Bankless - Part 2: Brian Armstrong, Erik Voorhees, & Ryan Selkis on Binance’s Acquisition of FTX

Episode Date: November 9, 2022

In Part 2, Ryan and David are joined by Brian Armstrong, Erik Voorhees, & Ryan Selkis to discuss what transpired today, how it’ll impact our industry, and what it means moving forward. In case you missed it, we’ve already released Part 1 where Ryan and David recap everything that happened leading up to today, what’s unfolded thus far, what happens next, and what it means for the crypto space writ large. ------ Earnifi | Check For Your Unclaimed Airdrops, POAPs, & NFTs https://bankless.cc/earnifi  ------ SUBSCRIBE TO NEWSLETTER: https://newsletter.banklesshq.com/?utm_source=banklessshowsyt  ️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/  ------ BANKLESS SPONSOR TOOLS: ️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum  ACROSS | BRIDGE TO LAYER 2 https://bankless.cc/Across  BRAVE | THE BROWSER NATIVE WALLET https://bankless.cc/Brave  NEXO | CRYPTO FINANCIAL HUB https://bankless.cc/Nexo  LEDGER | NANO HARDWARE WALLETS https://bankless.cc/Ledger  ️FUEL | THE MODULAR EXECUTION LAYER https://bankless.cc/Fuelpod  ----- Timestamps: 0:00 Intro 4:04 Ryan Selkis 11:45 Takes & Prices https://twitter.com/brian_armstrong/status/1590088673726717952  https://www.coingecko.com/  https://ultrasound.money/  20:32 Erik Voorhees 42:00 Brian Armstrong 1:00:25 New CZ https://twitter.com/cz_binance/status/1590103159506341888  1:02:45 Ultra Sound Money https://ultrasound.money/  1:04:45 Closing & Disclaimers ----- Resources: SBF Announcement https://twitter.com/SBF_FTX/status/1590012124864348160  CZ Announcement https://twitter.com/cz_binance/status/1590013613586411520  ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://www.bankless.com/disclosures 

Thank you, Inclous Nation, welcome to the second half of the live stream that Ryan and I did to cover the acquisition of FTX by Binance. The first half of the show, which we've already released on the RSS feed, cover the news, covered the tweets, covered the events of what happened, what unfolded between Binance and FTX, between CZ and SBF. In the second half of the show, we opened things up and we invited people on the show to give their takes and their thoughts and their perspectives. And who ended up coming onto the show? It's pretty damn interesting. First came Ryan Selkis of Missouri, followed by Eric Voorhees, followed by Brian Armstrong of Coinbase. And so these guests really ramped up over time. And so this is the episode that you are about to hear.

And I just wanted to give you that context. First you're going to hear Ryan Selkis of Missouri, who was calling it on his phone, followed by Eric Voorhees, the guy that we had hosting the debate between SBF, one of the players of the early parts of this story, followed by Brian Armstrong, who decided to call in all the way from Japan to offer his perspectives and his takes as to what the hell is going on in the crazy world of centralized exchanges and how Coinbase is not playing in those games yet still moving the needle forward when it comes to crypto. This is a hugely spontaneous event that we hosted on Bankless, a spontaneous live stream

where people just wanted to show up and offer their perspectives. And it was a great time hosting all three of these guests. So I hope you enjoy their conversations and their takes about what happened. But first, before we get there, a moment to talk about some of these fantastic sponsors that make the show possible. Arbitrum 1 is pioneering the world of secure Ethereum scalability and is continuing to accelerate the Web 3 landscape. Hundreds of projects have already deployed on Arbitrum 1 producing flourishing defy and NFT ecosystems. With a recent addition of Arbitrum Nova, gaming and social daps like Reddit are also now calling Arbitrum home.

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a decentralized web seamlessly without all the clutter. You can download the browser at brave.com slash banklist and click the wallet icon to get started. Nexo is your financial hub for all your crypto needs. Nexo lets you buy crypto instantly with your credit or debit card or via bank transfer. They also have an awesome advanced trading platform called Nexo Pro that pays you rewards when you swap crypto assets. And Nexo also lets you earn interest on your crypto in Bitcoin, ETH, or other assets. And they also give you an instant crypto line of credit with as low as 0% APR. And they also give you access to a crypto-backed MasterCard, of course earning you more crypto

when you use it. So, enhance your financial life with Nexo, who ensures all credit lines are over collateralized with insurance on all custodial assets. Nexo, the right place for your crypto. So click the link in the show notes to join over 5 million users who are getting the most out of their crypto. Can we talk about the regulatory impact? Because I think that's related to this. So I believe Ryan Selkis is in the waiting room.

Why don't we have that conversation with him? Yeah. All right. You want to stop sharing a screen, Ryan? Yeah. What's up? Mixer Selkiss are you with us? I am.

How's it gone? Hey, how's it gone? Hey. So you're on a stream, by the way. I'm on a stream. I'm live. Oh, yeah. You're live with 3,000 people watching.

So we just got off of a rant all throughout about everything that's going on. And the conclusion that we want to unpack is, is there, how big of legal trouble do you think SBF is in? I think everybody's speculating off the same public information right now. So I actually think that's a secondary issue, to be honest with you. I think the bigger issue is what's going on with the BCC. and the legislative agenda for the rest of the year. Okay. And in my mind, you know, this should be a killer for the DCCPA for this year.

It's difficult to envision a scenario where this gets pushed through before the end of the year, given how influential FTX and their team has been in these conversations. The flip side is, I don't know if this really did us any favors in terms of, you know, you know, urging caution and restraint and a kind of balanced, comprehensive approach to whatever legislative package could be pushed next year. So there is an argument to be made that this actually pushes us in the wrong direction and that there might be some more urgency to put something through almost like as an immediate measure, an emergency measure to make sure that there's a little bit more oversight of the exchanges in short order.

So we'll have a little bit more color, I think, after we see the results of the election tonight in terms of which way the balance is going to shift. Ryan, is it fair to say that this definitely makes the crypto industry, crypto community look bad? Is this another black eye for us? Well, yeah. I mean. other questions.

