting parallel to read in the

context of FTX uh just all of these um conflicts really that existed and so we got things like the Securities Act of 1933 and the Securities Act of 19 The Exchange Act of 1934. and so a lot of these conflicts were actually just taken out of the financial services space then and over time we've had additional regulation so you know you kind of pull that back and you say okay so Alameda raises Venture Capital dollars we've talked about that later how crazy that pitch deck was and the fact that people funded that but then they decided all right we're going to start an exchange and people just say a great idea guys like you own Citadel and now you're starting the New York Stock Exchange it like doesn't compute for me how people thought that this was a good idea in in

almost just from a selfish perspective it's like okay how are you going to take this company public your Venture Capital investor these companies need to go public right so you can't take a company public in the United States if it's an exchange that owns a prop shop it just doesn't happen and so you know we had uh is there a specific rule that says that that can't happen like why can't that happen I mean I know it's insane what but why well there's there's conflicts there right so your Prop Shop so Alameda traded on the fjx exchange and so they had visibility into very granular participation on that exchange so they would have been able to see if a large Market participant had just moved assets onto the exchange for instance there would have been able to position themselves against that so Alameda was

able to the claim is that Alameda was able to take in data that only FTX as a privileged entity The Exchange had and Alameda was able to leverage that data or is that an assumption I mean I'm sure it's true uh but is there no world there but where there could have been like a firewall between those two things Sam has public tweets that say that Alameda trades on the fjx exchange that in and of itself is a conflict that actually cannot exist in the equity World okay and so why did we think that this was a going to work in the crypto world and B good for customers like why is that good for a retail customer to have Alameda sniping orders on their own exchange it's just it's a predatory Market structure to begin with and we just sort of all turned a blind eye because Sam's

got a Chia Pet haircut and it's got a cute story and I think it's so I'm pissed about that I think it's an absolute joke you know you talk to people that are managing you know billions of dollars pools is the capital of the equity World up here in Boston and they're like hold on a second let me get this straight so this guy owned a prop shop it traded on the exchange and they stole all the customers of course he was going to do so like obviously well just to make that clear for folks so Alameda was basically set up structurally to front run its own customers I'm just like like just the base the base of the thing Prop Shop and exchange and Prop Shop gets special treatment that means front running that means a percentage of of slippage of

front run uh rather than go to customers goes to Alameda it's already Insider dealing just from the get-go not not to mention everything we've we find out just the structure is rotten we're going to discover a lot of things so the Department of Justice is going to be all over this they're going to be flying subpoenas all over the place in terms of Market participants who are on these platforms and you're going to get chat history and you're going to see chat history where it was FDX employees and Alameda employees sitting in the same office on the same chats together sometimes they had email addresses that were at you know one place sometimes they had to email address at the other so you know it's it's really an in-your-face conflict and you know my I never knew that fgx was a fraud like

obviously I had no way of knowing that but I could look at it from the outside and saying that this thing is set up for failure from a conflict perspective like what are you going to do how are you going to get this thing into compliance maybe that's part of this conversation here around what was happening in Washington around the digital Commodities you know protection act but you know it was really structurally unsound from the get-go is my opinion did you guys hear that um SBF had like a sort of a a route around in kind of the books in the back door in the accounting system so that he could kind of move money back and forth from from FDX and and Alameda um like his own personal just I guess tunnel to to to move funds without

anyone else knowing is it is I mean that's got it right that's what goes from conflict to fraud right like yeah yeah I mean you get into things like that and now you're starting to expand the surface area of people at Alameda and FTX who really obviously knew about this right I mean I don't know how you run a product organization and don't ask where the cold wallets are I don't know how you run you know venture capital or corporate development investing and you start to optimize around non-ftx deals in some of these transactions that happened so locking in the Alameda borrow on this lending platform so I think the the net is a lot wider than Caroline and say I'm on this

one for sure and like Matt when I was listening to you and Nick like reflect on this like it just made so much sense oh yeah there shouldn't be a trading firm and exchange have a relationship that is intuitive as an industry how did we let it why did we let it go on for so long why did we just accept it so look part of this is on the market participants like the investors and the trading firms and frankly the the large retail you know people that are trading in this in this environment there were a lot of trading shops that in the early days said we're not going to touch this exchange because Alameda is there and they're just going to be sniping us but they got more comfortable over time you know for whatever reason there was a lot of liquidity I think you know some of

that was manufactured you know I think the VC investor is playing today but frankly it's a regulatory issue in large part you know the fact that this was set up in Hong Kong from the get-go it was offshore made it have this feel that okay well it's offshore you can do this type of stuff and I think we are going to spend a lot of time in the coming weeks trying to figure out what this plan forward here was that he had in terms of coming into the United States what sort of no action letter was discussed at this meeting with the SEC was the master plan here to get fully compliant in the U.S in some way with FTX the offshore entity to bring that onshore there's you know a

