WEBVTT 00:00:00.000 --> 00:00:02.839 OK, let's unpack this. Usually when we sit down 00:00:02.839 --> 00:00:05.259 to do a deep dive on a corporate collapse, we 00:00:05.259 --> 00:00:08.599 are talking about a slow bleed. You know, a company 00:00:08.599 --> 00:00:11.699 like Kodak or Blockbuster that just sort of missed 00:00:11.699 --> 00:00:13.839 the boat on innovation and faded away over a 00:00:13.839 --> 00:00:16.039 decade. Right. The slow death by irrelevance. 00:00:16.039 --> 00:00:18.339 That is the standard narrative. Exactly. But 00:00:18.339 --> 00:00:21.440 today we are looking at something that is functionally 00:00:21.440 --> 00:00:25.170 the opposite of a slow death. A supernova. A 00:00:25.170 --> 00:00:27.510 supernova. That's a good way to put it. We are 00:00:27.510 --> 00:00:29.449 looking at a company that went from being the 00:00:29.449 --> 00:00:32.429 absolute titan of the industry, valued at $32 00:00:32.429 --> 00:00:36.929 billion, plastering its name on NBA arenas, getting 00:00:36.929 --> 00:00:39.090 shout outs from the biggest celebrities on earth. 00:00:39.270 --> 00:00:42.740 To nothing. to literally zero and not just zero, 00:00:42.820 --> 00:00:45.479 but a Chapter 11 bankruptcy filing and criminal 00:00:45.479 --> 00:00:47.979 charges in a roughly a three year span. It is 00:00:47.979 --> 00:00:50.399 arguably one of the most rapid and catastrophic 00:00:50.399 --> 00:00:52.960 corporate implosions in the history of financial 00:00:52.960 --> 00:00:56.060 markets. We are, of course, talking about FTX. 00:00:56.179 --> 00:00:58.420 Of course. And honestly, the speed of it is what 00:00:58.420 --> 00:01:00.600 makes it so terrifying. It wasn't a decline. 00:01:00.880 --> 00:01:03.539 It was an evaporation. The crypto exchange that 00:01:03.539 --> 00:01:05.620 was supposed to be the safe one. That was their 00:01:05.620 --> 00:01:08.879 whole pitch. The safe, easy way to get into crypto. 00:01:10.420 --> 00:01:13.500 SBF, Sam Beckman Freed, was the golden boy. He 00:01:13.500 --> 00:01:16.219 was the adult in the room. And that irony is 00:01:16.219 --> 00:01:19.120 exactly why this deep dive is so critical. We 00:01:19.120 --> 00:01:21.560 aren't just looking at some bad trades or a market 00:01:21.560 --> 00:01:24.400 downturn. We're looking at what the cleanup CEO, 00:01:24.799 --> 00:01:27.500 John J. Ray III. The man who cleaned up Enron. 00:01:27.640 --> 00:01:30.159 The man who cleaned up Enron. By the way, called 00:01:30.159 --> 00:01:32.420 a complete failure of corporate controls. Which 00:01:32.420 --> 00:01:34.939 is a very polite lawyerly way of saying it was 00:01:34.939 --> 00:01:38.480 an absolute disaster zone. Yeah, to put it mildly. 00:01:38.799 --> 00:01:40.859 When you actually dig into the source material, 00:01:41.140 --> 00:01:43.719 the bankruptcy filings, the court transcripts, 00:01:43.719 --> 00:01:46.219 it sounds less like a financial institution and 00:01:46.219 --> 00:01:48.480 more like a frat house. I've heard that comparison 00:01:48.480 --> 00:01:50.959 a lot, and it's not far off. I mean, we're talking 00:01:50.959 --> 00:01:53.060 about a group of friends, mostly in their 20s, 00:01:53.060 --> 00:01:55.519 living in a $30 million penthouse in the Bahamas, 00:01:55.540 --> 00:01:58.340 running a multibillion dollar empire using... 00:01:58.700 --> 00:02:00.980 QuickBooks. QuickBooks. And approving expenses 00:02:00.980 --> 00:02:03.540 with emojis on a chat app. It just boggles the 00:02:03.540 --> 00:02:06.140 mind. It really challenges your perception of 00:02:06.140 --> 00:02:08.680 what a unicorn startup actually looks like on 00:02:08.680 --> 00:02:11.340 the inside. So our mission today is to really 00:02:11.340 --> 00:02:13.680 unpack how this happened. We're going to trace 00:02:13.680 --> 00:02:16.659 the meteoric rise of Sam Bankman Freed or SBF, 00:02:16.800 --> 00:02:19.780 explore the specific technical mechanism of the 00:02:19.780 --> 00:02:22.340 fraud, because it is technical and we need to 00:02:22.340 --> 00:02:24.460 understand it, and look at the legal reckoning 00:02:24.460 --> 00:02:26.389 that followed. And we've got a lot of ground 00:02:26.389 --> 00:02:28.830 to cover. We've got the Wikipedia records covering 00:02:28.830 --> 00:02:31.289 the history, the detailed breakdown of the 2022 00:02:31.289 --> 00:02:34.150 crisis, and the legal fallout leading all the 00:02:34.150 --> 00:02:36.870 way up to the sentencing updates in late 2024. 00:02:37.330 --> 00:02:40.469 There are some real aha moments in here. The 00:02:40.469 --> 00:02:43.750 secret backdoor in the code, the fatal flaw of 00:02:43.750 --> 00:02:46.830 their FTT token. So buckle up. This isn't just 00:02:46.830 --> 00:02:49.409 a story about numbers. It's a story about hubris 00:02:49.409 --> 00:02:52.229 on a Greek tragedy scale. And to understand the 00:02:52.229 --> 00:02:54.590 tragedy, we have to understand the origin. Because 00:02:54.590 --> 00:02:56.530 the seeds of the destruction were planted right 00:02:56.530 --> 00:02:59.650 at the beginning. FTX wasn't the first act. It 00:02:59.650 --> 00:03:01.469 was actually the second act. Right. This doesn't 00:03:01.469 --> 00:03:03.110 start in the Bahamas. It starts in Berkeley, 00:03:03.289 --> 00:03:06.689 California, back in 2017. Correct. Sam Bankman 00:03:06.689 --> 00:03:08.990 Freed, along with Caroline Ellison and others 00:03:08.990 --> 00:03:11.169 who had worked at the quantitative trading firm 00:03:11.169 --> 00:03:13.990 Jane Street, founded a company called Alameda 00:03:13.990 --> 00:03:16.129 Research. I want to pause on Jane Street for 00:03:16.129 --> 00:03:18.500 a second. Yeah. For the listener who isn't deep 00:03:18.500 --> 00:03:21.400 in finance, this is a legitimate, high -frequency 00:03:21.400 --> 00:03:23.520 trading firm, right? This isn't some fly -by 00:03:23.520 --> 00:03:25.780 -night operation. Oh, extremely legitimate. It's 00:03:25.780 --> 00:03:28.199 one of the most prestigious and secretive firms 00:03:28.199 --> 00:03:31.340 in the world. They hire math geniuses from MIT 00:03:31.340 --> 00:03:34.759 to write algorithms that trade stocks and bonds 00:03:34.759 --> 00:03:37.439 in microseconds to capture tiny fractions of 00:03:37.439 --> 00:03:40.300 a penny in profit. That was the culture SBF came 00:03:40.300 --> 00:03:44.139 from. Smart, fast, algorithmic. So he takes that 00:03:44.139 --> 00:03:47.240 smartest guy in the room energy. and starts Alameda 00:03:47.240 --> 00:03:49.620 Research in Berkeley. And Alameda was a trading 00:03:49.620 --> 00:03:51.500 firm. They were the ones supposed to be making 00:03:51.500 --> 00:03:54.419 the smart bets on crypto prices. Precisely. In 00:03:54.419 --> 00:03:56.340 the early days, they were doing arbitrage, buying 00:03:56.340 --> 00:03:58.680 Bitcoin in one country where it was cheap and 00:03:58.680 --> 00:04:00.979 selling it in another, like Japan, where it was 00:04:00.979 --> 00:04:03.099 expensive. It was a money printing machine. They 00:04:03.099 --> 00:04:06.039 were very, very good at it. But then in May 2019, 00:04:06.560 --> 00:04:09.219 SBF and his co -founder, Gary Wang, decide that 00:04:09.219 --> 00:04:11.180 trading isn't enough. They want to own the casino. 