Yeah. I mean, how bad? I mean, the way the way that this went down was, I mean, I don't, I don't know exactly

what the thought process was over the weekend. But this certainly could have been handled a little bit differently. My honest, transparent

guess is that CZ wanted to take Sam down a peg given how much time and energy FTX has been spending on the lobbying front and frankly doing some things that might have been that unfavorable to finance. But maybe the reaction today was trying to kind of stem the negative effects of that weekend action. because I think that there's a good chance that CZ didn't realize how damaging those comments would be over the weekend. And the goal was to kind of jab, not name FTX. And it's just kind of spiraled.

That's my kind of poor man's speculation, which I think is the same thing that everybody's playing a guessing game around. But that seems to be the thing that makes the most sense from my vantage point. just having watch us play out and having kind of known what some of the political issues are right now. How does this look, though, to like a typical legislator?

You know, what would they make of this? We all know the SBF was very kind of tied into kind of the regulatory scene and was somewhat of a key contributor and champion for the DCCPA. And now

we're looking at the collapse, the bailout of FTF. his entire exchange. How does a legislator interpret this? Well, let me, I mean, yeah, let's just clarify. We don't actually know that this is a bailout, right? This is a non-binding LOI, and this could have been what I just said, which is to just prevents contagion and kind of hysteria from taking bold.

But there's still plenty of opportunities for, you know, both sides to walk away, FTX to line up other financing, figure out the duration issues on their books, that could be causing some of this. And eventually, you know, these could, you know, both continue to be independent, kind of going concern exchanges, both internationally and domestically. So let's not conflate like a binding purchase agreement and a non-binding LOI. That's number one. But from your second point, the policymakers, I don't think the policy priorities have changed.

It's still, let's have oversight of the exchanges. Nobody disagrees with that. let's make sure that the stable coins are well regulated and properly integrated in the financial system so you don't have a Luna situation and you have fully reserved stable coins that don't give you tether-like vibes. That's still a no-brainer and that's still something that's on everybody's mind. But the third thing that wasn't really solved by DCCPA and that hopefully would be better integrated in comprehensive legislation or kind of a third act, if you will, third pillar to this, is where do we draw the line between digital commodities,

and securities, right? And how do we classify tokens? And I think what's opened up now is the opportunity for us to have a serious conversation about what do you disclosures, safe harbors, and kind of fit for purpose regulation look like for that broad bucket of assets. And the story that was buried today, that's just as important as what happened with library. So that third issue is only getting more pronounced

in its importance, and it's something that has to be solved regardless of DCCPA. So I think exchange oversight before and after what happened today, it's still the same priority, and I think it's maybe more urgent from policymakers' perspectives. Stablepoint, same thing, but the hard work and the kind of standard setting that's going to happen over the next few months and maybe some self-regulatory efforts for a change that we've discussed, but it never really got momentum. So now there's probably a little bit more industry-wide urgency to get that right. And I think that's, you know, on the margin, I think it's a good thing.

And we could still come out of this in a healthier position, even though this is an immediate term setback. But all this really means is that it's going to have to be a more coordinated industry response versus one firm pushing the envelope. Ryan, thanks so much for cluing us in on the regulatory impact here in the DCCPA. I appreciate the work you're doing. And I guess do you have any other concluding thoughts from today's events? Recognizing it's all still early, there's a lot more to play out.

Anything else you'd leave us with? Leverage is bad. Trading customer deposits also bad. Ryan, thanks so much, man. We'll see you around. We'll do it again soon. Thanks, guys. All right, take care.

David. Yeah, we have more to cover Ryan. So that was a nice little break for Ryan to come in and talk so I could peruse Twitter. So there are things to discuss. Here's a tweet from Brian Armstrong. But before we read this tweet from Brian Armstrong, I just wanted to say thank you to the 3,000 people we got watching the show. If you are not liking the video yet, please do. If you are not subscribed to bank lists, please subscribe. We kind of cover these events whenever we can and we have a fun time doing it. So make sure you like and subscribe to the video. Brian Armstrong. The one other exchange founder left standing, the most humble of all exchange founders, the least mean character, perhaps, put out a tweet thread. Ryan, you want to walk us through this tweet thread? Yeah, Brian goes, number one, first off, I have a lot of sympathy for everyone involved in the current situation with FTX. It's stressful. Anytime there's potential for customer loss. That's right, Brian. It's very stressful.

Number two. Second, Coinbase doesn't have any material exposure to FTX or FTT, and no exposure to Alameda. Thank God. Also, number three, I think it's important to reinforce what differentiates Coinbase in a moment like this. This event appears to be the result of risky business practices, including conflicts of interest between deeply intertwined entities and misuse of customer funds. This is interesting. So what he's already established is first, I have sympathy. Second, we don't have exposure, not us.

We have nothing to do with this. Third, I feel like David, he's starting to tee up making the case maybe for some independent, some sense. separation between sort of a hedge fund and an exchange. You can't be both. Maybe he's tilting the conversation towards that. Four, Coinbase has always strived to be the most trusted player in the space. We don't engage in this type of risky activity. Five, we don't do anything with our customers' funds unless directed to by the customer. We hold all asset dollar for dollar and users can withdraw their money anytime. Number six, we are incorporated in the US and publicly listed in the US because we believe that transparency and trust are so important.

investor and customer can see our publicly audited financials which show how we hold customer funds. We've never issued an exchange token. Interesting. Never issued an exchange token. I could see Brian laying down some best practices here, right? You shouldn't have a fund and you shouldn't have an exchange. They shouldn't be part of the same family of businesses. You shouldn't have an exchange token. It's crazy that we have to say this. Well, we have to learn the hard way. Everything, I think, in this industry. Part of the issue, number seven, here is that regulators have been forced onshore in each of their respective markets, while customers have moved offshore in companies with more opaque and risky business practices.

Oh, now this is a shot across the battle regulators, David. So he's saying, hey, regulators, you know what? Customers are getting hurt because you're not allowing us to keep their funds safe. So they're seeking these services in other shadowy jurisdictions. They still want the services. This market needs, but you're pushing them outside. And so they're still getting, they're getting the worst of our worlds. They're getting the risk.