lot of chatter that he's trying to launch a stable coin I mean you just think about if he was successful in pulling this off this Con that he was pulling with The Regulators could this thing have been two three four times bigger with you know much more institutional Capital much more U.S retail on the platform if he actually got green lit um so I think that that's outrageous frankly yeah I'm pissed about that I mean I mean just I I shudder at the fact that uh you know FTX having its own stable coin I just shudder at the fact that that that could be called into existence and be backed by possibly nothing um FUSD I guess the biggest stable coin uh okay so

where were the Regulators at the table and what parts were what parts were regulated because I mean they were having meetings with Regulators obviously and FDX and FTX us to some extent were were regulated entities is this just what slipped through the what slipped through the cracks maybe talk about the regulators and also I mean weren't they audited didn't they have Auditors who were checking the books and making sure that everything was was sound wasn't that part of the part of the process I the regulatory question is a really difficult one I would say so FTX U.S obviously regulated um has mtls was pursuing a New York

trust license is my understanding MTL for people is what a money transmission licenses so in the United States a lot of these exchanges historically coinbase uh included has had to go state by state to get money transmission licenses because there has been no federal regulator to oversee things like cryptocurrency exchanges um now we're starting to have companies set up in New York under trust licenses that can can service the country you know from there FTX started offshore and so we're talking about a market structure that was really interesting from an investor standpoint for a long time because you had companies like coinbase and Kraken that were playing by the rules in the United States but had frankly just inferior products because they couldn't

offer leverage they couldn't offer their derivatives that were offered on FTX FTX was not regulated by anyone I mean I've seen Sam's tweets that hey we're a regulated entity FTX the the offshore entity was really not I mean they were operating in a wild west for a very very long time they were trying to come under a cftc umbrella trying to get uh repatriated to the United States but they had not done that and uh you know we'll see I think how far along that path they were but this really created this bad environment if you're coinbase and Kraken because you have all eyes on you Kraken and coinbase were getting dinged left and right for seemingly like pretty minor things but the cftc um you know offering margin on spot like things that okay you're not supposed to

do but hey take a look at fgi X and they're servicing U.S customers tons of U.S retailers on fgx offshore meanwhile coinbase and Kraken are getting slapped everything they they do is a very difficult environment I give a lot of credit to Jesse Powell and Brian Armstrong for building their businesses as strongly as they did in that environment the RSX team you know give them a lot of credit for building a regulated exchange that played by the rules in the face of just a kind of a wild west offshore entity that meanwhile was getting investment from SoftBank and Sequoia and you know was having meetings with Gary Gensler apparently it's just it's really crazy so would these regulations have prevented

the issue do you think there's a lot of things that would have prevented it right so it was known that U.S customers were on FDX and so Regulators in the United States could have taken action against them on that basis that they were knowingly servicing U.S customers they issued a token ftt which is an unregistered security and so you would think that that would be kind of the heart of an examination here around what the SEC could have done better you're allowing an entity that okay it's not registered in the United States it's offshore but it's mostly U.S people mostly servicing U.S people and institutions and they just issued this unregistered Securities offering and they were able to go out to a number of financial services firms and use that as

a form of collateral to get US dollar and stablecoin loans against so the surface area here for things that Regulators should have been paying attention to is really large meanwhile they're going after Library credits and Kim Kardashian it's like it's really hard to reconcile are we not supposed to be able to trade on FTX as U.S citizens like was FTI supposed to block us in the same way binance does yes what yes the hell yeah you're not supposed to be able to trade on FTX the primary venue as a U.S human and why is that you're saying not just spot trading but you can't do anything it's an it's really it's an unlicensed derivatives

exchange it's um it's what makes got in trouble for being yeah I mean and and they had uh to be clear I think FTX had geo-blocked the us at various points and so I think people were accessing largely via VPN that is my understanding and you know in the later years you wouldn't be able to get onboarded there unless you had an offshore sub which I get you know is fine like that's that's how people were doing it but um yeah they were servicing U.S customers and you know a lot of them uh honestly I just thought that there was FTX us and normal FTX and everyone in the United States was like I'll just go use the nor the FTX normal version because it's better and more powerful and for some reason that that was just

legal I never really thought that they were actually supposed to ban U.S customers in the same way I guess like binance and all the other exchanges were but now in hindsight it makes total sense it just seems like the The Regulators just took the the turned the biggest Blind Eye of all time I think they did I think they did a judgment that it would be difficult to go after FTX they had a huge War chest they had some really large backers and they said this is going to be a tough fight to win we already have a fight going with ripple which you know Ripple seemingly has endless amounts of capital to spend on lawyers in their defense they have a big case there and it's a lot easier to go out and take down a fraudulent Ico look the list of fraudulent icos that still haven't been

prosecuted in the United States what the four or five hundred of them probably and so you could spend the next three years just going after them and never picking the big fight with FTX and then you had Sam who was donating a lot of money to democratic causes and then you had uh you know someone who works for him donating to Republicans so they're sort of greasing both sides and they're saying the right things or saying they want it to be compliant and so my guess is that there was a decision that look there's just easier cases to win right now like let's go take down Library credits so the conclusion that I've kind of taken as a result of the of this and I was listening to Brian Armstrong on the all-in podcast talk about uh how he was like kind of Measuring Up coinbase to