00:04:12.139 --> 00:04:15.180 So they launch FTX. And this is the crucial context 00:04:15.180 --> 00:04:18.319 for you, the listener. FTX was born out of Alameda. 00:04:18.339 --> 00:04:20.620 You have a trading firm, Alameda, and an exchange, 00:04:21.000 --> 00:04:24.060 FTX, owned by the same people. And in traditional 00:04:24.060 --> 00:04:26.000 finance, like the stock market, that's usually 00:04:26.000 --> 00:04:28.420 a huge no -no, right? The New York Stock Exchange 00:04:28.420 --> 00:04:30.740 doesn't also run a hedge fund that trades against 00:04:30.740 --> 00:04:33.279 its own customers. It's a massive conflict of 00:04:33.279 --> 00:04:36.790 interest, a cardinal sin. In regulated equity 00:04:36.790 --> 00:04:39.490 markets, there are strict firewalls. You cannot 00:04:39.490 --> 00:04:41.490 be the referee and a player in the game at the 00:04:41.490 --> 00:04:44.069 same time. But in the crypto wild west of 2019? 00:04:44.670 --> 00:04:46.709 They just went for it. They started in Berkeley, 00:04:46.889 --> 00:04:49.069 moved operations to Hong Kong for a while, and 00:04:49.069 --> 00:04:51.569 eventually in September 2021, settled in the 00:04:51.569 --> 00:04:54.329 Bahamas. Why the Bahamas? Was it just for the 00:04:54.329 --> 00:04:56.370 weather and the lifestyle? The lifestyle was 00:04:56.370 --> 00:04:58.740 a perk, I'm sure. But it was about regulatory 00:04:58.740 --> 00:05:01.199 arbitrage. The Bahamas had passed a new law, 00:05:01.399 --> 00:05:03.759 the Dairy Act, which created a framework for 00:05:03.759 --> 00:05:06.560 digital assets. It was, let's say, friendlier 00:05:06.560 --> 00:05:08.560 and less intrusive than dealing with the SEC 00:05:08.560 --> 00:05:11.000 in the United States. Got it. So it allowed them 00:05:11.000 --> 00:05:13.879 to operate with a lot less oversight. A lot less. 00:05:14.160 --> 00:05:16.680 And I want to go back to that DNA of the company 00:05:16.680 --> 00:05:19.959 you mentioned. The source material says the dangerous 00:05:19.959 --> 00:05:22.379 DNA was there from the start because of this 00:05:22.379 --> 00:05:26.339 link between Alameda and FTX. It was inextricably 00:05:26.339 --> 00:05:29.389 linked. Bloomberg reported later that Alameda 00:05:29.389 --> 00:05:32.110 functioned as the primary market maker for FTX 00:05:32.110 --> 00:05:35.389 early on. They provided the liquidity. If you 00:05:35.389 --> 00:05:37.790 wanted to buy Bitcoin on FTX, there was a very 00:05:37.790 --> 00:05:39.389 good chance you were buying it from Alameda's 00:05:39.389 --> 00:05:41.069 account. Which sounds helpful on the surface. 00:05:41.170 --> 00:05:42.410 You know, you need someone to sell to you until 00:05:42.410 --> 00:05:44.649 you realize that if the exchange is rigged to 00:05:44.649 --> 00:05:47.490 help the house's trading firm, regular users 00:05:47.490 --> 00:05:49.649 are sitting ducks. They're just exit liquidity. 00:05:49.910 --> 00:05:52.449 But at the time, nobody seemed to care because 00:05:52.449 --> 00:05:55.189 the growth was absolutely explosive. Meteoric 00:05:55.189 --> 00:05:57.709 is the only word for it. Let's just run through 00:05:57.709 --> 00:05:58.970 some of the investment numbers because they're 00:05:58.970 --> 00:06:02.170 wild. In August 2020, they acquired Blockfolio 00:06:02.170 --> 00:06:05.730 for $150 million. Which was a huge deal at the 00:06:05.730 --> 00:06:09.069 time. Then in July 2021, they raised $900 million. 00:06:09.410 --> 00:06:12.569 That round valued the company at $18 billion. 00:06:13.189 --> 00:06:16.829 $18 billion in basically two years of operation. 00:06:17.129 --> 00:06:20.029 That is insane speed. And the investor list was 00:06:20.029 --> 00:06:23.350 a who's who of finance. SoftBank. Sequoia Capital, 00:06:23.629 --> 00:06:26.149 BlackRock, the Ontario Teachers Pension Plan. 00:06:26.529 --> 00:06:30.129 These are the titans of the industry. They weren't 00:06:30.129 --> 00:06:32.889 just throwing money at a kid. They were vying 00:06:32.889 --> 00:06:35.670 for the privilege of giving him money. Sequoia 00:06:35.670 --> 00:06:38.290 famously wrote a fawning article about him, about 00:06:38.290 --> 00:06:40.649 how he was playing League of Legends during his 00:06:40.649 --> 00:06:42.790 pitch meeting, and they were just blown away. 00:06:43.009 --> 00:06:45.089 They all wanted a piece of SBF. And then just 00:06:45.089 --> 00:06:48.300 a few months later... In January 2022, they do 00:06:48.300 --> 00:06:51.759 it again. FTX Ventures raises another $400 million, 00:06:51.980 --> 00:06:55.120 and now the valuation is $32 billion. To give 00:06:55.120 --> 00:06:57.879 you a sense of scale, a $32 billion valuation 00:06:57.879 --> 00:07:00.920 put them in the same league as some major established 00:07:00.920 --> 00:07:03.800 banks and massive tech giants. They had barely 00:07:03.800 --> 00:07:05.699 been around for three years. It was unprecedented. 