To take the U.S. as an example, 95% of crypto trading has developed overseas. Did you know that? I didn't know that. I thought it was like 80%. 95% is developed overseas, he said, because crypto regulation in the U.S. has been hard to navigate. That's bad for the U.S. and Americans are still losing money in these overseas blowups. Number nine, the temptation from events like these is to call for more heavy-handed regulation. This would just make the problem of crypto companies and crypto users going overseas worse.

This is a very fair point. Number 10, we should continue to work with policymakers to create sensible regulation for centralized exchanges, custodians in each market, as we've been doing for some time. But then we need to see a level playing field and force, which hasn't happened to date. Long term, the crypto industry has an opportunity to build a better system with defy and self-custodial wallets that don't rely on trusting third parties. Instead, you could trust in code math. Everything can be publicly auditable on chain. Sounds like Defi, David.

This is a topic for another day. A strong tweet thread from Brian laying out his case for Coinbase and the long-term direction for the space. By the way, David, you know what? I think in the aftermath of this, we should really get Brian on the podcast. I think it would be refreshing to hear from Brian. I put out this tweet. It's funny, I saw you put out this tweet right after I put out the same tweet.

This is just, you know, why I enjoy. you as my co-host, Ryan. We both tweeted out, like, thank God for Brian Armstrong. Yeah. It's just like, and it's not to say that anything that CZ is doing is, maybe it's, maybe it's less than neutral. It's not inherently bad. But I'm just glad that there is a centralized crypto exchange founder who isn't playing

and is just focusing on himself. A little lawful good category. A lawful good category of, which is exactly what we need as the U.S. onshore. exchange. Absolutely. What's this other take? Yeah, so while I was writing some notes for the show, Up Only was live streaming and they were they were trying to get people on. They of course wanted to get SBF on. They're not going to come on. So who did they get? They get Doquan. Who's not, the one with your cursor in the top right is the guy at Wintermute. I don't know who the guy is below them. Also Martin Screlli also showed up and then there's Kobe just like laying on the ground.

is like, what the hell is going on? Yeah, it's crazy. Crazy times. Crypto is never boring. I got to say that, David. All right, I feel like... The last thing I think we want to do is pull up Coin Gecko. Let's pull up Coin Gecko.

The impact is? Markets down bad, Ryan. Markets down bad. How bad? I haven't looked at this. Yeah, let me look. And so Ether... 20% down, ETH?

Yes, yeah. So Ether was at 1220. It bottom ticked at 1220. and as soon as I saw that, I opened up Coinbase. Coinbase was having trouble keeping up with server load, and so I kept on having to refresh it. I sadly did not make a sub-1300-dollar buy. I bought about $13.

Wait, that's what you're buying. You're buying E-Thunding day like this. You're not buying B&B. I'm not buying B&B. No. You can, we'll go to B&B later. But I'm just saying I bought today. I bought it 1310.

I really wanted that $12.50, but they jumped back up too high. Look at that. Let's open up the BNB. Let's open up the BNB chart. It's still down 7% today, David. Yeah, it's down 7% where everything else. Look, it jumped up. As soon as the news happened, it jumped up to 375.

All-time highs. Not quite all-time highs. But since then, the whole market has nuked. I'm wondering where that cell pressure came from. Definitely a lot of fear. I'm worried that Alameda liquidated whatever it's got. But a lot of cell pressure came. Is this worse than three hours capital?

David. I mean, this is, we're at the bottom of this local liquidation event. I don't, I don't think there's any more contagion. The contagion is just between Alameda and FTX. I think this is a local bottom. These are pretty big parties, though. It's not discount them. Like, how's, by the way, how's Salana?

Solana is a, caught in the crossfire. So Solana has gotten hit particularly bad because it's a big asset of Sam and probably, presumably Alameda. It's kind of associated with all of them. So Solana has gotten hit particularly bad. This is a, the salon is at lows for the year, where, you know, Ether is almost two-ex its lows. Bitcoin is like 50% up on its lows. Solana is at its lows for the year.

But, I mean, I kind of think this, this is a fair bottom to call. I'm not one for calling bottoms. A Salana bottom? A Salana bottom. Yeah, I could call a salonabotum here. You know what else is bottoming, Ryan? Tell me. Ether supply.

Oh, my God. Are we really doing this? We're doing this right now. Wait, first of all, but first of all, we forgot to talk about Bitcoin, just briefly, 12% down. Yeah, so ether down 70%, Bitcoin down 12%. Yeah. We are so close. And I've been waiting for this moment.

We are so close. Look at that straight line down. Gas has been between one and 400-Gue. We're at 50-Guei. It got up to 400-Gue, Ryan. And we are burning ether like crazy. Look at that. 600-Gueh!

600-Gue! And we are burning ether like crazy right now. more than we've ever burned. We are at 600 Guay? Where's the gas? We peaked it. You live down. Just there.

You can see the peak. Yep. That was 600 way. Some blocks hit 600 way. I'm sure we burnt something like 10, 20, 30 ether per block. Because when stuff happens in crypto, a lot of blocks. People got liquidated. Yeah.

You demanded things on chain get expensive. Yeah. I bet you if we hang out here, Ryan, for a little bit. Oh, except Eric Forhees is in the room. So here comes Eric. And but we are at 0.02% of ether supply. What's up, Eric? Hey, can you hear me?

Hey, how's it going? How's it going? It's going all right. What a fucking day. Yeah. What do you make of this, man? What's happened? So I was out this morning, and my phone starts blowing up, and I was, like, rushing to get back to

see what was happening. And I've been watching all the drama between CZ and SBF over the last few days. And then to see that CZ might be buying it. FTX is crazy. So, you've seen a lot in crypto. There've been a lot of crazy days in crypto, right? I mean, we've had some even this year.

How would you rank this one? I mean, did this one get you by surprise? I was telling David the beginning of the show, I like to say now when people ask, like, you know, what do you think of this event? I'm like, I'm never surprised. And then crypto continues to surprise me. Like a day like today was surprising to me,

But you've been in crypto for longer than I, Eric. How do you rank today? Like, what's on the surprise meter? I mean, this is a 10 on the surprise meter. This is like the most dramatic soap opera event that I've seen. There have been more days that were more calamitous for sure, like Mount Cox going down or three arrows or something. But this is definitely the weirdest.