FTX and he knew that coinbase had some amount of Revenue and FTX had that amount of Revenue yet FTX and like Sam were able to like buy anything and everything under the sun and also donate seven million 70 million dollars to Democrats and slap their name on like uh the arena in Miami and like try and buy Twitter uh help Elon Musk buy Twitter and and Brian from coinbase was like I just couldn't the math didn't check out as to like where all these funds were coming from and now that we're like uh starting to see some of the the size of the hole that FTX had as far as I'm concerned Matt I want you to check me on this is like FTX was just Sam bankman's freed slush fund to score points uh and

do cool things that he was like he was treating in the world as a video game and he was treating FTX as like his inventory to navigate that world and it was just his slush fund to do whatever the hell he wanted I so that's what I think I mean I think there's clear unchain proof that coinmetrics and Lucas nuzu discovered in Q2 around the transfer of ftt tokens uh between the entities and so at minimum we know that that's when it started I think it's a very strong possibility that it was run off of customer funds even before that but I think on chain you can see in Q2 and I feel pretty confident about that I think the question of where was Sam getting all this money is going to get a lot of scrutiny in the in the years to come and

so he made a 500 million dollar investment into Robin Hood out of an entity that he controls and so if you're an investor in FTX you know I guess we'll find out did Sam sell common stock like did he take a secondary and take money off the table was it 500 million dollars was it a billion and if he did not then where did you think the money was coming from and my guess is that a lot of people thought that it was coming from Alameda so he owns 90 of Alameda and he's probably taking big distributions off of The Prop Shop which raises two questions one what's the potential conflict there and do we like that as investors in FTX do we like the fact that this guy is making way more money off of a business that

we're not even investor investors in and is he going to optimize for that and the second question it raises is what the hell is our exit strategy obviously we can't go public if we have this structure so how are we going to get liquid liquid on this thing is it going to be ftt tokens Can this company go public so it raises a lot of questions I mean he had a 500 million dollar LP Venture Capital book Sequoia altimeter multi-coin I mean there's a lot of money being shown the more the more we find out about this uh it just you know makes me realize like we literally gave billions of dollars to a degenerate uh Gambler and um somebody for somebody I mean for him it was pathological you

just kind of look at the decisions he's made and the types of risks he was engaging in and the speed at which he was trying to uh level up in in the sam5 video game and it's just like it's pathological uh and the different face like the lies that he told even he's still Tweeting this morning Matt like what is he talking about what happened was the tweet I like the study of Sam bankman freed I'm like uh I'm sure there were um some filmmakers trying to make documentaries earlier this year and like doing the dokwan documentary I made a three-hour suzu documentary but like all of that is now overshadowed by this this is even crazier and I can't believe it like I can't believe our industry is like this right now I've spent a lot of

time and I've been speaking to a lot of people that knew him and I I just can't get over the human being side of this how do you I know how do you bring yourself to this level where you're taking customer deposits and you're just going this far beyond the pale and it's fgx employees too right I mean he had FTX employees that had not only all of their crypto all of their money on the platform we're starting to hear some of these stories and so just the human destruction that this has caused it's just it's really hard to wrap your head around your I mean you're obviously dealing with someone that does not have emotions that can not connect to people on a human level it's a true sociopath that we're talking about here and so I

don't even know if it's worth analyzing the human you know he's not experiencing the world in the same way that three of us are experiencing the world there's not a human there now it's it's crazy okay so how do we protect our so here's kind of a question right is people like this exist all right we know this we have a few cases this year maybe SBF being the most blatant case it's unbelievable to the links he was he was going and how far the empathology would would lead him um but how do we know who to trust and here's a question I think in everyone's mind um I I was telling David yesterday my dad called me over the weekend he's like I have some funds in coinbase should I get them out and I can't actually like

even though Brian Armstrong coinbase is no GE Brian Armstrong or coinbase is regulated institution I personally trust coinbase I can't say I know for sure like at this point in time I think this sort of thing is going through everyone's mind like you mentioned um the ftt token well binance has the BNB token right it's like like what's that is there leverage against that how safe is binance how safe is Kraken how safe is coinbase how do we know do you have any insight into this Matt I mean the the knee-jerk reaction and panic which because the show is called bankless I don't want to discourage this in the least is withdraw your money from

exchanges use it like a public bathroom you get in do your business you get out you convert like Fiat to crypto and then you self-custody right not everyone can do that we don't have the tools ready which crypto Banks can we trust right now and how do we actually know look so I I think there's a lot to that question and there's a lot that we should be doing uh one of the bigger disappointments about this is that public blockchains give you a tool set that we're just not taking advantage of right now and so the first thing is self-custody so I think we need to redouble our efforts and our investments into making self-custody easier I want to live in a world where I hold a key Fidelity holds a key in another trusted party hold a key and we have a very safe

multi-signature or MPC based custody scheme I think at scale the whole definition of custody needs to change for crypto assets I don't want to live in a world where I'm storing anything with a central administrator that can move on their own and so I think we need to invest in product management experiences so that's one thing can we just pause on that for a second Matt because you run a fun too right and we've seen some funds get blown up uh ikigai Travis Travis Kling hit a whole bunch of his fund on FDX you're saying that should not be the strategy moving forward there you should there should be sort of some some multi-sig some on-chain type of wallet used for for funds and we should no longer trust exchange as the model moving forward is