00:07:05.939 --> 00:07:08.120 There's also a really interesting detail in the 00:07:08.120 --> 00:07:11.319 notes about a rival. Binance. Yes. Changpeng 00:07:11.319 --> 00:07:14.240 Zhao, or CZ, the CEO of Binance. He actually 00:07:14.240 --> 00:07:17.040 bought a 20 % stake in FTX right at the beginning, 00:07:17.180 --> 00:07:19.420 about six months after it started. Which feels 00:07:19.420 --> 00:07:21.680 like buying stock in your competitor before they 00:07:21.680 --> 00:07:25.040 get big. Like if Pepsi bought 20 % of Coke when 00:07:25.040 --> 00:07:27.519 Coke was just a startup. Exactly. It was a savvy 00:07:27.519 --> 00:07:32.160 move. But as FTX grew, SBF wanted that equity 00:07:32.160 --> 00:07:34.819 back. He didn't want his biggest rival having 00:07:34.819 --> 00:07:36.959 a seat at the table seeing his books. He didn't 00:07:36.959 --> 00:07:39.839 want CZ owning a piece of his empire. Not at 00:07:39.839 --> 00:07:43.920 all. So in 2021, he bought out CZ's stake for 00:07:43.920 --> 00:07:47.899 approximately $2 billion. $2 billion to get your 00:07:47.899 --> 00:07:50.899 rival off your cap table. That transaction seems 00:07:50.899 --> 00:07:53.139 like a victory lap at the time. Look at me, I'm 00:07:53.139 --> 00:07:54.860 big enough to buy you out. It must have felt 00:07:54.860 --> 00:07:57.009 that way. But as we'll see later, that transaction 00:07:57.009 --> 00:07:59.689 actually loaded the gun that would eventually 00:07:59.689 --> 00:08:01.970 kill the company. It did. It gave Binance the 00:08:01.970 --> 00:08:05.269 ammunition they needed later. But before we get 00:08:05.269 --> 00:08:07.170 to the fall, we have to look at the illusion 00:08:07.170 --> 00:08:10.230 of legitimacy. Because SBF wasn't just raising 00:08:10.230 --> 00:08:12.430 money. He was spending it to make sure everyone 00:08:12.430 --> 00:08:15.209 knew the name FTX. Oh, the spending was everywhere. 00:08:15.389 --> 00:08:18.930 If you watch sports in 2021 or 2022, you could 00:08:18.930 --> 00:08:21.170 not avoid those three letters. Not a chance. 00:08:21.370 --> 00:08:23.329 They bought the naming rights to the Miami Heat 00:08:23.329 --> 00:08:26.589 Stadium. It became the FTX Arena. Which is a 00:08:26.589 --> 00:08:29.110 classic move for a company trying to project 00:08:29.110 --> 00:08:31.879 stability. We have our name on a building. We 00:08:31.879 --> 00:08:34.159 aren't going anywhere. It anchors you in the 00:08:34.159 --> 00:08:37.059 physical world. Makes you feel real. They had 00:08:37.059 --> 00:08:39.279 patches on Major League Baseball umpire uniforms. 00:08:39.600 --> 00:08:41.700 I remember seeing that and thinking, the umpires. 00:08:41.759 --> 00:08:43.620 That's an interesting choice. They sponsored 00:08:43.620 --> 00:08:46.600 the Mercedes -AMG Patronus Formula One team. 00:08:46.820 --> 00:08:49.600 Lewis Hamilton's car had FTX on it. They even 00:08:49.600 --> 00:08:53.120 sponsored TSM, the esports giant. It's a blitz. 00:08:53.299 --> 00:08:55.919 And then there were the celebrities. Tom Brady, 00:08:56.159 --> 00:08:59.889 Gisele Bundchen, Stephen Curry. Shaquille O 'Neal, 00:09:00.029 --> 00:09:02.590 even Kevin O 'Leary from Shark Tank Mr. Wonderful 00:09:02.590 --> 00:09:05.970 himself, was a paid spokesperson. It's wild to 00:09:05.970 --> 00:09:07.830 think about now. Tom Brady and Gisele were actually 00:09:07.830 --> 00:09:10.129 equity holders. They lost millions. They did. 00:09:10.250 --> 00:09:12.669 And there's that one anecdote that stands out 00:09:12.669 --> 00:09:14.830 to me, the one deal that didn't happen. Ah, yes. 00:09:15.190 --> 00:09:17.610 Taylor Swift. Yes. They were in talks for a $100 00:09:17.610 --> 00:09:20.429 million sponsorship deal with her. Can you imagine 00:09:20.429 --> 00:09:23.789 the Erez tour brought to you by FTX? It reportedly 00:09:23.789 --> 00:09:27.269 broke off in the spring of 2022. In hindsight, 00:09:27.470 --> 00:09:30.450 that was the luckiest break of her career. But 00:09:30.450 --> 00:09:32.649 the point of all this spending wasn't just vanity. 00:09:32.830 --> 00:09:35.429 It was to build a mode of trust. That's a good 00:09:35.429 --> 00:09:37.710 way to put it. If Tom Brady uses it, if it's 00:09:37.710 --> 00:09:40.129 on the NBA arena, if the MLB umpires wear the 00:09:40.129 --> 00:09:43.370 logo, the subconscious message to you, the regular 00:09:43.370 --> 00:09:46.250 person, is this is legit, this is regulated, 00:09:46.450 --> 00:09:49.690 this is safe. Right. It masked the reality. Because 00:09:49.690 --> 00:09:52.450 while the outside world saw glossy ads and Super 00:09:52.450 --> 00:09:54.250 Bowl commercials with Larry David. Which was 00:09:54.250 --> 00:09:56.110 a great commercial, by the way. Hilarious. But 00:09:56.110 --> 00:09:59.129 while they saw that, the inside was. Well, let's 00:09:59.129 --> 00:10:01.110 get into the mechanism of the fraud, because 00:10:01.110 --> 00:10:02.850 this is where you really need to understand the 00:10:02.850 --> 00:10:05.169 nuts and bolts. How did this machine actually 00:10:05.169 --> 00:10:08.409 work? OK, so at its core, it was about the relationship 00:10:08.409 --> 00:10:12.090 between FTX and Alameda Research. On paper, they 00:10:12.090 --> 00:10:15.070 were separate entities. SBF claimed Alameda was 00:10:15.070 --> 00:10:17.450 just another user on the platform subject to 00:10:17.450 --> 00:10:19.590 the same rules as you or me. But we know now 00:10:19.590 --> 00:10:21.509 that wasn't true. Not even close. Far from it. 00:10:22.029 --> 00:10:24.710 John J. Ray III later revealed that Alameda had 00:10:24.710 --> 00:10:27.750 a secret exemption from FTX's auto liquidation 00:10:27.750 --> 00:10:31.309 protocol. Okay. Auto liquidation protocol. That 00:10:31.309 --> 00:10:34.269 sounds incredibly technical, but it's actually 00:10:34.269 --> 00:10:37.110 the bedrock of how a crypto exchange survives. 00:10:37.370 --> 00:10:38.730 We need to break that down for the listeners. 00:10:38.850 --> 00:10:42.289 Let's do it. So imagine you are trading on an 00:10:42.289 --> 00:10:44.690 exchange. You want to make a big bet. So you 00:10:44.690 --> 00:10:47.090 use leverage. You borrow money from the exchange. 00:10:47.409 --> 00:10:49.990 Let's say you put down $10 of your own money 00:10:49.990 --> 00:10:53.210 to bet $100. Okay. So if the price goes up, I 00:10:53.210 --> 00:10:55.750 win big. But if the price drops... If the price 00:10:55.750 --> 00:10:58.610 drops by just 10%, your $10 of collateral is 00:10:58.610 --> 00:11:02.309 gone. You are now at zero. In a normal system, 00:11:02.450 --> 00:11:05.629 a safe system, the risk engine kicks in immediately. 00:11:05.970 --> 00:11:08.990 Right. It automatically sells your assets to 00:11:08.990 --> 00:11:11.029 cover the loan before you lose more than you 00:11:11.029 --> 00:11:13.429 have. It liquidates you. It's like a bouncer 00:11:13.429 --> 00:11:15.450 at a club. If you run out of money for drinks, 00:11:15.490 --> 00:11:17.470 you get thrown out immediately. The bar doesn't 00:11:17.470 --> 00:11:19.549 let you run up a tab you can't pay. Exactly. 00:11:19.570 --> 00:11:22.529 It protects the exchange and, crucially, it protects 00:11:22.529 --> 00:11:25.450 the other customers. But Alameda had a secret 00:11:25.450 --> 00:11:28.070 switch in the code. A switch in the code. Literally 00:11:28.070 --> 00:11:30.549 a piece of code that said, allow negative, that 00:11:30.549 --> 00:11:33.250 exempted them from this protocol. Gary Wang, 00:11:33.490 --> 00:11:35.610 the co -founder, testified about this in court. 