This one seems like the most, like it was written into a script to just fuck with everyone. Yeah. Well, is CZ like the mastermind that people in crypto Twitter are making them out to be? Um, so there's definitely like an icarus phenomenon in crypto, right? You get these people that they come in and build up some momentum and traction and then they get super popular and everyone loves them and they're like a god. And so many of those people have been destroyed or destroyed themselves, sometimes very quickly.

CZ, I think, gets the crown for being in such a high position for so long and doing it so well. So it does not, I mean, yeah, I don't know inside of his head, but he's clearly executing at a level that is impressive. And who knows how much of this was pre-orchestrated or not, but it certainly looks like a masterful move in hindsight. I guess we need to be careful not to assume what's going to happen, right? All that's happened is a letter of intent. An actual deal could fall apart for a thousand reasons.

And the whole thing may end up being a huge black mark on the industry. But right now, it looks like CZs in the, position of the kingmaker. This is the meme, right, where their crypto-twitters got the meme of, you never want to be the main character because if you're the main character, you're about to be killed off. CZ has been the main character for a main character for a long time. He's made it through all the seasons.

He's on season eight. And now, like, there were a collection of main characters at times. Like, Doe Kwan took front stage and center for a while. Three Ro's Capital were front and center for a while. See, Z's been a main player, but never really, like, in the same limelight as Doquan or all of them, until now. Now he is the main character. I hope he continues to be around. Yeah.

It's wild. And I was just talking last night with someone about this, how, like, yes, these spats and these feuds are kind of immature, kind of unprofessional, maybe very unprofessional. and they kind of make our industry look a little childish, granted. But I would so much rather have this world of like honesty and hyper-capitalistic competition out in front of everyone versus the banking system, which has all sorts of corrupt nonsense happening behind the scenes, but they put on always this like professional face, a suit and tie,

super slick, you know, marketing brochures and press releases. And it's also fake, right? Like, it's also fake. And you look at one of these, like, banking CEOs, and there's no way anyone should trust these people. Like, they rise to that occasion, sure, on their skill, but also on their ability to be completely opaque about their real intentions. And so I like the raw energy and the genuine nature of,

crypto, even if it may look kind of immature and wild west. As content creator, so did David and I. That's for sure. It gives us a lot to work with. Yeah, you guys have probably had your schedule full, I guess, since our interview with SBF. Well, I want to ask you about that, Eric. So like, you know, some people are saying that this was the first domino

to get tipped over. Kind of they harken back to you the conversation that you and SBF had, I guess, two weeks ago now, this debate. And in fact, even CZ, you know, mentioned it as maybe part of a reason for selling FTT. You mentioned, you know, SBF's work in D.C. Maybe going contrary to the industry, something to this effect. Do you think that this is all related or how do you think this regulatory conversation ties in, if at all? And how do you think maybe lawmakers, working on the DCCPA might respond as they're as they're witnessing the last two days of events unfold. Yeah, I'm still I'm still trying to process all this. It does seem that SBF was

inviting or encouraging some regulation which much of the community, as in like the authentic crypto people that really care about what we're doing, we're not happy about. And I don't know this and I don't want to like make up rumors, but I would not be surprised if someone like SBF had been throwing a company like Binance under the bus. Like in some ways, Binance is is the living, breathing ethos of crypto. It is this renegade company and the best one, like the best renegade company in crypto that has built something so impressive and successful. And you just know that it gets trashed like in in the policy circles because it is not, it does not play by the normal rules that a U.S. regulated financial institution would. And thank goodness for that, right. So I wouldn't be surprised if SBF had used finance as the example of how exchanges should not operate.

And, hey, regulators, let's fix that. And he would find lots of allies in DC with that message. So yeah, this whole thing has just been really wild. And I think most important of all is for people to recognize yet again the dangers of opaque intermediaries that are custodians. This lesson has been learned over and over and over and over and over. And people keep leaving all their funds with these counterparties. Some of them are very, very trustworthy, right? I think Coinbase absolutely falls into that category.

I think Cracken falls into that category. But people need to recognize that, like, defy being auditable all the time, open source all the time, provably verifiable all the time, operating exactly as the code says. This is such a step function improvement over centralized intermediaries. Anyone in D.C. who actually cares about protecting people needs to pay close attention to that lesson. I hope they see that lesson, Eric.

And I think there's a certain irony in the conversation that UNSBF were having a couple weeks ago, this debate about protecting retail by having registration, by registration being required for all DFI front ends, right? But the story throughout 2022 has not been a story of like DFI failing. It's been centralized exchange and centralized institutions failing due to opaqueness, due to lack of transparency. and Defi is a way out of that. But one hopes that they'll learn the lessons. I'm just worried that our industry crypto might come out of this with yet another black eye and with lawmakers not learning the actual lessons they should be learning.

I mean, a simple view of this is like, oh, there it goes again. Cryptos, the Wild West, they screwed up again. This is why we need the cops on the beat to breathe down their neck and bring some law to this nefarious industry. I hope that's not the takeaway. It will be the takeaway by everyone who wants to regulate the industry, which is probably most of the regulators. So that's unfortunate.

Let's hope this doesn't become a black eye. Let's hope that this actually ends up as an example of the industry settling its own issues and perhaps something insolvent being, A, exposed by the market, be resolved by the market. That would be wonderful. And that's all on CZ right now. So let's hope it goes there. A lot of responsibility on CZ right now.

Eric, do you have any parting thoughts for us? You know, this day, November 8th, anything you want to say to the crypto community on the back of this? No, just this is so much more interesting than the election. Wait, there's an election today? Okay, yeah, apparently there's an election here. So everyone, make sure to go vote so that the government can get the election. bigger tomorrow. Yeah, I thought I was going to be sitting around watching CNN and drinking myself to death

and misery, which is usually what I do on election day, just because it's kind of fun to do that. But this has been so much more interesting, I've got to say. Yeah, this is certainly, people are going back and forth as, is this the biggest thing since Luna or is it even bigger than Luna? Some people... We don't know how it'll turn out yet, right? So, yeah, so how much, my, my take is that the contagion is largely contained between FTX and Alameda.