that right look so right now that infrastructure doesn't exist so you can't point to it and say look Travis you shouldn't have been doing it this way because he had a strategy and he was executing that strategy I think in the future what we're going to have is exchanges will be bifurcated from custodians and so you could imagine tri-party relationships enabled by MPC custody solutions that allow you to trade on venues but not move your crypto assets there to keep them in the possession of a custodian and even potentially at some point in the future with a key Arrangement where you hold a key the custodian holds a key and someone else holds a key and so you don't live in a world where someone can run off with that we need to invest much more in that and so we're you know we're investing in the retail side of this

we're investing in the institutional side of this we need to get these things to the point where funds like Castle Island can use them in production soon and so that's the first thing I would say on the the self-custody the other question Ryan is kind of around moving reserves I think I mean I've heard you guys talk about this and and it's more than just proving the reserve it's proving the liability and I think so you need to have some accounting an audit firm involved in the liability side but we should really be demanding out of our custodians and exchanges that they Implement a proof of Reserve policy it is great to see some of these competitors come out and say that they will do this so I'm very encouraged by that but we need to really speak with our capital and so if you have funds on

a platform and they're not doing this and you want them to do it there will be Alternatives I think in the very near future um what do you think The Regulators are going to take coming out of this are they going to be the ones to Institute the types of reforms that you're talking about or are they going to be the ones to have a complete knee-jerk reaction to this and take steps to further encumber further uh trap further harm crypto further drive it outside of at least in the US's cases outside of the borders of the United States of America what do you think their reaction is going to be in the aftermath I'm going to be really interested to see what the blowback is

um so we've had a shifting of the tides in the house Financial Services committee and so we're going to live in a world where McHenry and emmer have more power they've both been very pro-crypto we'll see if they still are frankly I mean I think a lot of damage has been done uh the first thing we very clearly need is just Clarity on who regulates the spot market for these things in the United States um and the second thing we need is just a way for a token project to raise capital and eventually be fully decentralized and so Hester purse I know you guys have had her on the podcast I think her proposal is the most viable option so this token Safe Harbor proposal would get you to a point where you have Clarity on whether or not these things are securities or Commodities and

then if you have the further Clarity on who the regulator is then I think we just kind of fall into line the first the third thing I would say is that you know the D5 part of this is kind of wide open and none of what I just said applies to D5 my view is that these networks should not be regular related at the protocol level and you know I hope that that continues I think Sam frankly had a lot different view on that and that was going to be very very harmful I think to the industry if he was successful Matt there's a few more topics I want to want to touch base with you on uh I think there's some more silver linings out of this event that I think we could unpack a little bit also there are some other cast of characters that have

Revisited the scene like dokwon and suzu and Kyle Davies have chosen this moment of all moments to come back and and say hi so I want to kind of get your takes on that and a few other things but first we gotta cut for a second sponsor break to thank all these sponsors that make the show possible in all of my years in crypto I've never been hacked scammed or lost money to a thief and a lot of that credit goes to my ledger Hardware wallet the love your Nano X and The Ledger Nano S Plus Hardware wallets allow users like you and me to secure and manage all of our crypto assets and our nfts all with the security of storing users private Keys offline and Out Of Reach from hackers The Ledger Nano X is the perfect Hardware wallet for managing your crypto

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and we are back uh I think we were talking uh um during the commercial break about um there's a number of different topics that we want to get through and one of those is I think is is this is what we're watching happen right now sorry about this fire truck uh is The Logical continuation of the May uh contagion uh first we had Tara Luna which which triggered the contagion with frios Capital which triggered the contagion of a lot of things and then Alameda really had this show of strength during that one moment which and we were talking about this me and Ryan were like yo like FTX and Sam Beckman free they're buying everything they're saving the industry like when Sam tweeted out that he was saving block fi like the Market's

pumped a little bit I remember like that was a plus 10 day uh but little did we know that the reason why that worked was because uh of the uh fake plugging of the hole between Alameda and and uh and FTX and so like my question to you Matt is like this is the same contagion right like this is the same event it just happened to be like we got like a six month break out of it right I I think that's right I mean it's funny I look back on all my text messages and you know telegram chats and I just put in Alameda and see when I started talking about it and you know early days and like looking at pitch decks and things like that but then there's a lot of chatter around the covet crash so what was that like March of 2020 uh when

the markets nuked there's a lot of chatter that Alameda had blown up then it would never really heard anything about it so I you know put a pin in that one I'm interested to see if that comes out in a forensic analysis if they actually took customer funds as early as 2020 and moved over but I think I feel a lot more confident to say that Luna played a big role in this and so I think the way to think about that is we've already established that Alameda trades on the fjx exchange and they're kind of a backstop liquidity provider and so you know imagine a world where Luna blows up and people are just chucking Luna as fast as they can into that two three day period is it possible that Alameda was blowing up because they were

