The Michael Knowles Show - Lies, Theft, & Orgies In The Bahamas： FTX Crypto Explained ｜ Erik Voorhees

00:00:00.000 It all seemed so wonderful. FTX, the world's second largest crypto exchange, was changing

00:00:08.040 everything. It was revolutionizing not just crypto and finance, but the whole world through

00:00:14.660 effective altruism, through the funding of the most wonderful, idealistic, largely Democrat

00:00:22.880 politicians all over the United States. It was all just so beautiful until it all came

00:00:29.720 tumbling down. And it turned out that FTX was actually just a bunch of kids living in a Bahamas 1.00

00:00:38.800 penthouse, doing a ton of drugs and sleeping with one another and spending gazillions of dollars that

00:00:46.300 didn't actually really exist. Now, I know absolutely nothing about crypto or finance or the Bahamas for

00:00:56.000 that matter. But fortunately, we have one of the OG leaders in crypto, Eric Voorhees, who has debated

00:01:03.880 the man in question here. That would be Sam Bankman-Fried, S-B-F, and who has really approached

00:01:12.620 crypto, not just from a money-making perspective, but from a philosophical perspective as well.

00:01:17.000 And can, I think, shed some light on what the hell happened. Eric, thank you so much for coming on the

00:01:23.400 show. Hey, Michael. Thanks for having me. I truly know nothing about crypto. I have been reading the

00:01:31.920 reports of what happened here at FTX. I still, I don't quite get it. The best I can deduce is that

00:01:39.180 the whole thing was kind of a Ponzi scheme. What happened?

00:01:45.280 Yeah, let's start with the basics. So yeah, FTX was this massive exchange, fairly new on the scene,

00:01:52.580 like it didn't even really exist three or four years ago. But suddenly it was the second largest

00:01:57.400 exchange. It had its name on the Miami Heat Stadium. It was doing Super Bowl ads with Tom Brady and Giselle.

00:02:04.940 And everyone thought it was like one of the most successful companies in the entire industry.

00:02:12.460 It had a related company called Alameda, started by the same guy prior to FTX. Alameda was a

00:02:20.760 prop trading firm. They would trade their own money, make speculative bets on various things within the

00:02:26.080 crypto world and without. And FTX was a exchange for customers. So people that want to buy and sell

00:02:34.260 cryptocurrencies would go to FTX to do that. What seems to have happened is that Alameda made a bunch

00:02:41.600 of losing bets, very large losing bets, billions of dollars, perhaps earlier this year. And it borrowed

00:02:50.780 the missing amount from FTX. FTX lent customer money over to Alameda. So FTX had billions of dollars

00:03:02.620 of customer deposits who were trying to trade their own cryptocurrencies. It lent that money,

00:03:07.040 unbeknownst to those customers, to this other company. And that seems to be what has happened

00:03:12.680 generally. The details are still all coming out. But there's something around $10 billion missing,

00:03:19.400 which is an absurd amount. And the behavior of SPF since the collapse last week has been also very

00:03:29.900 strange and extraordinary. So I'll stop there and we can dig into whatever you want.

00:03:34.320 Fools and their money are quickly separated. But you're talking about some pretty serious people 0.99

00:03:39.520 with some pretty serious money and then a ton of other kind of regular run-of-the-mill retail investors

00:03:45.740 who are using this exchange. How did nobody figure out that the whole thing was kind of a scam?

00:03:53.660 Well, Twitter figured it out. Crypto Twitter figured it out. Just people using blockchain forensics

00:04:01.080 figured it out. And that's kind of what started this all unwinding. It certainly wasn't the government

00:04:05.940 that figured it out. It certainly wasn't regulators that figured it out. It certainly wasn't the police

00:04:10.200 anywhere that figured it out. It was just private people doing some investigation. And so it was discovered

00:04:19.180 because basically they had to stop having customer withdrawals. They had to pause them.

00:04:27.080 And that's always like a huge red flag. There should be no point where a custodian is ever pausing

00:04:32.220 withdrawals. That's a problem. And they're pausing it because they didn't have enough money to fund it.