I don't, can't really think of a world where it escapes that, but like, I think that the risk is that a deal does not happen. That a deal, oh, that a deal does not happen. I mean, yeah. What's, what's been exposed. So yesterday, it was reasonable to believe, as I did, that FTCX is fine. All these rumors are just rumors. There's no reason to think that they're insolvent. And then this morning, it's like, oh, boom, not only are they insolvent, but they're being

required by CZ. So what's been revealed is that there was an insolvency. People are assuming that this deal fixes it. And if the deal happens, it probably does fix it. But if the deal doesn't happen, which could happen for all sorts of reasons, then where is this insolvency and what are the consequences of that? We saw that report that SBF went to Wall Street to immediately. emergency finance $1 billion, but that the hole in a balance sheet could be as large as

$5 to $6 billion, which is a huge hole. I don't know if those numbers check out. Did he try borrowing from Ave? Or did he not get through the KYC? Well, you need collateral to borrow from Hove. You need a little bit of collateral. The FTT wasn't going to cut it. I'm wondering if this has, from what I've gathered,

Binance is immediately establishing some sort of line of credit to allow for customer withdrawals so that customers can get their money out of FTX. Unsure, again, unsure is the details of that. I'm wondering if this has given SBF the time to go actually to Wall Street and put a more sophisticated deal together to have competing offers rather than just being under the thumb of CZ. Do we know where this insolvency came from? I mean, I dismissed this as rumors because I was like, a properly run centralized exchange

takes customer deposits and then even if everyone withdraws their deposits, that just means the exchange is empty. It should not in and of itself cause some kind of run. What is it that actually was the deficiency? Like, is that a rumor or does anyone know like where actually this came from? So this is, we only have speculation, but the association between FTX and Alameda research, the idea, the speculation is that FTX sent customer deposits to Alameda research to leverage in their trades. and then Alameda research returns to them less money than they received.

What the fuck? Like, really? We don't know that that is true. We just see Alameda research sending stable coins to FDX to their hot wallet so that FTCS can facilitate outbound withdrawals. So people are just connecting dots, but without any sort of real substantial evidence. If that is true, this needs to be, if that's true, and I don't want to judge people before things are clear. If that's true, this needs to be the center example of the compliant exchange actually being riskier with customer money than what the unregulated non-compliant defy apps would be doing. To be loaning customer deposits to a risky counterparty to such a degree that a decline like this, which is very foreseen, right?

like a 10, 20, 30% drop in crypto prices is not unheard of. That they would do that while going to Washington, D.C., to beg for more regulations to protect people, is unforgivable if that's what happened. So let's reserve judgment on that until we know, but the fuck. I mean, there's, there's, there's, there's, there's, it's not like this, it's not like this hole in FTX's balance sheet just magically showed up recently. he's been in D.C. lobbying for the D.C.P.A. while this whole NFTX balance sheet has existed. Like that feels like a safe bet to, a safe claim to make.

I mean, yeah, I don't, I don't have a better explanation. It's not, none of this is proven yet again, but, man, so bad. Yeah. It's as, it's as bad as it gets. So what would you say, Eric, to somebody who says, all right, how do we fix this? Is the answer just like defy? Is that kind of the bottom line answer? So one way to fix it is for centralized intermediaries to be more responsible. And there are some. Coinbase has done an amazing job of that over a very long term.

Cracken has done an amazing job of that over a very long term. But the bigger important point here is that we don't want to have to trust people. People fail. People are wrong. People can be malicious. People make mistakes. People are subjective. We don't want people running the financial system.

We want the hard laws of code running the financial system. That's how you fix it. So that is the lesson here. I definitely hope the industry learns this lesson. I wonder how many more times you have to learn. They won't. They won't. Some people will.

Like each time this stuff happens, some cohort among the unwashed masses gets bathed in blood and learns the lessons that we try to talk about all the time. And then they're like, oh, I see. I see why self-custody is important. I see why sound money is important. I see why defy and open permissionless systems are important. But before that, these were just like bullet points on a white paper,

and they didn't quite get it. These trials and these tests, like teach people through the breaking of bones why the financial system that we have today is bad and how to make a better one. I mean, one example of that I think is, you know, from the time CZ tweeted what he originally tweeted about selling FTT and started making some comparisons between FTX and Alameda and Luna, there was a mass exodus of with. withdrawals from FTCX. And this, I think, is investors and retail actually like learning the lessons from Celsius. I mean, I guess if they totally learned the lesson, they wouldn't have their money on there in the first place.

But they were quick to get it off. That's for sure. And I think this also contributed to the kind of the spiral downward. We saw where as of this morning, FTCS was no longer able to honor withdrawals. And I mean, just thinking about that, Eric, is just like, that should not be the crypto experience. It should not be the experience of a retail user to be able to go and try to access their blockchain secured coins, crypto coins, and told that, like, sorry, delays, we don't have your money, we can't give it to you, come back tomorrow, wait until we sort of out, we don't know where the money is. For that to be a first experience is, is not why we're here. It's not why, like we call this a bankless financial system.

Yeah. It's not bankless if you use a custodian. Yeah, I mean, it's just atrocious. And like when we created, when we created ShapeShift, you know, in 2014, it was in response to Mount Gox. Like, how do you let people trade cryptocurrencies without taking custody? So the people don't need to trust us. It doesn't matter if they know me. They can just use the system and we're not holding billions of dollars of customer money.

And then to have these regulators like, you know, going after us for years under the banner of protecting people when this kind of tomfoolery is going on is ironic and just makes me so livid. But here's Brian. Hey, Brian. It's good to see you, man. Hey, Eric. Good to see you. What a day. I'll see the floor to you, sir. 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 Ledger NanoX and the Ledger NanoS Plus hardware wallets allow users like you and me to secure

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on Arbitrum or Boba Networks. Hey, Brian. Welcome. Welcome to Bankless. Thank you for joining us. We were just talking about the tweet thread you put out. And we're hoping to get some insight on that. So what do you think of today's events?

What's kind of going through your mind? Yeah, a lot of stuff. Well, I mean, first of all, it's kind of a difficult moment, obviously, for everybody involved in the markets. The market's going to be down. There's potential for customer losses across a variety of areas. So we've got to start with that. And then, you know, I think it's also, it's not a great day for crypto.

