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₿ "Sam Bankman Fraud: Inside the Collapse of FTX’s Hollow Empire"

The Breakdown, With NLW

Table of Contents

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Host: Nathaniel Whittemore
Category: ₿ Crypto | Inside FTX
Original: 58 min | Time Saved: 53 min

Podcast’s Essential Bites:

[0:07] NLW: "On Tuesday, November 1, FTX was worth $40 billion, and its CEO Sam Bankman-Fried (SBF) was worth about $16 billion. By Friday, November 11, FTX had declared bankruptcy and the Bloomberg Billionaires Index was estimating SBF's net worth around a single dollar."

[1:05] NLW: "I intersect with FTX in two ways. [...] FTX [was] a sponsor [of the podcast], but I also work[ed] with them. Specifically, I've done brand marketing with FTX for a couple of years, but the most notable things being the TV ads. Larry David's Superbowl commercial, that was me. Importantly, here are the things that I have never done with FTX: anything involving product, anything involving their investing, anything involving customer service, anything involving customer funds, anything involving their politics, anything involving anything other than helping tell our story to the public. I've always been remote. And in the two years I worked with FTX I spent one day in any office, which was the Chicago office, which is also the only time I met Sam."

[6:33] NLW: "At 10:44 am EDT on Wednesday, November 2, Ian Allison published a piece called "Divisions in Sam Bankman-Fried’s Crypto Empire Blur on His Trading Titan Alameda’s Balance Sheet". The piece was based on a balance sheet obtained by Allison that as he readily admitted was potentially only a partial document. [...] There are a few major points that shook the market. First was the huge amount of FTT, which is the native token of the FTX international exchange, that was on Alameda's books. Of Alameda’s  $14.6 billion of assets its largest, by far, was 3.6 billion of unlocked FTT, and its third largest asset was 2.16 billion of FTT collateral. [...] At the time of the reveal, [...] combined this FTT was worth more than the entire market cap of FTT."

[7:25] NLW: "The second notable fact about this balance sheet reveal was how much else was concentrated in highly illiquid tokens. There were hundreds of millions and tokens like SRM, which is the native token of the decentralized exchange that SBF started in late 2020. Plus tokens like MAPS, OXY, FIDA. There was also more than a billion dollars worth of various forms of locked and unlocked Solana. The third notable fact was just an implication of the first two. Alameda was really really really illiquid."

[8:16] NLW: "That brings us to the weekend of November 5 and November 6. Even before that Sunday, FTX was processing more withdrawals than normal, based on the reverberations of the CoinDesk piece on Alameda. But it wasn't until Sunday that things got really gnarly. I had noticed for months that the tension between Binance and FTX was growing. Binance had been one of the earliest investors in FTX. But in 2021 FTX bought out Binance's stake, firmly separating the company's."

[10:04] NLW: "On Sunday, the 6, [...] at 10:47 ET CZ (Changpeng Zhao, Ceo of Binance) tweeted: As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that have [come] to light, we have decided to liquidate any remaining FTT on our books. We will try to do so in a way that minimizes market impact. Due to market conditions and limited liquidity, we expect this will take a few months to complete. Binance always encourages collaboration between industry players. Regarding any speculation as to whether this is a move against a competitor, it is not. Our industry is in [its] nascency and every time a project publicly fails it hurts every user and every platform. We typically hold tokens for the long term. And we have held on to this token for this long. We stay transparent with our actions."

[15:18] NLW: "By 8pm Sunday night, people were pointing out that FTX's stablecoin reserve had dropped by 93% over two weeks and was down to just $50 million. From a communications perspective, saying nothing was not an option. [...] But not only did the public not get that no one inside the company did either, at least not through any of the major Slack channels. Even more significant by late Sunday night, all of our biggest clients were frantically asking for answers as well. [...] And what they were asking for wasn't extraordinary. They just wanted to hear from the company or from Sam. And they just wanted really simple, should-be-easy-to answer [...] questions answered. They wanted to know we were solvent. And they wanted to know that we don't lend out our customer assets."