on the other side of all of that and they were just backed up liquidity on the FTX platform I'm speculating but that would make sense if you look at this through the lens of how could you lose that much money yeah the Robin Hood deal and Tom Brady and Gisele and you know but doesn't really add up and so I think what's likely is that Alameda took a massive hit on the Luna trade and that they just allowed the Alameda balance to run negative negative equity on the platform and so they just started to you know they basically couldn't lose like the Alameda could not get blown out on FTX and so then it became really like a Ponzi Dynamic from there where they just needed to get net new retail flows and institutional flows onto the platform to

continue to operate the exchange because they had such a huge hole so I I'd be really curious if that's what it ended up being because you could imagine that's the case right they didn't come out and say that they had a huge loss to three hours Capital they didn't come out with a big Luna loss it's possible they just ate all of it some in the chat is asking can you talk about what you believe will happen to those who have coins in Block five what do you think Matt I don't know and I should I should disclose that I'm a Castle Island is an investor in Block fi the way that I looked at that deal at the time so Zach I have the utmost respect for I'll stand behind Zach prince in Florida I think they're highly ethical management team the three arrows situation resulted in a

basically an untenable situation where they're dangerously low on net Equity capital and Sam came to the table with a deal that would result in a very bad outcome for the equity holders but it would allow the customer deposits to be made whole and so there was a discussion around taking that deal they took the deal and I was ultimately supportive of that deal even though it was resulted in us writing our Equity position down to zero and I thought that Zach and flori behaved highly ethically in that standpoint and they truly believed that that would save the business uh where that stands right now you know I think I don't have any Insider knowledge but certainly their lack of ability to pull down on that credit for facility is is

not good I'll give you my take so I have a small bit of funds uh in Block fi I like to test these things it's really fun to test crypto Banks like block fine Celsius yeah it's super fun yeah um I personally this is just Ryan's opinion I personally am I've discounted everything in Block five to zero basically and if something falls out of that that's above zero I'm happy with that but um given the way I'm kind of reading the tea leaves I don't have a lot of Hope or I have similar levels of Hope as maybe I had with Celsius although I will note I agree with you in your assessment Matt this is a different situation than Celsius which I mean Celsius is very clearly machinskied it was completely mismanaged and this is a

a different case of that um it's not a degenerate Gambler at the helm they just got caught up in some risks that they didn't anticipate uh with some of these events here but so you think that back to kind of what popped the balloon here you think maybe behind the scenes it was sort of Luna I'm just I'm just fascinated that SPF and Alameda were able to run this thing for like five more months okay because no one really knew in fact the here's the Insidious thing coming out of that is like as David was saying all of these funds get wiped out through his Capital Trader gods of 2021 we wiped out through as capital who's left standing it's Sam bankman freed it's FTX it's Alameda and they came out of this event actually

looking stronger and really the whole thing was was Hollow the whole thing was rotten all the way down there was something else that actually ended up popping the uh the balloon here and I'm wondering what you think that was was it really cz's tweet on that uh that boring Sunday afternoon it was afternoon East Coast time anyway where he tweets out about ftt was that the final pinprick a week before that we had um of course SBF giving his uh regulatory takes with Eric Voorhees not very well received by the community that seemed to be like uh if you were charting Sam's um I guess influence in the crypto Community or the fondness of crypto that started it to hit like his

fondness meter by All Time to all-time lows I'm not sure that was the prick maybe it was the the CZ tweet what do you think I think you guys might be in the movie here because I think what you guys had with the Voorhees and him I think that played a role in it so I think sentiment had really started to turn against SBF on some of this defy stuff that we're talking about the fact that he was really trying to Nuke defy to the advantage of his own company and so he started to see people get pretty upset about that and the price of ftt started to slip a little bit started to see a kind of a little bit of a bank run effect where people were not comfortable Voorhees wiped the floor with him and that uh that debate it was unlike

anything I've ever seen so it started to get a little bit precarious keep in mind he has ftt on collateral with a bunch of places and so he's probably getting margin called as the price starts to adjust people are calling and saying are you good and then CZ gets wind of it CZ is like you think CZ didn't see this on chain and Q2 I mean he's one of the sharpest guys in the industry I bet that he knew that they had been moving ftt between the entities um you know he has access to the stuff that you know coinmetrics is putting out there so my guess is that he knew that something was up he probably didn't think it was a complete fraud that it ended up being he probably thought hey look they're running fractional and he decided to just test the waters a little

bit you know who knows you guys should try to have him back on but I I doubt that he knew it was this bad I think we will one day I I almost wonder if the CZ maybe saw some of the sun chain but the final straw from him was finding out that um SPF and FDX was working behind the industries back in DC and when CZ saw that sentiment drop right he decided to fire an arrow into this thing and uh it maybe that was the the final Arrow but it's just reflecting the bow actually crumbled the whole entire ship yeah just I mean that Cannonball that tweet around is cesia loud in Washington DC ends up