Let's just be honest. You know, this kind of reminds me a little bit of Mount Gox back in the day. There's folks of us that went through that time period and it was not pleasant. And it left a, you know, it left a memory for people for many years just about what it was like to be in crypto and what's going well and what's not. So I think my hope is that people remember going through this moment that not all companies out there are like this, right? It's not a criticism of crypto writ large. It's really, there's certain actors that are going to do well or do poorly in any kind of environment.

And we need to wait to see what all the, until all the facts are in about what exactly happened in this case. But yeah, I guess the other thing I'm just thinking about is whether this, you know, the temptation is that this always leads to sort of overreaction of regulation. And I don't know if this is Eric, what you were just talking about when I came in. But I think the other thought I have top of mind is the regulatory environment has not, not helped this situation, right? As there's been a lack of clarity or trying to move towards more clarity with regulation, many customers have kind of gone towards these offshore unregulated exchanges.

And we're seeing these blowups happen. Whereas if I think if we'd had more regulatory clarity in the U.S. for the centralized exchanges and custodians, you know, customers wouldn't have gone offshore and gotten into even bigger issues. Brian, that was one of your tweets and your thread that I actually didn't know the stat behind, but you said to take the U.S. as an example, 95% plus of crypto trading has developed overseas. And you say that's because crypto regulation, the U.S. has been hard to navigate. 95% plus.

So you're making the case that crypto regulation, as we have it in the U.S., is actually putting investors and folks that want to trade in retail in a worse. position because we're driving them offshore into entities that engage in in riskier practices. Yeah, that's correct. So that 95% stat is looking at both spot trading and futures. And yeah, it's pretty stark if you look at it. Even if you just look at spot trading alone, I think at the beginning of this year, the U.S. market was maybe like 23% of global spot for crypto. It's now about 13%. So spot went down. But of course, futures and derivatives and all that really developed offshore because of the lack of regulatory

clarity and that market's even bigger. So if you take those in at least from a trading volume point of view, so if you take those in aggregate, over 95% of the trading volume really moved offshore outside of the U.S. And of course, you know, we want crypto to be a global thing. So offshore is not necessarily a bad thing. It should be developing in every country of the world. But where it becomes a problem is that if you have a foreign company that's sort of jurisdiction hopping or trying to find one place that's the least regulated and serve the whole world from there, you know, that's where you kind of get to some of these issues. So what do you think the takeaways for regulators and lawmakers should be from this event

over the last couple of days? Yeah. I think number one, it's, again, it's not an indictment of all crypto. By the way, these kind of blowups happen in the traditional financial system, you know, as well, look at 2008 and all kinds of situations, right? So that's not, we don't say, oh, let's do away with the whole traditional financial system. That's the first point. The second is, let's keep working towards regulatory clarity for centralized exchanges and custodians and stable coins and things like that while preserving the innovation potential

for defy and self-custody, because those have the opportunity to actually create an even better system, which we can come back to in a minute. Don't resist the temptation to say, oh, we're, we need more and more heavy regulation. No, we need to push forward the regulation we were already contemplating, but then actually create a level playing field and don't allow, you know, citizens of these countries to go offshore to other products. Like right now, the incentive system is actually kind of backwards where the companies that are trying to do the regulated approach often end up with a worse product, fewer features, higher costs, and they're almost incentivizing the companies that are less regulated to go to draw these customers offshore.

I'm here in Japan actually right now where I've been meeting with our team in Japan and the regulators here. And it's actually a very similar story here as in the U.S. Companies that have gotten locally licensed in Japan and there's some regulatory clarity emerging have had a very hard time making compelling products. Whereas, you know, we've seen Japanese customers go offshore to these unregulated exchanges, and, you know, we're starting to see some of the results of that. Brian, you mentioned this in your thread as well, this talk of tokens as well, and, you know, something that Coinbase is not done. Famously, Coinbase is IPOed. But tokens, these sort of, I don't know, what we'd call them, what we classify them as,

loyalty token, I'm not sure what they are, but they were actually at the center of the story, part of the center of it, like leverage on tokens like FTT, for example, and we've seen massive price swings. What role do you think tokens play in this story? And, you know, what would you say the learning lessons for exchanges or centralized intermedias are from, you know, from a token perspective? Yeah. So, you know, I'm basically, there's a number of conversations I've had and I don't want to reveal anything out of turn. So I would say just high level, we need to wait until all the facts are in and let other people kind of share some of these stories as they come to light. But I do think that there's certainly a risk just broadly of there's nothing wrong with companies creating tokens, right? There's various types of tokens. There's some that are clearly non-securities.

I think if companies want to create tokens that are securities, there should be a regulated path to do that in the future and kind of register those in various markets around the world. So the issue is not tokens writ large. In fact, I think there should be more and more companies creating tokens and have regulatory clarity around that. It seems like, and again, the facts are not all in, that in these cases, these tokens may have been used to kind of, you know, inflate the assets on paper where there may not have been true liquidity there or true use cases. And, you know, we're seeing that come back in a negative way. You know, Coinbase, we would have liked to have done something like this. I think there's a lot of interesting tokens that could have been created. But again, we looked at the regulatory environment and we didn't find a way to do it that we felt was within the current regulatory frameworks.

So we decided not to do that. And I think obviously in moments like this, it looks like the right choice. But ideally, we would be able to create tokens in a clear regulatory environment going forward. And I think it would prevent some of this activity. Brian, one thing I'm concerned about is that buying into this huge empire that's, been built out in the east has an insane amount of market share of centralized exchange volume. And FTX and Coinbase have just been like neck and neck kind of tied for second in volumes over the last like six months or so. And now if this deal goes through with Binance,

finance will just gobble up the next biggest centralized exchange that exists on the market. Just an insane amount of consolidation. And CZ is a person that plays a particular game. We started this episode talking about like kind of it's like a game of Thrones. It's a game of centralized exchanges. And a certain, I feel like if you are a centralized exchange that issues an exchange token, you are playing in that game of Thrones. Coinbase doesn't seem to play, it plays a different game. And we, both Ryan and I were saying while we were going through the stream, like, thank God for the differentiation between Coinbase and the rest of the market. So first off, thank you for being different and being what we called lawful good.

but are you worried that there is this Binance empire that is offshore, that is this massive player that is playing in a different game that is like now like just so entrenched into this industry. Like I'm kind of worried about just the insane monopoly risk that is now happening to this industry. When you see the growth of Binance, are you concerned for this industry? Yeah, I mean, a lot of questions there. And I like the lawful good framework, by the way. That's a good one. Look, I think it's good to have a variety of different companies with different approaches in most markets.