[17:54] NLW: "Throughout Monday morning the internal discussion was getting more and more frantic. [...] That afternoon Sam tweeted : 1) A competitor is trying to go after us with false rumors. FTX is fine. Assets are fine. 2) FTX has enough to cover all client holdings. We don't invest client assets. Even in treasuries. [This tweet is not available anymore]. It would be less than 48 hours before we all learned that this message was a bald faced lie."

[20:26] NLW: "By Tuesday morning, the situation was dire. We were officially in a bank run. And what's more, withdrawal seemed to be slowing down and taking longer and longer to complete. [...] By the beginning of the East Coast business day, the press noticed that FTX had stopped processing on-chain withdrawals from Etherium, Solana, and TRON entirely. Now for me by this point, it was clear that the game was over. [...] There was no universe, no communication strategy so bad or so stupid, that it would say nothing for this long, unless something truly catastrophic had happened. And for something truly catastrophic to have happened, based on what we had been led to believe up to that point, there had to be a big lie somewhere."

[21:27] NLW: "At 11am Eastern Time [...] myself in the rest of the FTX team found out at the same time as all of you that Sam had, in fact, not been out raising an emergency round, but instead selling FTX [...]. Hey all, he wrote, Things have come full circle, and FTXs first, and last, investors are the same: we have come to an agreement on a strategic transaction with Binance for FTX (pending DD etc.). Our teams are working on clearing out the withdrawal backlog as is. This will clear out liquidity crunches; all assets will be covered 1:1. [...] The important thing is that customers are protected. A *huge* thank you to CZ, Binance, and all of our supporters. [...] We are in the best of hands. Note that FTX.us and Binance.us –two separate companies–are not currently impacted by this. FTX.us’s withdrawals are and have been live, is fully backed 1:1, and operating normally.)"

[22:50] NLW: "Two things that are important to note about this mind boggling statement. The first is that [...] Sam just totally sucks up to CZ. [...] But even beyond that, the statement [...], all assets will be covered 1:1, people immediately noticed the use of will not are. It was tantamount to an admission that FTX had been playing loose with customer deposits."

[23:41] NLW: "Almost as soon as the deal was announced, the crypto community nearly universally bet that it was never ever going to happen. If there was really a big hole on the balance sheet, because FTX had been lying about lending out customer assets, why would Binance want to take that on? [...] For about a day the charade the deal would close was kept up. [...] But by Wednesday afternoon the deal was dead and Sam got to experience a bit of what employees had been experiencing all week when he found out that the deal was off through Twitter and the media rather than through Binance telling him directly."

[25:01] NLW: "You have to understand just how devastated the average FTX employee was at this point. Many of these people, especially our global staff, use FTX as a bank, being more efficient than banks in their part of the world. Not only then did it seem like they might be out of the job, but they were also potentially facing the total loss of their savings."

[29:39] NLW: "Reuters published a piece on Thursday that suggested that Alameda was rocked by the crashes in May and June alongside many of their other hedge fund compatriots. According to Reuters sources at that time, SBF transferred at least 4 billion in FTX funds to Alameda, secured by assets including FTT and shares in Robinhood, which SBF had bought a 7.6% share of in May. Importantly, according to these sources, a portion of these funds were in fact FTX customer deposits. [...] The one thing that had been promised over and over [...] to the very last minute was that FTX didn't touch customer funds. And it was a lie."

[27:25] NLW: "Over the next couple days, the reported numbers of the transfers from FTX to Alameda kept growing. By Friday night, Reuters again reported that it was $10 billion of customer funds. And that what's more, a huge portion of that was now missing. One source put it at exactly 1.7 billion and missing funds, and one put it up between 1 billion and 2 billion."

[28:27] NLW: "On [...] [a] Sunday meeting, where Sam was briefing execs to figure out how much to raise and telling them how much he had transferred to Alameda, apparently, it came to light that SBF had implemented bespoke software to build a backdoor into the FTX bookkeeping system. [...] The setup meant that the movement of the 10 billion in funds to Alameda did not trigger internal compliance or accounting red flags that FTX."

[30:36] NLW: "As late as Thursday night, there were still extreme battles within the organization about whether there could be some way to salvage something, or whether the whole thing needed to be put into bankruptcy. [...] By Friday, the forces of rationality had prevailed and FTX was put into bankruptcy. To be clear, something like 130 or more corporations tied to FTX were put into bankruptcy, which is just insane. Sam was deposed as the CEO and John Jay III was put into place, [...] the same person who was appointed to lead Enron through bankruptcy and settlement proceedings in the early 2000s."