00:11:35.830 --> 00:11:40.080 So if I'm Alameda and my bet goes down 10%. Nothing 00:11:40.080 --> 00:11:41.740 happens. Nothing happens. Your account just goes 00:11:41.740 --> 00:11:44.039 negative. It goes down 50 percent. The system 00:11:44.039 --> 00:11:46.500 ignores it. So they had an infinite line of credit. 00:11:47.000 --> 00:11:49.320 Effectively, yes. They could keep losing money 00:11:49.320 --> 00:11:52.080 and the system wouldn't stop them. And here is 00:11:52.080 --> 00:11:54.600 the scary part. Since they were losing money 00:11:54.600 --> 00:11:57.320 and the exchange wasn't stopping them, who was 00:11:57.320 --> 00:11:59.840 covering those losses? It has to come from somewhere. 00:12:00.039 --> 00:12:02.379 It can't just be imaginary money. It came from 00:12:02.379 --> 00:12:06.190 the customers. FTX lent approximately 10. billion 00:12:06.190 --> 00:12:09.389 of customer assets to Alameda to plug these holes. 00:12:09.610 --> 00:12:12.610 $10 billion. That is money that people thought 00:12:12.610 --> 00:12:14.629 was sitting in their accounts. Safe and easy, 00:12:14.690 --> 00:12:17.870 right? That's just, it's theft, isn't it? Legally, 00:12:17.870 --> 00:12:20.250 what is that? It's misappropriation on a massive 00:12:20.250 --> 00:12:22.299 scale. Commingling of funds. It's one of the 00:12:22.299 --> 00:12:25.299 oldest sins in finance. Alameda was using that 00:12:25.299 --> 00:12:27.320 customer money to make risky venture capital 00:12:27.320 --> 00:12:30.539 bets, buy real estate in the Bahamas, and make 00:12:30.539 --> 00:12:33.379 massive political donations. But there is another 00:12:33.379 --> 00:12:36.159 layer to this scheme, and that is the FTT token. 00:12:36.379 --> 00:12:39.039 Right. The FTT token. This is the flywheel effect 00:12:39.039 --> 00:12:42.639 people talk about. What exactly was FTT? FTT 00:12:42.639 --> 00:12:46.059 was a cryptocurrency token created by FTX itself. 00:12:46.860 --> 00:12:49.679 On the surface, it gave you discounts on trading 00:12:49.679 --> 00:12:51.899 fees and things like that. Yeah. Standard loyalty 00:12:51.899 --> 00:12:54.980 point stuff. Airline miles for a crypto exchange. 00:12:55.299 --> 00:12:59.379 Good comparison. But Alameda held a massive amount 00:12:59.379 --> 00:13:01.840 of it. The company just printed these tokens 00:13:01.840 --> 00:13:04.460 and gave a huge chunk to its sister company. 00:13:04.659 --> 00:13:06.659 OK, so the company prints its own money, essentially. 00:13:06.700 --> 00:13:09.879 Yes. And here's the trick. The trading volume 00:13:09.879 --> 00:13:12.840 of FTT was actually quite low, was illiquid. 00:13:13.039 --> 00:13:15.220 But because the price in the exchange was high, 00:13:15.899 --> 00:13:17.700 Alameda could list these tokens on their balance 00:13:17.700 --> 00:13:19.899 sheet at that high price. Let me see if I have 00:13:19.899 --> 00:13:21.639 the analogy right. It's like I print a billion. 00:13:22.200 --> 00:13:24.840 tokens in my basement i sell one to you for ten 00:13:24.840 --> 00:13:26.840 dollars and now i turn around and tell the bank 00:13:26.840 --> 00:13:28.639 look i have a billion tokens worth ten dollars 00:13:28.639 --> 00:13:30.259 each my company is worth ten billion dollars 00:13:30.259 --> 00:13:33.019 lend me real money against it that is exactly 00:13:33.019 --> 00:13:35.679 the analogy it's mark to market accounting gone 00:13:35.679 --> 00:13:38.799 horribly wrong it's like printing monopoly money 00:13:39.319 --> 00:13:41.519 valuing it at a high price based on very few 00:13:41.519 --> 00:13:43.779 transactions, and then, this is the critical 00:13:43.779 --> 00:13:46.500 part, using that monopoly money as collateral 00:13:46.500 --> 00:13:48.960 to borrow real money. And they were borrowing 00:13:48.960 --> 00:13:51.100 the real money from? From FTX customer deposits. 00:13:51.419 --> 00:13:53.759 So it's a completely closed loop. A circular 00:13:53.759 --> 00:13:56.799 dependency. As long as the price of FTT stayed 00:13:56.799 --> 00:14:00.039 high, The illusion held. Alameda looked solvent 00:14:00.039 --> 00:14:03.460 because it had billions in FTT assets. FTX looked 00:14:03.460 --> 00:14:05.519 solvent because it had a huge loan receivable 00:14:05.519 --> 00:14:08.100 from Alameda that was backed by this FTT. But 00:14:08.100 --> 00:14:10.720 if the price of FTT crashed. The collateral becomes 00:14:10.720 --> 00:14:13.440 worthless. The loans go bad. The customer money 00:14:13.440 --> 00:14:15.679 is gone. The whole house of cards collapses. 00:14:15.919 --> 00:14:18.580 And that brings us to November 2022, the catalyst. 00:14:18.820 --> 00:14:20.500 Because for a long time, nobody knew this was 00:14:20.500 --> 00:14:22.299 happening. It was just a black box. What cracked 00:14:22.299 --> 00:14:24.879 it open? It was a report by Coindesk on November 00:14:24.879 --> 00:14:28.830 2, 2022. Coindesk is a crypto news outlet. They 00:14:28.830 --> 00:14:30.649 got their hands on a leaked balance sheet from 00:14:30.649 --> 00:14:32.909 Alameda Research. A leak. And what did they find 00:14:32.909 --> 00:14:35.070 in this document? They found that the emperor 00:14:35.070 --> 00:14:37.970 had no clothes. The reports show that a huge 00:14:37.970 --> 00:14:41.090 portion of Alameda's assets were just FTT tokens. 00:14:41.809 --> 00:14:45.830 Specifically, they had $3 .6 billion in unlocked 00:14:45.830 --> 00:14:49.710 FTT and another $2 .16 billion in FTT collateral. 00:14:50.360 --> 00:14:52.279 So the hedge fund that was supposed to be a master 00:14:52.279 --> 00:14:54.440 of the universe, doing high -frequency arbitrage, 00:14:54.580 --> 00:14:57.019 was basically just holding a giant bag of tokens 00:14:57.019 --> 00:15:00.220 printed by its sister company. Exactly. It revealed 00:15:00.220 --> 00:15:03.039 the insolvency. It showed that if FTT dropped 00:15:03.039 --> 00:15:06.659 in price, Alameda was functionally dead. But 00:15:06.659 --> 00:15:08.960 the market didn't panic immediately. It took 00:15:08.960 --> 00:15:11.740 a few days for the info to digest. The spark 00:15:11.740 --> 00:15:13.639 that really lit the fire came four days later, 00:15:13.720 --> 00:15:16.379 on November 6th. Enter CZ from Binance again. 