And I agree with you, centralization is bad. So there is a place that the industry can get to where any one player has too much of any particular metric. You know, trading volumes is the one people look at a lot. But there's lots of different ones you could look at. I do think Coinbase and Binance are following pretty different approaches. And look, it's not my place to kind of say anything about what they're doing. I can just tell you what we're doing. And we're trying to follow a regulated, trusted approach.

We're trying to think long term. We're trying to enable people not just to do crypto trading, but to actually go use crypto. Like what I'm really passionate about is not just, I'm not really a trader by background. I'm a tech guy. I want to see a more free and have an economy for the world that has more economic freedom. So I want to see people using crypto for earning a living and buying stuff and commerce and remittance and peer-to-peer payments and then all kinds of new stuff in Web3 and DAPs and whatnot. So, you know, trading, I think we have really good trading products and good trading tools.

Sometimes it definitely feels like our hands are tied because we can't offer some of the same products that we want. Other times, it's just our own execution is getting in the way, right? So, you know, I think to look at it very intellectually honestly, I think like 50% of it is we could be executing better and that's where we have our own work to do. the other 50% of it is that we're choosing to follow the rules. And, you know, it's just like a very different, it's a more difficult path. And like sometimes your hands are tied. So I, but, you know, I think that's the right long term strategy. And I don't know if that's going to what it looks like short term, but long term,

I think that's definitely the right way we're going to go. At the center of this story was SBF's approach to regulation and engagement with Capitol Hill. CZ, whether or not he actually meant it, cited Sam's approach in regulation in D.C. And how CZ felt that Sam was really going to D.C. and then shutting the door behind him and leaving Binance out to dry. Allegedly, this is what CZ was one of the motivating factors behind CZ. And also the industry at large kind of voiced their opinion, especially with our episode with Eric Forhe. He's in SBF when we had that debate. No one really seemed to have appreciated Sam's approach.

to regulation. And that also seems to be one of the differentiators that I see out of Coinbase and your guys' approach to regulation and how to interface with regulators on Capitol Hill. How, if you were in Sam's position, which you are because you were the CEO of a centralized exchange, what's the right way to approach regulators? Like, how should he have been doing it, in your opinion? Yeah. So, you know, I'm trying to make sense of this, too, because I actually think Sam's approach with regulators and policymakers in D.C. was actually pretty good, I thought. You know, he clearly had a passion for it. I think he was smart and he advanced some of the issues in a meaningful way, which I give him credit for. I think that where he went on the DFI side,

obviously was not fully in line with some of the values we have as an industry. And so that, I think you guys did a great job of sort of bringing that stuff to light. I don't know. The most interesting story from my point of view is, you know, he gave a lot of money to various politicians in D.C. and had built these really strong relationships. And I guess I worry a little bit what's happening in their mind right now where they think, oh, well, I've got to go distance myself from this person who is now sort of persona non grata or something like that. Or maybe they're thinking, you know, we have to be careful. Why did I trust this person? And I don't really know what's going through their head. But I do, I do think that DC is going to be a little more skeptical of people coming in

and talking to good game if they, if they admit, they might feel like they got a little bit burned in this situation. You know, our approach to DC and just policymaking generally is we're a little bit more behind closed doors. You know, sometimes these people appreciate having like dialogue and back and forth that doesn't, you know, emerge on Twitter. And so we've basically been behind the scenes trying to just be quiet. And we try to give them all the credit and like not take any credit on our own. And I think we've done reasonably well advancing some of these conversations and defending the industry. Once in a while, if there's something we feel like we need to speak out on like tornado cash, we'll actually, you know, take a stand and try to protect our customers from

bad policy. But 95% of the time, it's just us working with, there's like a lot of reasonable people in government and we can find common ground with them. And that's what we do most of the time. So Brian, you alluded to this earlier and you actually end your tweet thread with it, which is like, I think a really important place to go is just kind of what's next, how we actually solve this. You talk about Coinbase taking the long-term approach. And you said about the long-term. Long-term, the crypto industry has an opportunity to build better systems with defy and self-custodial wallets that don't rely on trusting third parties. Instead, you can trust in code, math.

Everything can be publicly audible on chain. This is a topic for another day. Can you tease us a little bit about what you think, the real solution? to the problems that we've seen today over the last couple of days are. And how is Defi part of the solution in your mind? Yeah. Well, you guys know this better than I do. I mean, you've been preaching this for a long time.

And I'm a true believer. I mean, I feel like this is the real opportunity that crypto has to create a more transparent and fair and free financial system. I'm a real believer in that. So, you know, I think people have to bifurcate these two things in their mind. Like a lot of the activity happened today is still on centralized products, exchanges, custodians, you know, with stable coins. And that's fine.

I mean, that stuff needs to exist as a bridge between the traditional financial world and the crypto financial world. And I think we can play a really important role there. And that stuff's going to be very regulated. It probably should be. It's a financial service business. But Coinbase is also helping in, you know, the crypto to crypto world, the true crypto economy with Define Everything.

And we've done that with Coinbase Wallet. You know, hopefully people have been realizing and seeing a lot of, we've been pushing a lot of updates this year. I think it's like an incredibly good place. And we're enabling, for instance, people to access Web3 from directly in the Coinbase app, whether using Coinbase Wallet or our main retail app. We invested in a bunch of MPC technology to make that kind of stuff work. And we've started to build some decentralized apps ourselves.