[34:26] NLW: "Why was there no due diligence from investors? [...] First, I will say it's not quite true that no investors saw red flags. Chamath Palihapitiya of Social Capital [...] [and] Jason Choi [...] [publicly shared their] reservations about FTX. [...] Second, there were clearly some conflicts of interest. The Information reported last week that SBF had quietly invested more than a half billion dollars in Sequoia, Paradigm, and other venture firms who also invested in FTX. This sort of circular investing seems likely to be something that is going to get a lot more scrutiny and whatever is to follow. Third, [...] the guy was on the cover of magazines. He was on TV constantly. He was what the better side of crypto was supposed to look like."

[35:36] NLW: "Why didn't they just let Alameda die? [...] To me, there are two possible answers. The first is arrogance of kids who thought they could save everything and were willing to play fast and loose to do so. The second and more concerning was that they knew that the death of Alameda was an existential threat to FTX because of yet to be revealed tie ups. I think both of these are plausible and even likely."

[37:33] NLW: "Where do regulations go from here? One thing that is abundantly clear is that the [...] DCCPA (Digital Commodities Consumer Protection Act) is dead for this year. More broadly, I think many people are expecting a political dragnet in the wake of FTX's collapse. [...] People are particularly worried because already DeFi was on shaky ground regulatorily. And it seems fairly clear from the initial response to DeFi and all of the rest of crypto is getting swept up in what ultimately is an institutional failure based on fraud. Unfortunately, getting politicians to recognize nuance when the event is so cataclysmic is going to be an uphill battle."

[38:18] NLW: "Where really was the rot here? [...] One possible answer is the very idea of tokens as a construct. As it's becoming clearer and clearer, tokens like FTT and SRM were used as little more than a shell game to balance out a seemingly endless back and forth of value on paper games between Alameda and FTX. [...] Another possibility is that the rot has to do with a type of business relationship that simply shouldn't be allowed to exist. In other words, should it be the case that crypto exchanges or the people that own and operate them should not simultaneously be able to own and operate prop trading firms? Is a source of rot the lack of regulations that let the above two conditions persist? [...] Is the source of rot an industry that wasn't willing to do diligence, and that overly relied on media as an instrument of legitimacy? That was so desperate for a mainstream success that it was willing to overlook red flags. [...] I think the answer to all of these questions is yes, none of them can explain it alone."

[39:34] NLW: "However, there was another source of rot here, one which in our necessary self reflection we cannot forget. And that's a power-drunk kid or kids with too much fake money and too much willingness to lie, deceive, and defraud his customers, employees, and investors to achieve whatever ends he had decided justified the means."

[39:55] NLW: "That brings us to, I think, what is the biggest question for many, why Sam did this. [...] It feels to me that there are only a few possible answers. The first one is greed. [...] A second possible answer to why is power. This seems to be more plausible. [...] Getting money and then channeling it in a way that he thought was uniquely correct, especially relative to how others were spending money, whether it was in charity or in politics was a distinct and key motivator. Which [...] brings us to the third possible answer: hubris. [...] Simply put, Sam thought he could get away with it. The brazenness of lecturing Congress in the Senate on FTX's transparent practices, while lying to everyone in the industry, including his own team is so gallantly hubristic, it would make ancient Greek poets blush. There is of course, though, a fourth possible answer, which is desperation."

[41:48] NLW: "There is a growing speculation and investigation of to what extent the supposed fortunes of FTX and Alameda as companies and Sam, as an individual, were built on a foundation of fraud and lies from the very beginning. It is entirely possible that the open door between Alameda and FTX, and specifically those $10 billion in customer fund transfers, were in fact the pre requisite of the whole setup. That if they couldn't pull off this fraud and deception, the whole thing was going to crumble in on itself anyway. For now, we don't exactly know. We can only speculate. But I suspect we'll know a lot more soon."

Rating: ⭐⭐⭐⭐⭐

🎙️ Apple | Google | Spotify
🗓️ 11/15/2022

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