00:15:16.620 --> 00:15:18.980 The rivalry returns. Remember, Binance had received 00:15:18.980 --> 00:15:21.440 a bunch of FTT tokens when they sold their stake 00:15:21.440 --> 00:15:24.019 back to SBF. Right, the $2 billion buyback. A 00:15:24.019 --> 00:15:26.360 lot of that was paid in FTT tokens. On November 00:15:26.360 --> 00:15:29.500 6th, CZ tweeted that, due to recent revelations, 00:15:29.679 --> 00:15:32.720 a clear reference to the Coindesk report, Binance 00:15:32.720 --> 00:15:35.100 would be selling all of its remaining FTT holdings. 00:15:35.299 --> 00:15:38.179 Oof. That is a vote of no confidence if I've 00:15:38.179 --> 00:15:40.470 ever seen one. And he didn't do it quietly. He 00:15:40.470 --> 00:15:42.710 announced it to the world on Twitter. It was 00:15:42.710 --> 00:15:46.110 a declaration of war. And because the market 00:15:46.110 --> 00:15:49.250 for FTT was so thin, remember it was illiquid, 00:15:49.309 --> 00:15:52.049 everyone knew that if a whale like Binance started 00:15:52.049 --> 00:15:54.950 selling, the price would crater. There weren't 00:15:54.950 --> 00:15:57.309 enough buyers. So it's a race to the exit everyone 00:15:57.309 --> 00:15:59.370 else tried to sell first. Exactly. It triggered 00:15:59.370 --> 00:16:01.509 a bank run. Yeah. But not just on the token, 00:16:01.529 --> 00:16:04.029 on the exchange itself. The story made people 00:16:04.029 --> 00:16:06.940 nervous about FTX's health. Customers rushed 00:16:06.940 --> 00:16:08.519 to withdraw their real money, their Bitcoin, 00:16:08.720 --> 00:16:11.179 their dollars. We saw an estimated $6 billion 00:16:11.179 --> 00:16:14.960 in withdrawals in just 72 hours. $6 billion. 00:16:15.080 --> 00:16:18.320 Imagine the scene inside FTX. SBF is scrambling. 00:16:18.399 --> 00:16:20.519 He's tweeting, assets are fine, trying to calm 00:16:20.519 --> 00:16:23.539 people down. He's deleting tweets. But the money 00:16:23.539 --> 00:16:25.820 simply wasn't there to pay people out, was it? 00:16:25.960 --> 00:16:28.519 No, because it had been lent to Alameda, and 00:16:28.519 --> 00:16:30.879 Alameda had lost it or tied it up in illiquid 00:16:30.879 --> 00:16:33.639 venture bets and Bahamian real estate. The liquidity 00:16:33.639 --> 00:16:36.460 crunch was immediate and total. And then came 00:16:36.460 --> 00:16:39.340 the weirdest plot twist of all. For a brief moment, 00:16:39.460 --> 00:16:41.240 it looked like Binance was going to save them. 00:16:41.480 --> 00:16:44.860 It was whiplash. On November 8, CZ announced 00:16:44.860 --> 00:16:47.440 they had signed a non -binding letter of intent 00:16:47.440 --> 00:16:50.799 to acquire FTX. He basically said, we'll step 00:16:50.799 --> 00:16:52.639 in and cover the liquidity crisis to protect 00:16:52.639 --> 00:16:55.139 users. I remember seeing those headlines. Binance 00:16:55.139 --> 00:16:57.940 buys FTX. SBF probably thought he was saved. 00:16:58.059 --> 00:16:59.740 He thought he could sweep this whole mess under 00:16:59.740 --> 00:17:01.940 the rug. But notice the phrase non -binding. 00:17:02.809 --> 00:17:04.910 Binance started their due diligence looking at 00:17:04.910 --> 00:17:07.690 the books, and it took them less than 24 hours 00:17:07.690 --> 00:17:09.930 to run for the hills. Less than a day. What did 00:17:09.930 --> 00:17:12.470 they say? On November 9, they walked away. They 00:17:12.470 --> 00:17:15.390 issued a statement citing mishandled customer 00:17:15.390 --> 00:17:18.009 funds and pending U .S. agency investigations. 00:17:18.450 --> 00:17:20.730 It was essentially a polite way of saying, this 00:17:20.730 --> 00:17:22.609 is a crime scene and we are not touching it with 00:17:22.609 --> 00:17:24.750 a 10 -foot pole. That must have been the moment 00:17:24.750 --> 00:17:27.349 the reality set in for SBF and his whole team. 00:17:27.490 --> 00:17:30.069 It was. SBF had to admit to his employees on 00:17:30.069 --> 00:17:32.819 Slack that Binance bailed. The company officially 00:17:32.819 --> 00:17:35.000 stopped processing withdrawals. And on November 00:17:35.000 --> 00:17:39.599 11, 2022, the inevitable happened. FTX, FTX US, 00:17:39.940 --> 00:17:42.380 Alameda, and over 100 affiliated companies filed 00:17:42.380 --> 00:17:45.960 for bankruptcy protection in Delaware. SBF resigned 00:17:45.960 --> 00:17:48.640 as CEO. And this is where we meet the new sheriff 00:17:48.640 --> 00:17:51.819 in town, John J. Ray III. A legendary figure 00:17:51.819 --> 00:17:53.980 in the world of corporate restructuring. As we 00:17:53.980 --> 00:17:56.220 mentioned, he was the man who cleaned up Enron. 00:17:56.559 --> 00:17:59.079 He is the guy you call when the building is not 00:17:59.079 --> 00:18:01.380 only burned down, but the ashes are radioactive. 00:18:01.839 --> 00:18:03.880 And you'd think if you cleaned up Enron, you've 00:18:03.880 --> 00:18:07.079 seen it all. But his comments about FTX were 00:18:07.079 --> 00:18:10.579 just scathing. He didn't mince words. He stated 00:18:10.579 --> 00:18:13.099 in a court filing, and I'm quoting here, Never 00:18:13.099 --> 00:18:15.359 in my career have I seen such a complete failure 00:18:15.359 --> 00:18:18.119 of corporate controls and such a complete absence 00:18:18.119 --> 00:18:20.920 of trustworthy financial information. Complete 00:18:20.920 --> 00:18:23.950 absence. Coming from the guy who handled Enron, 00:18:24.109 --> 00:18:26.690 that is terrifying. He testified to Congress 00:18:26.690 --> 00:18:29.369 that there was literally no record keeping, no 00:18:29.369 --> 00:18:31.789 list of bank accounts, no list of employees. 00:18:32.269 --> 00:18:35.589 He noted that this multi -billion dollar conglomerate 00:18:35.589 --> 00:18:38.349 used QuickBooks software designed for small businesses, 00:18:38.609 --> 00:18:41.529 for local bakeries, for its accounting. And I 00:18:41.529 --> 00:18:43.309 love the detail about how they approved expenses. 00:18:43.569 --> 00:18:45.769 It wasn't through a formal audit process with 00:18:45.769 --> 00:18:48.869 a CFO signing off. No, it was often just emojis 00:18:48.869 --> 00:18:51.569 in a chat app. If an employee wanted millions 00:18:51.569 --> 00:18:53.849 of dollars for a sponsorship or an investment, 00:18:54.130 --> 00:18:57.029 they would put it in the chat. Someone like SBF 00:18:57.029 --> 00:18:59.809 would put a thumbs up emoji and the money moved. 00:19:00.009 --> 00:19:02.789 It sounds like a fraternity house managing a 00:19:02.789 --> 00:19:05.150 hedge fund. That is not a terrible description. 