00:04:38.020 Right. I mean, this is the sort of thing we read about in the 1930s or right after the stock market

00:04:43.260 crash that this Twitter thread emerges. And they say, actually, FTX is completely screwed. And then

00:04:55.080 people come in and they say, OK, I want to get my money out of here. And it's basically like a run

00:04:58.420 on the bank. And the bank or the exchange, the FTX in this case, doesn't have the funds. And so they

00:05:03.460 say, OK, we're going to put a pause on it. And then no one has any faith whatsoever in the institution

00:05:07.520 anymore. And then the whole thing just collapses instantly. Yeah, the comparison to a bank is the

00:05:13.120 right one. So just like with banks, FTX operated on what's called a custodial model where it's

00:05:18.620 holding customer money. So a lot of things in crypto are called self-custody, where you're

00:05:23.640 holding your own keys, you're holding your own crypto, and you don't have to worry about whether

00:05:27.480 people are trustworthy. But still, people deposit funds with third parties. And in this case, the third

00:05:33.320 party was FTX. And just like a bank that doesn't actually have all the money in it that people think

00:05:37.960 it does, FTX did not either. But unlike a bank, FTX does not have a backstop of taxpayers in the form

00:05:45.020 of FDIC insurance. So when the run started, it all fell apart. You have to feel sorry for the people

00:05:52.780 who lost their money, even Tom Brady or whoever. But there is something really satisfying here,

00:05:59.360 which is that SBF, the guy who was running this thing, was so flamboyantly liberal. I don't know.

00:06:09.800 He was so effusive about effective altruism and how he was going to transform the world. And he

00:06:16.300 wasn't really in it for the money. He was just in it for all the good that he could do for everybody

00:06:20.440 else. And then it turned out it was just complete BS. The guy's a common criminal, basically.

00:06:25.700 Yeah, well, he was the second largest donor to the Democratic Party in this last cycle,

00:06:31.320 something like $40 million. I'm awaiting those politicians to return all that money so that

00:06:35.940 it can go into the relief fund for the victims. That would be nice.

00:06:39.420 Well, I hope you're not holding your breath on that, Eric, because I don't think that would be

00:06:44.440 conducive to your health. So the basic scheme here was the guy takes the money out of the exchange

00:06:54.680 and sends it over to this hedge fund. The hedge fund is being run, it turns out, by this 20-something

00:07:01.900 Stanford graduate girl who may or may not have been SBF's girlfriend and who publicly now it is

00:07:10.740 coming out. I mean, I guess it was public before, but no one was paying attention to it,

00:07:14.720 was not implementing even basic protections against some of her crazy bets that obviously

00:07:21.980 weren't paying off very well as investments. And then they would all brag about how they were

00:07:26.720 hopped up on amphetamines. I guess what I still struggle with is how did they get away with it for

00:07:33.600 this long? They got away with it for this long because they had the mirage of protection under

00:07:42.320 government regulation happening. FTX's marketing campaign was the safe, regulated way to buy Bitcoin

00:07:49.040 and digital assets. And it wasn't just a campaign. Again, Sam was in Washington, D.C. lobbying and

00:07:56.740 talking with all these regulators. He was buddies with many of them. There are all sorts of photos of

00:08:00.700 him with Maxine Waters. And he had meetings with the chairman of the SEC, Gary Gensler, who seems to

00:08:07.180 have taken a very light touch approach with him. People trusted it because it flew under the banner of

00:08:15.740 regulation. And unfortunately, people trust the government. They should stop doing that.

00:08:20.120 Thankfully, in crypto, you can trust code. You can trust math. You don't need to trust politicians.

00:08:25.340 But people still do. And so that's part of what allowed this to get so large and to collapse so

00:08:31.020 horribly. You know, I'm not a huge Ayn Rand guy, but I have to admit this whole episode just seems like

00:08:37.680 something out of Atlas Shrugged. You know, the really crooked businessman whose entire wealth rests on

00:08:44.280 favors that he's calling in in Washington, D.C. I mean, this guy, Sam Bankman-Fried, was just doing

00:08:49.600 all of that. And it's not just the regulators in D.C. It was the media, too. I just pulled at sort of

00:08:56.660 at random one of the glowing profiles of this man. Here's what they said about his Bahamian business

00:09:03.620 operation. Sam Bankman-Fried lives there with nine roommates, fellow travelers in effective

00:09:10.280 altruisms movement. An intimate crew. We learned it was actually a very intimate crew, but that's

00:09:15.700 beside the point. It's just SBF, his family, his mother, father, and brother are all in town,

00:09:21.660 and close friends. A team dedicated to fixing the world via the magic of quantitative easing and the

00:09:27.700 overwhelming force of goodwill. All of them are united by the mission. Goes on and on and on.