Like, for instance, some of the stuff is Webbase. 2.5, you're kind of getting closer and closer to Web 3, but with, you know, for instance, Coinbase NFT and things like that, we're doing more and more on chain. We're introducing E&S into our products. So, you know, I think Coinbase can basically help in both areas. We're going to help. We make a lot of our revenue from the custodian exchange brokerage piece, but we're also starting to generate revenue in the Web 3 piece. And I think over time, that'll become a bigger and bigger. I hope someday, by the way, the majority of our revenue on our user base, or accessing Coinbase through self-custodial, using WebDAPs and Web3,

that would tell me that we've actually succeeded in creating this new crypto economy. It's not just about trading anymore. So the entire crypto community and everyone watching has been through quite a tumultuous day, and there have been a few of those this year. How would you summarize this? What message do you want to share with the crypto community who's tuning into bankless right now? Yeah. Well, I would say, you know, it's never as good as it seems. It's never as bad as it seems in crypto. So this is not, this is not unlike, we've been through things like this before, right? We went through Mount Gox. We've been through crypto cycles up and down. We went through three arrows capital and Celsius and Voyager and Terra Luna. So look, in any kind of marketplace or economy or in capitalism, in startups, right? Like, you know, a thousand ideas are going to be tried. And some of them aren't going to,

work, but others really will, and they'll rise to the top. And that's, that's what capitalism is about. It's about trying many different ideas and seeing which ones work, and those grow, and they get to allocate more capital into the next things. So this is incredibly painful. I know some people are probably in experiencing financial hardship due to it, and they are in the traditional economy as well with down markets. So I want to be very sympathetic to that and also send out a reassuring message that, you know, crypto is resilient. We're going to get through this and we're going to build the future in an even more powerful way. Brian, we appreciate you coming on and talking to the crypto community on days like this. I think it's particularly important. You know, I'm glad that Coinbase has

always taken the approach that's taken of, you know, establishing a firm foundation, building strong and being there for the crypto industry when we need it. And also we certainly need it. And also what Brian said, the strategy of following the rules, which is crazy that that's a strategy. Yeah, we appreciate you. And thanks for coming on, Brian. Yeah, thanks, guys. I appreciate what both of you have done for the industry as well. So have good day.

See you later. Bankless Nation, as always, if you were tuning in, of course, and you have not hit the like or the subscribe button, please do so. We're trying to keep you up to date on the latest that's going on. Today was quite the day. Occasionally, we have days like this. We just jump on the live stream.

And I don't know if we're going to have any other guests, here, David, but I do know something important might be about to happen. We'll get there. There's a one last tweet. A new CZ just dropped, if you will. Oh, okay. I sent that to you around. You want me to send you the link to that. Sure, I got it. Here it is. Here we go. Two big lessons CZ says he tweeted this out. Let's see, 10 minutes ago. Never use a token you created as collateral, number one. Number two, don't borrow if you run a crypto business. Don't use capital efficiently, have a large reserves.

Binance has never used B&B for collateral and we will have never taken on debt. Say, say, safu, say foo. I just, I can't read this, Ryan,

and think that CZ is taking a victory lap and also just like, he definitely just sniped the hell out of FTX. He's like, you guys opened up a weakness using your token that you created as collateral. And I sniped you. And now here's my victory tweet. That's how I interpret this. Yeah, but yes, and I also think that these are good and obvious takeaways, right?

Never use it. It's interesting how you, you know, the faster they rise, the faster they fall kind of thing. It's just, I think part of the reason that FTX, it seems like in Alameda, rose so fast, is because they were taking excess risk. So borrowing while running a crypto business, not having a large reserve, leveraging the token, that they created. I mean, Brian Armstrong's approach we just heard is like, don't create a token in the first place if you don't need it, right? CZ pushed that a little farther and we're going to have a token. And then CZ said, and then FTC said, we're going to have a token and we're going to use it as collateral. So just kind of juicing up the growth, growing a little faster, but at the cost of risk, this is what things like margin give you and certainly tokens give you superpowers in these areas.

And I think that'll bring us to the final slide that we want to bring up because this is the eth-maxy show. So we do the eth-maxy things. It's not an eth-maxy show, David. This is not. Why do you say that? I'm making fun of people who make fun of us. Anyways. And yet still we're here at the ultrasound money charts.

Yeah, here we are. Okay. So ether is below 100 ether issued since merge. This is what happens when volatility hits the markets. And this is why I'm always super bullish on. the burn because the burn rate that we've seen this far has been a bear market burn. This is straight line down in the last like hour or so has I think something like two or three thousand ether has been burnt in in one or two hours.

Wait, wait a second. I just want to underline this. Are we 90th away from ultrasound money? Yes, correct. 90th away. And I remember was it last week? We were about like 2,500, 3,000. Well, it was today.

It was today we were. 2,500. This morning. This morning, yeah, 1,800, excuse me. And so, depending on it, the gas is coming down. It peaked around 500 or 600. We're now at 36. So we're still, so we're still burning ether, but the rate of burn is going down. I think it's going to be at this rate an hour, Ryan or so before we go ultrasound. It's also a chance that we touch the bottom and don't actually go through it at the rate that gas is calming down. But we are so, so close. David really, really wanted, he really wanted this to happen on the live stream. I don't think it's going to happen.

What I'm saying is it might be one to three to four hours, perhaps. Yeah, I'm not hanging out for that long. But, yeah, at least we showed you ultrasound money website at the end. We're real close. I mean, it's got it. It's got to be. One more liquidation and eth is ultrasound. That's the rules.

So look for the tweets, I guess. We're not coming back in the live stream to stream that after that epic live stream. Wow. Man, we had Eric Voorhees on, Brian Selkis on, Brian Arndr-Freking Armstrong on. We covered the event. I hope you guys enjoyed this. We'll be putting this out on the podcast feed as well. David, is there anything else we should share with the Bankless Nation?

Ryan, I'm sad for you because you don't get to engage with the chat as much as I do while we do these last streams. But the chat is just so fun, man. Especially, it's like the bankless community. So thanks for, again, the 4,000 people that showed up. and all the people hanging out in the chat. So shout out to all the people in there. And so we definitely enjoy you guys and definitely appreciate you being here.

So make sure to like and subscribe. So you get notified whenever we go live. Well, guys, I'm going to end it. As we always do, risks and disclaimers on days like this, these risks and disclaimers should mean a little bit more. Crypto is risky. All of it is. Defi is risky.

But so are centralized exchanges, maybe especially centralized exchanges. You'd lose what you put in. But we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.