00:19:05.670 --> 00:19:08.630 Ray also noted that they use software to conceal 00:19:08.630 --> 00:19:11.710 the misuse of customer funds. This wasn't just 00:19:11.710 --> 00:19:14.730 incompetence. It was, in his view, deliberate 00:19:14.730 --> 00:19:17.920 obfuscation. Now, right when the bankruptcy hits 00:19:17.920 --> 00:19:20.740 late at night on November 11th, things get even 00:19:20.740 --> 00:19:24.049 crazier. There's a hack. Yes. as if things weren't 00:19:24.049 --> 00:19:27.029 chaotic enough. Late on a Friday night, over 00:19:27.029 --> 00:19:31.150 $473 million was siphoned out of FTX wallets. 00:19:31.250 --> 00:19:33.190 I remember this vividly. Twitter was melting 00:19:33.190 --> 00:19:35.349 down. Everyone thought it was an insider. They 00:19:35.349 --> 00:19:37.549 thought, oh, SBF or one of his lieutenants is 00:19:37.549 --> 00:19:39.170 running off with the last of the cash before 00:19:39.170 --> 00:19:41.670 the liquidators get it. It was the logical assumption. 00:19:42.089 --> 00:19:44.089 Ryan Miller, the new general counsel, called 00:19:44.089 --> 00:19:46.529 them unauthorized transactions. And they had 00:19:46.529 --> 00:19:48.910 to move the remaining funds to cold storage offline 00:19:48.910 --> 00:19:52.170 wallets just to stop the bleeding. It was panic 00:19:52.170 --> 00:19:55.299 mode. But it turned out, years later, that it 00:19:55.299 --> 00:19:58.019 wasn't an insider after all. That's right. It 00:19:58.019 --> 00:20:00.980 wasn't until January 2024 that the mystery was 00:20:00.980 --> 00:20:03.619 solved. The Department of Justice indicted three 00:20:03.619 --> 00:20:07.019 individuals for a SIM swap scam. Okay, explain 00:20:07.019 --> 00:20:09.200 that quickly for the listener. What is a SIM 00:20:09.200 --> 00:20:12.039 swap? SIM swapping is a surprisingly low -tech 00:20:12.039 --> 00:20:14.579 technique where a hacker tricks a cell phone 00:20:14.579 --> 00:20:17.900 carrier like AT &T or Verizon into transferring 00:20:17.900 --> 00:20:20.000 your phone number to their device, their SIM 00:20:20.000 --> 00:20:22.740 card. Oh, wow. Once they have your number, They 00:20:22.740 --> 00:20:25.759 can intercept all your calls and, more importantly, 00:20:25.980 --> 00:20:28.859 the text message codes used for two -factor authentication. 00:20:29.359 --> 00:20:31.759 So these massive crypto wallets holding nearly 00:20:31.759 --> 00:20:34.799 half a billion dollars were protected by little 00:20:34.799 --> 00:20:37.740 more than a phone number. Potentially, yes. Inadequate 00:20:37.740 --> 00:20:40.400 security protocols. These hackers saw the chaos, 00:20:40.680 --> 00:20:43.539 pounced, and managed to steal around $400 million, 00:20:43.779 --> 00:20:46.220 which was later confirmed to be the FTX funds. 00:20:46.730 --> 00:20:49.289 It adds another layer of absurdity that even 00:20:49.289 --> 00:20:51.170 while the house was burning down from the inside, 00:20:51.430 --> 00:20:53.430 looters were breaking in through the windows 00:20:53.430 --> 00:20:55.430 because the locks were cheap. The collapse of 00:20:55.430 --> 00:20:58.509 FTX wasn't isolated, though. It was like a bomb 00:20:58.509 --> 00:21:00.849 going off in the center of the crypto industry. 00:21:01.210 --> 00:21:04.210 The contagion was real. Absolutely. You have 00:21:04.210 --> 00:21:06.470 to remember how interconnected these firms were. 00:21:07.170 --> 00:21:10.640 BlockFi. A major crypto lender had significant 00:21:10.640 --> 00:21:13.799 exposure to FTX. They had lent them money. They 00:21:13.799 --> 00:21:16.420 had assets on the exchange. They halted withdrawals 00:21:16.420 --> 00:21:18.900 and prep for bankruptcy almost immediately. Genesis, 00:21:19.019 --> 00:21:21.720 another big lender, halted withdrawals too. And 00:21:21.720 --> 00:21:25.589 Solana. We have to mention Solana. It was a blockchain 00:21:25.589 --> 00:21:29.069 heavily associated with and supported by SBF 00:21:29.069 --> 00:21:31.990 and Alameda. Its price plummeted because people 00:21:31.990 --> 00:21:34.509 feared the FTX bankruptcy estate would have to 00:21:34.509 --> 00:21:36.789 dump their massive holdings of the SOL token. 00:21:37.069 --> 00:21:38.849 And what about those institutional investors 00:21:38.849 --> 00:21:41.509 we mentioned earlier? A smart money, Sequoia, 00:21:41.529 --> 00:21:43.890 Temasek, the Ontario Teachers Pension Plan. They 00:21:43.890 --> 00:21:45.470 had to write their investments down to zero. 00:21:45.930 --> 00:21:49.250 Sequoia lost around $214 million. They released 00:21:49.250 --> 00:21:51.769 a public statement basically apologizing to their 00:21:51.769 --> 00:21:53.950 limited partners, saying they were misled. That's 00:21:53.950 --> 00:21:56.490 a huge black eye for a top -tier venture capital 00:21:56.490 --> 00:21:59.789 firm. It shattered the idea that smart money 00:21:59.789 --> 00:22:02.930 always does its due diligence. They got duped 00:22:02.930 --> 00:22:05.890 by the story and the hype. Just like the retail 00:22:05.890 --> 00:22:08.069 investors. So the company is dead. The money 00:22:08.069 --> 00:22:11.210 is gone, or so it seems at the time. Now comes 00:22:11.210 --> 00:22:15.009 the legal reckoning. SBF is in the Bahamas. What 00:22:15.009 --> 00:22:18.250 happens next? The wheels of justice turn surprisingly 00:22:18.250 --> 00:22:21.369 fast. Usually white -collar investigations take 00:22:21.369 --> 00:22:24.319 years. But the evidence here was so overwhelming 00:22:24.319 --> 00:22:27.759 and the cooperators flipped so fast. On December 00:22:27.759 --> 00:22:30.140 12, 2022, just a month after the bankruptcy, 00:22:30.519 --> 00:22:33.279 SBF was arrested in the Bahamas at the request 00:22:33.279 --> 00:22:35.140 of the U .S. government. And he was extradited 00:22:35.140 --> 00:22:37.039 to the U .S. pretty quickly. He was. He was flown 00:22:37.039 --> 00:22:39.079 to New York and charged with a slate of federal 00:22:39.079 --> 00:22:42.319 crimes. Fraud, conspiracy to commit money laundering, 00:22:42.319 --> 00:22:45.259 and campaign finance violations. He pled not 00:22:45.259 --> 00:22:48.259 guilty and was released on a massive $250 million 00:22:48.259 --> 00:22:50.859 bond to house arrest at his parents' home in 00:22:50.859 --> 00:22:53.119 Palo Alto. Which became a media circus in itself. 00:22:53.440 --> 00:22:56.619 But while SBF was pleading not guilty and starting 00:22:56.619 --> 00:22:59.339 a substack to defend himself, his inner circle 00:22:59.339 --> 00:23:01.720 was singing a very different tune. This is key. 00:23:02.039 --> 00:23:04.680 The code of silence did not hold for a second. 