00:09:33.460 Yes, the government regulators failed here. Didn't the media fail as well? How come it's just

00:09:38.280 random guys on Twitter who were able to expose this fraud? Where were the journalists? Where

00:09:42.960 are the financial journalists who should have been poking around the business operation?

00:09:48.660 Yeah, well, they, like often, abdicate their responsibility. In the crypto world,

00:09:53.620 we get lots of articles from the press that are very damaging and very cynical about what we're doing.

00:10:01.740 But when it comes to someone like SPF, they write these glowing reviews.

00:10:04.900 Why? Why that discrepancy? Like the good leaders that have been in this space for

00:10:10.900 up to a decade at this point, just get totally trashed by the New York Times, by the Wall Street

00:10:16.160 Journal, myself included. And then the biggest fraudster that has ever appeared in crypto comes

00:10:23.100 along, and they write these glowing reviews about him. Even what came out in the New York Times a day or

00:10:28.060 two ago, post the collapse. If you read it, it's shocking how unwilling they are to acknowledge

00:10:35.100 that Sam committed an absurd degree of fraud and theft here. They don't even use those words. They

00:10:41.520 talk about how there was a collapse and this thing went off the rails. And it just got this vibe of,

00:10:48.800 you know, poor kid got ahead of himself instead of, this guy stole customer deposits and gave them to

00:10:56.300 a sister company. And that is simply just fraud and theft. It's not complicated. It's not like some

00:11:03.260 complicated new scheme was created using crypto technology. They just had a bunch of customer

00:11:08.280 money and they gave it to someone else. And it's just theft.

00:11:11.320 You know, I did watch a debate between you and this guy, Sam Bankman-Fried, and knowing absolutely

00:11:19.100 nothing about crypto, I had the sense that you had the right side of the debate because you gave your

00:11:26.260 answers in really plain, concise language. And he would just spin a yarn forever using all this kind

00:11:34.520 of jargon and all of these kind of mealy-mouthed words. And I thought, you know, seems like the guy is

00:11:40.780 trying to hide something here. And clearly that's the case. But as you point out with the New York

00:11:45.380 Times, the narrative that is emerging from the collapse of FTX is that this was a failure of

00:11:52.540 too little regulation. The failure here was that, you know, crypto itself is sort of poisoned or,

00:12:01.520 you know, we just need the government to come in there more and add some more safeguards. You say

00:12:06.760 it's exactly the opposite. Yeah. The problem here is that someone committed theft and stole a bunch

00:12:12.380 of money. Theft doesn't require regulation. It's already illegal. Crypto doesn't need more rules. It

00:12:18.340 already has a bunch. Centralized custodians like this are already heavily regulated under the Bank

00:12:22.640 Secrecy Act and many other laws in the United States and elsewhere. Those of us in crypto have

00:12:28.480 seen how much regulation we have, and it doesn't help people. And here comes the biggest fraudster ever,

00:12:33.840 and none of the regulators stopped it. None of the regulators caught it. The industry caught it.

00:12:38.900 The industry stopped it. And for those of us who have been building this stuff, what we're trying

00:12:43.780 to advocate here is that people realize that decentralized finance, basically using financial

00:12:49.360 tools built on blockchains where you don't have to trust anyone, is the future. You can have honesty

00:12:54.060 through transparency and through code. You don't need to trust, you know, Tom Brady's endorsement.

00:13:00.160 You don't need to trust Maxine Waters and her, you know, 50th Committee on Financial Oversight.

00:13:05.800 You can just trust open source code, and that is incredibly powerful. And that's actually the

00:13:09.240 right lesson to learn from all this. By the way, I remember what Tom Brady did to those footballs,

00:13:13.260 okay? I remember Deflategate. So I would never trust a crypto exchange that he was endorsing.