being one of the most costly tweets of all time this is what I'm saying I hate to keep going back to the psychology of the man but the the utter hubris uh imagine like thinking coming out of that that episode with Voorhees that you had won the debate or he wasn't even prepared quite frankly I mean everyone knows what what Vorhees is going to say he's he wrote a freaking post basically his entire opinion and SPF was just ill-equipped like it was as if he had not been in this industry for the past four years had not heard the arguments of the crypto ethos aligned people and was completely inadequately prepared to meet those arguments in any coherent way

and yet he still chose to have a debate with Eric Voorhees on this subject it like why it's just dumb why would you tweet that about CZ like dumb I can't believe it it's the hubris of the person which is which is why part of the the things coming out lately I mean we talk about um the children running things with adults I I kind of Wonder like to what degree like I don't know amphetamines were in play like drugs like some there's something that has really pushed a personality towards all in Icarus hubris gambling with depositors money level of uh schemery here I think that'll be part of the

defense I think that's probably what we're seeing with the tweets is that some sort of an insanity or you know purged on amphetamines type of a defense you're right Ryan I mean when you read that when you go back and you look at that debate and I've watched it a few times what I kind of think is who would give money to this guy I would give money to Eric Voorhees but he's smart enough not to take it and he wants to deal with me in a non-custodial way and uh you know it's kind of crazy it's um I think when the movie is written that'll be kind of the the last chapter here where he's just kind of falling apart and you know adult and just you know physically like falling apart too yeah and but also like the the

whole like hubris and psychology part of the angle I think is is worth like diving into a little bit because like we as an industry like I was talking around on a stream yesterday it's like when FTX like rugs their customers and their investors or something in the crypto industry happens that it gets out of crypto like my mom calls me up and be like Dave what's going on in the crypto world I'm like that's my responsibility that's on me those are my shoulders that like this rests on because that's how I'd like treat my my relationship with crypto and like we had this was the like third or fourth thing like this in a long year of 2022 where the same patterns happened over and over again we had these egotistical like maniacs who loved to so

why did SPF take this debate with Eric Voorhees because his ego had to do it why did he not let Alameda fall when he could have just let Alameda go to zero and keep his darling exchange which was printing hundreds of thousands of dollars every single day because of his goddamn ego why did dokwan like tweet out study Labs deploying Capital well like all that stuff ego like two zoo and Kyle Davies ego and like we as an industry keep on enabling these people we love the egos we're like yeah save funnier tweets yay like do something on Twitter and like we promote these people and we put them there and so like this is like the reflection I've been having it's like man we really take these crazy maniacs and like make a farce out of

them for our own enjoyment and then they rug us and we're like surprised like what the hell man we we've enabled a lot of eccentric sociopaths in the history of this industry and I think look there's always going to be some idolization of public figures Elon Musk is a great example of that but what we need to do is just put better scaffolding behind this industry so that the real Builders can actually be successful here and this doesn't happen again and so there's some super obvious things that we should be doing we should be insisting on proof of reserves and liabilities we should be enabling we should tell these exchanges that they need to get into full compliance without other Financial assets work why do they not have um Market manipulation surveillance sharing agreements between

themselves why are they not enacting the travel rule it's like whether you like those rules or not they work in other markets they're the law of the land and equities they're going to be the law of the land whether you like it or not in crypto so just get into compliance it protects your customers uh token investing schedules another good example there and so we better get our act together as an industry and stop dumping on retail you know from insiders and from you know the Venture funds and the crypto hedge funds there's a lot of things that we should just take this opportunity to just burn it all to the ground and come back in a better way and it's not that we need to just lean in and say hey regulate us it's let's do things that protect the users of these networks that's really what it demands

to what a crazy thought damn who would have thought and I think there's some wisdom there Matt because like I think what I hear you saying is um don't expect human beings to behave any better next time around which if if anything that crypto's taught me it's that we're going to make the same damn mistakes every three to four years aren't we with a new generation of people and we feel the lesson now right as we did with mount gox in 2013. now here we are less than 10 years later and uh it's happening again so rather than depend on people we have to push this down a layer into the protocols we have to put proof of reserves into the stack we have to use bankless money systems we have to use multi-cigs we have to use all of the

on-chain cryptographic resources that this industry is supposed to be based on and not leave this all at the social layer and yes I think where there is centralization there needs to be a coherent well thought through regulation to plug some of those holes but we can't rest on the people the masses uh you know we can't like discipline them or scorn them into propping up you know the next egomaniac uh the next you know megalamaic lamichal character that crypto brings because I know they're coming back and even now like today I was looking at uh you know tweets from suzu and Kyle Davies formerly of three hours Capital I'm like you guys are planning to come back aren't you the

there's like blame shifting there's a little bit of like we're not as bad as like you know this happened because of bad bad SPF like I already see the seeds of this [ __ ] happening like I can we've seen the Playbook enough you've seen it I've seen it David's seen it we can already call it and like the fact that these people are not only are they not in prison not only are they not in court okay they're still Tweeting and planning their comeback story is absolutely maddening meanwhile we have have Alex pursef is an open source developer no one knows his name not a superstar coder he's in a prison somewhere he's in a jail what it what