00:23:06.059 --> 00:23:09.140 Gary Wang, the co -founder, Caroline Ellison, 00:23:09.240 --> 00:23:12.220 the CEO of Alameda, and Nishat Singh, the engineering 00:23:12.220 --> 00:23:14.980 director, they all flipped. They recognized the 00:23:14.980 --> 00:23:17.359 prisoner's dilemma immediately. The first one 00:23:17.359 --> 00:23:19.980 to talk gets the best deal. They did. They pled 00:23:19.980 --> 00:23:22.180 guilty and agreed to cooperate fully with the 00:23:22.180 --> 00:23:25.039 prosecution. And their testimony during SBF trial 00:23:25.039 --> 00:23:27.960 was absolutely damning. Specifically, Caroline 00:23:27.960 --> 00:23:30.079 Ellison, she was the star witness, wasn't she? 00:23:30.220 --> 00:23:33.220 She was. She had kept diaries. She had Google 00:23:33.220 --> 00:23:35.900 Docs. She testified that SBF directed her to 00:23:35.900 --> 00:23:38.180 commit these crimes. She confirmed that he knew 00:23:38.180 --> 00:23:40.640 about the borrowing of customer funds, that he 00:23:40.640 --> 00:23:43.180 directed the specialized code changes, and that 00:23:43.180 --> 00:23:45.460 he had her prepare false balance sheets to show 00:23:45.460 --> 00:23:47.559 to lenders. It just completely destroyed his 00:23:47.559 --> 00:23:49.700 defense that this was all just a mistake or bad 00:23:49.700 --> 00:23:51.920 management. Completely. And so let's fast forward 00:23:51.920 --> 00:23:54.180 to the sentencing, because we have updates from 00:23:54.180 --> 00:23:57.240 2024 that really closed the loop on this. SBF, 00:23:57.299 --> 00:23:58.980 of course, was found guilty on all seven counts. 00:23:59.099 --> 00:24:02.140 And in March 2024, sentenced to 25 years. 25 00:24:02.140 --> 00:24:04.460 years in federal prison. 25 years. A significant 00:24:04.460 --> 00:24:06.980 sentence. Very. But let's talk about the others. 00:24:07.039 --> 00:24:09.079 What happened to the cooperators? Yeah, let's 00:24:09.079 --> 00:24:11.500 look at the outcomes. First up, Ryan Salami. 00:24:11.640 --> 00:24:14.220 He was another high -ranking executive, though 00:24:14.220 --> 00:24:16.539 not in the inner inner circle like Caroline or 00:24:16.539 --> 00:24:19.299 Gary. Ryan Salami pled guilty to campaign finance 00:24:19.299 --> 00:24:22.240 violations and operating an unlicensed money 00:24:22.240 --> 00:24:25.059 -transmitting business. He didn't cooperate to 00:24:25.059 --> 00:24:28.329 the same extent as the inner three. In May 2024, 00:24:28.690 --> 00:24:30.769 he was sentenced to seven and a half years in 00:24:30.769 --> 00:24:32.789 prison. Seven and a half years. That's still 00:24:32.789 --> 00:24:35.349 significant time. Now, compare that to Caroline 00:24:35.349 --> 00:24:37.309 Ellison. She ran the hedge fund. She was at the 00:24:37.309 --> 00:24:39.369 center of it. She was sentenced in September 00:24:39.369 --> 00:24:43.750 2024. Judge Lewis Kaplan gave her two years in 00:24:43.750 --> 00:24:47.190 prison. Two years for a multi -billion dollar 00:24:47.190 --> 00:24:50.910 fraud? That feels light. It is light, historically 00:24:50.910 --> 00:24:54.009 speaking. But Judge Kaplan explicitly noted her 00:24:54.009 --> 00:24:56.700 cooperation. He said it was substantial and came 00:24:56.700 --> 00:24:59.480 at great personal cost. But he also said it wasn't 00:24:59.480 --> 00:25:02.259 a get -out -of -jail -free card. He had to balance 00:25:02.259 --> 00:25:04.599 the severity of the crime with sending a message 00:25:04.599 --> 00:25:07.200 that cooperation pays off for future cases. I 00:25:07.200 --> 00:25:09.680 see. And then Nishad Singh and Gary Wang, the 00:25:09.680 --> 00:25:12.720 tech guys. Nishad Singh, sentenced in October 00:25:12.720 --> 00:25:16.720 2024. Time served plus three years of supervised 00:25:16.720 --> 00:25:20.220 release. Gary Wang, sentenced in November 2024. 00:25:20.960 --> 00:25:23.819 Time served plus three years supervised release. 00:25:24.319 --> 00:25:26.599 So they walked free, essentially. No additional 00:25:26.599 --> 00:25:28.920 prison time. Correct. Because their testimony 00:25:28.920 --> 00:25:31.019 was the nail in the coffin for Bankman Freed. 00:25:31.259 --> 00:25:33.680 Gary Wang, for instance, was the one who could 00:25:33.680 --> 00:25:35.880 walk the jury through the actual code, the allow 00:25:35.880 --> 00:25:39.079 negative flag. Without him, proving the technical 00:25:39.079 --> 00:25:41.039 mechanism of the fraud would have been much harder. 00:25:41.380 --> 00:25:43.720 The judge viewed their roles as more limited 00:25:43.720 --> 00:25:45.880 and their help as essential to the conviction. 00:25:46.220 --> 00:25:47.980 It really shows how the system works. If you 00:25:47.980 --> 00:25:49.880 talk first and you talk most, you save yourself. 00:25:50.200 --> 00:25:52.339 That's the incentive structure. Yeah. But there 00:25:52.339 --> 00:25:54.440 is one final surprising twist in this story. 00:25:54.640 --> 00:25:57.359 The customers. Right. Usually in these crypto 00:25:57.359 --> 00:26:00.420 collapses like Metgox back in the day or Quadriga, 00:26:00.420 --> 00:26:02.240 people lose everything. Maybe they get pennies 00:26:02.240 --> 00:26:04.299 on the dollar years later if they're lucky. What 00:26:04.299 --> 00:26:06.819 happened with FTX? In a bizarre turn of events, 00:26:07.039 --> 00:26:10.259 the bankruptcy estate under John Ray III managed 00:26:10.259 --> 00:26:13.359 to recover a massive amount of assets. They clawed 00:26:13.359 --> 00:26:15.640 back donations. They sold off venture investments. 00:26:15.859 --> 00:26:19.420 In August 2024, a U .S. court ordered FTX to 00:26:19.420 --> 00:26:23.420 pay $12 .7 billion in compensation. Wait, does 00:26:23.420 --> 00:26:24.759 that mean customers are getting all their money 00:26:24.759 --> 00:26:29.299 back? That seems impossible. Yes. And no. This 00:26:29.299 --> 00:26:31.559 is the catch, and it's a painful one for many 00:26:31.559 --> 00:26:34.339 victims. The bankruptcy plan approved in October 00:26:34.339 --> 00:26:37.960 2024 pays customers 100 % of their claim value 00:26:37.960 --> 00:26:40.579 plus interest. That sounds great. Why is there 00:26:40.579 --> 00:26:42.859 a catch? Because the claim value was fixed in 00:26:42.859 --> 00:26:44.839 U .S. dollars at the time of the collapse November 00:26:44.839 --> 00:26:48.589 2022. Ah. And the crypto market was in the toilet 00:26:48.589 --> 00:26:51.069 in November 2022. It was the absolute bottom 00:26:51.069 --> 00:26:53.730 of the bear market. Exactly. Bitcoin was trading 00:26:53.730 --> 00:26:56.869 around, what, $16 ,000 or $17 ,000 then? By late 00:26:56.869 --> 00:26:59.569 2024, Bitcoin was trading vastly higher, over 00:26:59.569 --> 00:27:02.130 $60 ,000 at times. So if you had one Bitcoin 00:27:02.130 --> 00:27:04.450 on FTX, you aren't getting one Bitcoin back. 00:27:04.710 --> 00:27:07.980 You are getting $16 ,000 back. Right. Oh, that 00:27:07.980 --> 00:27:11.180 hurts. So you miss out on the entire recovery 00:27:11.180 --> 00:27:13.299 of the market. You get your dollar value back, 00:27:13.400 --> 00:27:16.200 but you lost all of the potential asset appreciation. 