00:13:18.540 But I don't know, maybe that's from my prejudices as a New Yorker, you know, never was a big Patriots

00:13:23.160 fan. Moving forward, you've got this DeFi movement. We're saying, okay, the regulation

00:13:29.040 is a big, big problem here. And obviously there was a failure of people being too cozy with these

00:13:33.760 regulators. Can crypto broadly survive this? I mean, because you can say, well, the narrative

00:13:40.940 that's being spun up by the media is total BS, but narratives have power. What does the collapse

00:13:48.060 of FTX mean for the broader crypto space? Yeah. So from a superficial level, it's a huge

00:13:54.760 black eye for crypto, right? Like irrefutably. The fundamental question, what's valuable to

00:14:01.520 understand is, did anything actually change with the technology that would lead someone who had a

00:14:07.040 thesis about this to change their thesis? Nothing about crypto technology changed. There's no horrible

00:14:13.440 bug revealed in the consensus mechanism of Bitcoin, for example. Crypto blockchains keep working just

00:14:20.460 as they always have, and they operate according to code. The failure here is a failure of centralized

00:14:25.160 financial intermediaries, and that's been happening for hundreds of years. There's nothing new to that.

00:14:31.640 But certainly people who don't look under the surface or who read the New York Times

00:14:35.400 are going to end up, you know, misled. And that's a shame.

00:14:40.020 I think you repeated yourself there, by the way, Eric. People who don't look under the surface and

00:14:44.200 people who read the New York Times. I hope they can look elsewhere to figure out the reality of

00:14:50.600 what is going on. But if you've got all this money that basically disappears, and who knows if SBF,

00:14:58.200 you know, flies off into the sunset, you know, and leaves on a yacht from the Bahamas, you know,

00:15:03.880 with some crypto wallets in his pocket. But how are the other exchanges reacting to this? And what do

00:15:11.660 you think, even if it's ill-advised, the regulatory action from Washington is going to be?

00:15:18.080 Yeah, so the other exchanges are, you know, all reacting first in telling people, you know,

00:15:26.080 they don't act the same way. You can trust them. And some of them are correct. You can trust them.

00:15:30.740 But that's also still missing the point. Again, the best way to use crypto is in a way that you

00:15:35.760 don't have to trust humans. That's the magic of the technology that has come out. So decentralized

00:15:39.860 exchanges haven't been saying anything, of course, because there's no people there. It's just these

00:15:45.420 financial robots that work according to code. And that's like a much better way to actually have

00:15:48.840 a foundation for economic interaction between people. One good thing that should happen from this

00:15:55.500 is more of the centralized exchanges may be encouraged to do what's called proof of reserves.

00:16:02.180 So you can actually do like a mathematical proof of what you hold. It's slightly technical,

00:16:08.120 but it can be done in a way for the user where it's clear and obvious. And that would provide

00:16:12.680 some degree of verifiability. So I'm hoping that that will happen. I think the regulators are going

00:16:19.340 to use this as an opportunity to regulate more. They're not going to use it as an opportunity to

00:16:23.680 self-reflect and recognize that they completely and utterly failed at their job. I can guarantee

00:16:28.400 you that. They're just going to use this to write more laws and impose them down on a bunch 0.96

00:16:31.860 of innocent people. So we've talked about what the effect for crypto will be. Will there be any effect?

00:16:38.860 Will there be any black eye for the effective altruism movement? Will there be any black eye for the

00:16:45.780 Democrat Party? Will there be any black eye for the regulators or no? Do you think that just gets

00:16:51.400 brushed under the rug because this is kind of a technical topic to discuss and most people are

00:16:57.160 just going to glaze over? Well, it's actually not a technical topic. It's just someone who had a

00:17:02.820 bunch of customer money stealing it and giving it to someone else, right? But I mean, the industry

00:17:06.520 broadly requires a little bit of kind of technical know-how. Yeah, that's fair. I don't really think

00:17:12.960 this is actually a story about effective altruism. I mean, that's the idea that if you're going to try to