was his crime he wrote open source privacy software in code that's what he did without right we have all of these people no charges laid against him we have all of these other people uh walking free too it's like the Injustice of it just starts to pile on you Matt just starts to like you start your post you started this this conversation I'm pissed I'm pissed too like I'm pissed we need to do better Regulators need to do better our justice system needs to do better like we need I don't even know what to say at this point it's absolutely maddening that we are in this spot and it's embarrassing I'm with David like every conversation you have with an outsider it's like I don't want to have to keep justifying

crypto's existence I want us to do the right thing and stand by our principles and why does this keep happening I couldn't agree more I think it's we need to take the parts of this industry that are rotten and we just need to burn them to the ground and Purge these people from the industry forever who cares if they're tweeting Justice takes months to catch up I'm not worried about whether or not these people will be brought to Justice in the least there's been gross negligence and highly obvious frauds that have happened and I think all of this will take care of itself in due time took made off like 24 hours to be arrested it's going to take a little bit while longer for some of the people that blew up in the Q2 time period looks like it's going to take a

little bit while longer with SPF But ultimately these people will be brought to Justice I think right now what we can be doing is just building a better foundation and I think it is also at the social layer it's let's put let's put Frameworks in place for uh disclosing who the investors are in some of these projects when do their tokens come off of lockup uh you know what information does the team have what information does the retail have common sense stuff so I think we can build this back but I think eventually look we're going to get past this time period we're going to get all of our anger out I'm still pissed there's going to come a time here where we're just gonna need to focus on what's left here and we just need to make sure let's just take this opportunity to just

burn the stuff to the ground that needs to be burned to the ground there there's a lot of zombies out there still let's just wait for the dust to settle do you know the other thing that I feel like failed is um I don't know what if I call it the credentialism have you guys seen the the clip of um uh Kevin O'Leary talking on stage where he's talking about and by the way Kevin O'Leary's been on the podcast you know we've talked to him and I you know he's done things in Washington that sort of thing but he was just out and out claiming that FDX was the safest spot on the planet to put your crypto why because it's regulated because sambachman freed you know is the son of Stanford professors who are just like know what

they're doing like the credentialism we that that's the social layer honestly that came in the cycle that's a little bit different than the social layer that you know and that we know from the ogs which is like f your credentialism like what no on chain cryptographic guarantees that's the that's the basis of this it's not who like where to go to school it's not you know which Senator do you know who can you get in a room with it's not what celebrities endorsing your product it's on chain cryptographic guarantees that's how we know you're not lying and we we lost that in this whole credentialism part of it is I think a dilution of the social layer Matt with this whole like influx of

Finance I'm you're from Finance I'm from Finance I love Finance but you know what I mean when I'm I'm saying this new crop of individual that didn't get to the root level and appreciate the values through which this ecosystem was built you could hear from SBF why did why did they start Alameda well uh we're either going to go into sports gambling or trading Commodities I don't know what the hell whatever makes the most money oh crypto that's why that's not why I'm here I know that's not why you're here and I hope bankless listener it's not why you are here uh we used to be in touch with these missions the the mission and uh and we lost some of that the previous year so maybe there's a reform that we can make on the social layer there too Matt

I think that's well said I mean look this has happened in public markets there have been big frauds have been people that have put their names on that uh I'm big Tom Brady fan that doesn't change my opinion of Tom Brady they've been um he's down bad he suffered through this and Enron had uh Enron had Fields like you know in Houston right and like you know you just need to put better Scaffolding in place we have public blockchains now we can do some of this stuff we can prove reserves on chain we can demand that our centralized institutions do more stuff nothing about this is about public blockchain the protocols you know like nothing about what we've talked about this entire episode is about more than a fraudulent guy and a cast of characters that were fraudulent building a

centralized business that was completely Wild West so you know I think look some of that's going to be solved through regulation but we can influence a lot of this stuff as an industry just by using the tools that are now available on public blockchains so Matt um I think at times like this there's a tendency obviously to to magnify the Bad actors right we're seeing like maybe the worst actors as uh crypto's ever seen maybe the the anti-satoshi or something like this has come for our industry and is wreaking havoc and it's you know is now leaving is now gone we do want to put these people behind us but um are there any adults left and who are the adults like where are they I mean you could name names if you'd like

um you know I've got a list in my head of people that um are building this industry for the for the long run and whom um I actually do trust uh to do the right thing um but like what do you see from your Vantage Point are there still some adults left in this industry that that uh that care and are going to work to clean up the mess from um the crazy party that SBF just threw I I mean look at it through this lens I spend most of my time talking to early stage startups and a lot of developers and so the the real talent the real All-Stars in this industry or the open source development communities and so I don't see any of that being impacted by this right so uh and that's across whatever chain you like you've got open source developers

maybe maybe not in like Ripple but like there's open source developers everywhere that are uh the real heroes here uh and who you know who ends up winning on the centralized side I think you're just going to see the capital is going to flow to the regulated entities right now so if there was ever a time for you know Fidelity Bank of New York Mella and coinbase all these regulated players cpoe which uh cboer sacks like all these businesses that have been just set up to disclose conflicts and not have proprietary trading firms attached to infusions and like seemingly obvious things like Audits and improving reserves I think the market will flow towards those type of Market participants um but look it'll take time I think