00:27:16.640 --> 00:27:19.339 You do. It's a huge point of contention for creditors. 00:27:19.539 --> 00:27:22.539 But in the world of bankruptcy law, getting 100 00:27:22.539 --> 00:27:25.240 percent of the dollar value of your claim is 00:27:25.240 --> 00:27:28.319 almost unheard of. It's a miracle. Usually creditors 00:27:28.319 --> 00:27:30.339 get 10 cents on the dollar. So it's a success 00:27:30.339 --> 00:27:33.799 legally. But it feels like a loss financially 00:27:33.799 --> 00:27:36.180 for the victims who are long term believers in 00:27:36.180 --> 00:27:38.039 Christo. It's fascinating that the assets they 00:27:38.039 --> 00:27:41.160 recovered, like the stake in the AI company Anthropic 00:27:41.160 --> 00:27:44.400 and other venture bets, actually held their value 00:27:44.400 --> 00:27:47.339 or grew. Right. And SBF often claimed during 00:27:47.339 --> 00:27:49.619 his trial that if they just let him wait it out, 00:27:49.700 --> 00:27:52.059 he could have made everyone whole. He argued 00:27:52.059 --> 00:27:54.559 there was a liquidity crisis, not a solvency 00:27:54.559 --> 00:27:57.430 crisis. But does that argument hold water? Not 00:27:57.430 --> 00:28:00.170 really. The successful bankruptcy recovery sort 00:28:00.170 --> 00:28:02.190 of proves that the assets were valuable, yes. 00:28:02.609 --> 00:28:05.009 But it doesn't excuse the fraud of using customer 00:28:05.009 --> 00:28:06.710 money without permission to buy them in the first 00:28:06.710 --> 00:28:09.130 place. Right. It's like the Robin Hood defense. 00:28:09.410 --> 00:28:11.789 But he was robbing his customers to pay for risky 00:28:11.789 --> 00:28:13.890 bets that happened to pay off for the bankruptcy 00:28:13.890 --> 00:28:17.079 estate years later. Precisely. You don't get 00:28:17.079 --> 00:28:19.500 credit for winning at the casino if you stole 00:28:19.500 --> 00:28:21.799 the chips to play. And remember, the reason the 00:28:21.799 --> 00:28:23.700 assets were recovered is because John Ray III 00:28:23.700 --> 00:28:26.519 and his team spent two years hunting them down 00:28:26.519 --> 00:28:29.579 and liquidating them in an orderly fashion. Not 00:28:29.579 --> 00:28:32.299 because SBF was some genius portfolio manager 00:28:32.299 --> 00:28:35.519 who just needed more time. So when we step back 00:28:35.519 --> 00:28:37.819 from all this, what does it all mean? We've watched 00:28:37.819 --> 00:28:40.119 this empire rise. We've dissected the technical 00:28:40.119 --> 00:28:43.180 fraud and we've seen the legal conclusion. What 00:28:43.180 --> 00:28:46.119 is the big takeaway here? For me, it highlights 00:28:46.119 --> 00:28:48.019 a massive contradiction in the crypto industry. 00:28:48.259 --> 00:28:50.359 This entire technology was built on the premise 00:28:50.359 --> 00:28:53.660 of decentralization. The ethos is don't trust 00:28:53.660 --> 00:28:57.240 banks, trust code, verify don't trust. And yet 00:28:57.240 --> 00:28:59.720 millions of people handed their money to a centralized 00:28:59.720 --> 00:29:02.579 entity run by a guy who slept on a beanbag chair. 00:29:02.819 --> 00:29:05.900 It was the cult of personality. Investors, media 00:29:05.900 --> 00:29:09.079 and customers overlooked glaring red flags because 00:29:09.079 --> 00:29:12.599 of the image SBF cultivated. The effective altruism, 00:29:12.680 --> 00:29:16.019 the messy hair, the Toyota Corolla. It was a 00:29:16.019 --> 00:29:18.880 costume of humility masking extreme greed and 00:29:18.880 --> 00:29:21.539 arrogance. It really was. And the ultimate irony 00:29:21.539 --> 00:29:24.180 is that this future of finance company failed 00:29:24.180 --> 00:29:26.359 because of the most old school reasons possible. 00:29:27.289 --> 00:29:29.710 bad bookkeeping and embezzlement. It wasn't a 00:29:29.710 --> 00:29:32.450 blockchain failure. It was a QuickBooks failure. 00:29:32.690 --> 00:29:34.930 It proves that human intermediaries are always 00:29:34.930 --> 00:29:37.509 the weak link. Whether it's a bank in 1929 or 00:29:37.509 --> 00:29:40.269 a crypto exchange in 2022, if you give someone 00:29:40.269 --> 00:29:43.009 custody of your assets without absolute transparency 00:29:43.009 --> 00:29:45.789 and robust controls, you are at risk. It definitely 00:29:45.789 --> 00:29:47.990 makes you look at the trustless promise of crypto 00:29:47.990 --> 00:29:50.130 differently. Maybe the technology works, but 00:29:50.130 --> 00:29:52.109 the bridges we built to it, the exchanges, are 00:29:52.109 --> 00:29:55.160 still incredibly shaky. It raises a provocative 00:29:55.160 --> 00:29:57.339 question for you, the listener, to leave with. 00:29:57.619 --> 00:30:00.240 The legal system worked eventually. SBF is in 00:30:00.240 --> 00:30:02.660 jail. The bankruptcy process worked eventually. 00:30:02.880 --> 00:30:05.339 People got their cash back, more or less. But 00:30:05.339 --> 00:30:08.200 does the FTX saga prove that we need more heavy 00:30:08.200 --> 00:30:10.640 -handed traditional regulation to protect people? 00:30:11.059 --> 00:30:13.299 Or does it prove that the crypto industry needs 00:30:13.299 --> 00:30:16.240 to stop trying to replicate banks and actually 00:30:16.240 --> 00:30:18.700 build systems where custody never leaves the 00:30:18.700 --> 00:30:20.640 user's hands in the first place? That is the 00:30:20.640 --> 00:30:22.940 billion -dollar question. Because as long as 00:30:22.940 --> 00:30:24.869 there is a middle... man, there is a risk that 00:30:24.869 --> 00:30:27.049 the middle man is using emojis to gamble with 00:30:27.049 --> 00:30:29.789 your savings. A sobering thought to end on. Indeed. 00:30:30.069 --> 00:30:32.369 Well, that's our deep dive on the rise and fall 00:30:32.369 --> 00:30:34.990 of FTX from the penthouse in the Bahamas to a 00:30:34.990 --> 00:30:37.089 federal prison cell. Thanks for listening and 00:30:37.089 --> 00:30:37.549 stay curious.