00:17:17.380 be generous, you should try to be effective in your generosity. And there's nothing wrong with

00:17:21.440 that in principle. The reason that gets pulled into the story is because it looks so bad when,

00:17:26.200 you know, one of the world's foremost billionaire effective altruism advocates comes out as like

00:17:31.140 the greatest Ponzi scheme operator of all time. This isn't actually even a Ponzi scheme. It's just

00:17:36.960 theft. So like we don't need to come. Do you think there's a comparison? You know, people are asking,

00:17:42.880 is this Bernie Madoff? Is this Enron? Is this, I don't know, any other number of huge financial

00:17:48.640 scandals? Is there any analogy that you would draw? I think it's closer to Enron than Bernie.

00:17:56.200 Bernie was running a Ponzi scheme over many years over the long term that failed as Ponzi schemes must

00:18:02.520 fail. This wasn't really a Ponzi scheme. This was just taking a bunch of customer money and giving it

00:18:07.580 to someone else. I'm sure that Sam thought that he'd get that debt paid back and it would never

00:18:13.280 be a problem. But it was a problem. So yeah, there's, I don't know a good historical example

00:18:22.960 like this. Certainly within crypto, a lot of centralized exchanges have gone bust or had

00:18:28.260 hacks, you know, that kind of thing. So it's not new within centralized custodians.

00:18:33.460 You've talked about your enemies in Washington. Do you have any allies? I mean, are there politicians

00:18:39.080 that you would point to who you think these guys get it, they get what crypto is and what crypto

00:18:44.100 could be and they're moving in the right direction on it? Yeah, there are a few and there's more and

00:18:51.180 more. You know, 10 years ago, no one in Washington cared about Bitcoin or crypto. Five years ago,

00:18:56.740 no one in Washington was an ally. Now there are some allies. I don't actually want to name any

00:19:03.440 names because I'm kind of a persona non grata in Washington and I don't want to get them in trouble

00:19:09.400 with their peers. But it has been good to see actual allies that understand it and who speak

00:19:14.700 eloquently when they're discussing cryptocurrency. Can I at least ask you, are you talking about

00:19:19.260 regulator or bureaucrat types? Are you talking about US senators, say, or are you talking about

00:19:24.740 all of the above? Senators, senators and congressmen. I don't know that I've seen any

00:19:28.660 regulators who are doing a good job. I will make one exception, which is Hester Pierce at the SEC.

00:19:36.560 She's been the most thoughtful, perhaps the only thoughtful regulator at the SEC.

00:19:41.620 She has stood against many of the decisions that they've made that have been really bad.

00:19:45.860 So yeah, props to her for both understanding what she's talking about and for coming to the right

00:19:50.060 conclusions on it. Well, that's terrific. I'm glad to hear that you've got a little bit of support in

00:19:54.420 Washington, even if you wisely don't want to go about flaunting it. You saw what happened to the

00:19:59.420 last guy who was flaunting all of his political contacts in Washington. Did not turn out very

00:20:03.320 well for him or for his exchange. But thank you for shedding a little light on something that I

00:20:07.860 really, you know, I just mired in all of the gobbledygook jargon. I couldn't make any sense of

00:20:13.580 it, but you've distilled it pretty well. A guy stole a bunch of money and spent it in ways that he

00:20:18.780 shouldn't have. A tale as old as time, but in this case on a very large scale. Eric, where can people

00:20:24.760 find you if they want to read more, follow your thoughts, and all the rest of it?

00:20:30.400 Twitter's great, at Eric Voorhees, Eric with a K, and you can find me there.

00:20:36.400 That's great. That's wonderful. I look forward to that. Speaking of freedom and, you know,

00:20:42.200 getting rid of regulations, Twitter, another great place right now where a billionaire is coming in

00:20:47.980 and hopefully making things a little bit more free. So I'll look forward to seeing you over there.

00:20:51.820 And for all the rest of you out there, I look forward to seeing you tomorrow. I'm Michael Knowles.

00:20:55.560 This is The Michael Knowles Show.

The Michael Knowles Show - November 27, 2022

Lies, Theft, & Orgies In The Bahamas： FTX Crypto Explained ｜ Erik Voorhees

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