right now there's going to be a lot of people on the allocation side that are just super gun shy and um yeah we'll have some contagion here I think but coming out of it it's the developers and it's the players that you know put regulation aside it's the ones that do things to protect their customers and that are not predatory towards them put a timeline on this how long is it going to take to heal I you know a lot of this is going to be interest rate driven too and so I think you can put imagine if we were still living in a zero rate environment it's a shutter to think that maybe FTX would have been able to they would have been continuing the fraud if we're you know zero rate so I think we're going to get a pivot at some point we're going to

have the FED pull back appetite for risk will increase um and I think the other thing is very positive is that a lot of these institutional custody audited Platforms in the US are now coming online so you know Fidelity has been at this for years and now that product's in a position to launch for Retail Bank of New York Mellon has been working on this do you know how many people use Bank of New York Mellon for custody in other assets a lot I mean it's it's the largest custodian in the world and so they have you know 100 people there that know what they're doing building out NPC custody I think that's unbelievably bullish for the industry NPC custody custody wow yeah that's awesome you know and I think it's been public that they're working with fire blocks on

that so so you know they know what they're doing over there so I think um that's reason for optimism but you know ultimately a lot of this is going to be rates driven I think I think that's yeah the big um Legacy of this whole event is the polarization of some people are going to be like the the middle ground between pure decentralized protocols and highly regulated trusted onshore centralized entities the middle ground's gone it's like pick one or the other like you're you hold your own assets on your Ledger on the chain or you are in an onshore regulated U.S entity that looks and feels legit and has been around for 100 years I I think that's right I mean I think the D5 space will be interesting to see

because I I do like this idea of you know on-chain lending and D5 and some of the things that you could potentially do at the intersection of regulated financial services and public blockchain so I think there's something there um I think we'll have a blending it's quite possible to me at some point in the future that centralized institutions in the US are offering you know a lot of interesting creative products that right now are only available to individuals on like metamask and and messing around um personally but uh I'll be here for it I'm excited about it I mean on your point in Fidelity I know it's for the first time in a Fidelity account that uh that I've seen you can actually buy eth I think that was uh just um just added pretty recently which is uh which is really cool to see and definitely um you

trust Fidelity more than you trust an FTX uh right now um and I think your other point about interest rates right um we would have never had the blow-ups that we had this year unless the FED actually raised rates and so there was all sorts of risk on shenanigans that were happening as a result of of low zero almost negative cost of capital right and so this is like from a macro perspective this is very healthy the most unhealthy thing would have been to your point Matt if we had uh zero percent interest rates for a while and the trade and the Ponzi got larger and larger imagine Sam like accruing ultimate power David and I in a

livestream yesterday compared him to like Emperor Palpatine like you know episode one he didn't know he was a Sith Lord right he's accruing power and pulling the strings in the background and it turns out he's a pretty bad dude who's bent on controlling the entire galaxy zero percent interest rates uh could have given him that leverage I guess uh maybe a question for you again on timing is um do you think the worst is behind us or do you think there are more blow-ups that we're going to see and I'm not so much I you know there's more contagion coming from this event very probably um I don't know how much more is ahead I'm more talking about another month down the road massive event like this uh is that in the in the cards for us or

have we really burned off all of the um all of the molds from the space I think you'll have some second order effects here around Market participants whether they be trading firms or hedge funds that that go under I think some of these rumors that we've seen around the third tier exchanges I would be running for the hills if I had assets on some of these platforms so I think some of that will happen um what type of an impact that would have I would think it would be a lot less than what we just went through with FTX the interesting thing about fgx is that they don't have a lot of Bitcoin and Eve left on the balance sheet either and so you know from a market impact we're not a trading firm you know we don't take these positions but I it'll be interesting to see what happens to

just the price price of cryptocurrencies because it's it's unlike past blow-ups in the sense that there's not a ton of cell pressure just sitting on the sideline for some of these large cap assets there was a there's a theory that the worst actually hit us in the summer of this year when we saw you know the three hours Capital massive liquidations of all of that Bitcoin and all of that ether and uh this is a different type of event that might not hit those large cap assets as much of course the macro is still as uncertain as ever as we're streaming this a uh I guess there was a missile from uh Russia that hit Poland ready to go unpack that right like so there's a whole that whole backdrop uh as well but um yeah it's interesting

times for sure Matt um thanks so much for spending time with us and uh for being one of the adults in the room uh we need people like you casa Island yeah to help us through some of these things particularly with your institutional experience uh super valuable so we appreciate you thanks for me on guys keep up the great work action items for you today I don't know if we have any do we David we have so much content on the FTX SPF front that um you know you can go download some of that if you want and we'll be talking about it a bit more along with our regular scheduled program which is uh next Monday we have an episode coming out about the FED about this episode people should look forward to it I'm going to listen to that one it's great

uh it's really great and I'll leave it there risks and disclaimers of course crypto is risky so is ethos Bitcoin all of D5 is you could lose what you put in but we're headed west this is the frontier it's not for everyone but we're glad you're with us on the bank list Journey thanks a lot