Big Technology Podcast - Crypto After FTX — With Kate Rooney

Episode Date: January 11, 2023

Kate Rooney is a star reporter at CNBC who covers crypto. She's reported deeply on crypto exchange FTX's collapse and spent time with its disgraced ex-CEO — Sam Bankman-Fried — in the Bahamas. Rooney joins Big Technology Podcast for a discussion about what happens to crypto now that its promise of 'trustless' finance has crumbled. Join us for a deep discussion of the industry's future, the responsibility for journalists covering it, and the lessons from the collapse. If you're enjoying Big Technology Podcast, please rate us five stars ⭐⭐⭐⭐⭐ in your podcast app of choice. For weekly updates on the show, sign up for the pod newsletter on LinkedIn: https://www.linkedin.com/newsletters/6901970121829801984/

LinkedIn Presents Welcome to big technology podcast, a show for cool-headed, nuanced conversation of the tech world and beyond. Now, cryptocurrency's big promise was that it would be trustless. Instead of putting your face in the faceless banks that didn't have your best interest in mind, you could just use a system that worked. on the blockchain, where all your transactions were recorded in plain sight for everyone to see. But all that came crashing down through a very nasty back half of 2022. And really, fully and

deeply, when Sam Bankman Freed's FTX was exposed as a house of cards, it turns out that you still needed to trust him. And if you did, it didn't end well. So what exactly is left of crypto after this? That's what we're going to find out in this week's episode. My guest today is Kate Rooney. She is a star reporter at CNBC, and she's been all over the story and even spent time with SBF down in the Bahamas. She's going to talk about that. Now, few people have followed this story so closely, so I think you're going to love hearing from Kate. Here's our conversation. Kate, welcome to the show. Alex, good to be here. Thanks for having me. Great to have you. We're going to talk a lot about FtX and other crypto companies that might be in trouble.

But first, what I really want to do is get a little philosophical. Everybody seems to know the details of the case, right? It's working its way through the legal system. SBF, Sam Bankman-Freed has pleaded innocent or not guilty, and it's going to work its way through. What I really want to know is by the time we leave here, I really want to know how healthy is the crypto industry after this, and how did this happen in the first place? And there's a Ponzi scheme element to it, but also the fundamental question has to be, why would anyone put their money into a firm like FTX? They had something like maybe $8 to $10 billion of funds that they were holding,

and it wasn't regulated the way that the normal financial industry is. So that's a pretty big risk. what brings people to say, I'm going to put a lot of my money into a company like this and at the risk that it could all go away, which eventually it seems like that's what's going to happen. Yeah. Well, let's definitely dive into some of its stuff. It's exciting to be able to, like we were saying, talk for more than 90 seconds that we sometimes get on broadcast. I think this topic definitely merits a longer format here. So, I mean, as far as the industry, you were saying, what is this done? And why would anybody put their money in crypto? I think that's sort of the next step of all this. It is undoubtedly injured. Some estimates, I mean, it's hard to really quantify, but some people have said it's taken it back, you know, two years, if you think about even just the regulatory side of things. And then this industry and a lot of the tech in general, in the past few years, has been fueled by a little bit of FOMO, by low rates, and that froth has really come out of crypto. And crypto in general has been the poster child for that. So if that's gone away in the market in general, crypto is the extreme example of that. It's really drying up. And even if you look at something like Bitcoin, which is really seen as

the safer, boring side of this whole industry, it's completely flat. There's almost no volatility. There's not a lot of trading activity. So people are either sitting on their hands and waiting for the right time to buy more. There's just almost no trading activity. So it's in this sort of holding pattern. And you've got the eternal optimists in crypto and tech that will say, this is actually a good thing. Some of the grifters are out. Sam Bank Medfrey, Doe Kwan, the guys from Three Arrows. Right, right. But why would it? Yeah. But why would anyone put money in in the first place? So take us into like the minds of a retail investor or even an investor who's responsible for client funds.

What is going to make me put my money into an FTX? Maybe is it to, I mean, to buy the coins, you know, the $10 billion is a lot of money. So what was the promise there that they came to initially? So a lot of people were just chasing yields. I think at this point, you know, the bar is extremely high to take any of that risk. But if you flash back to, you know, a year ago and, two years ago, there was a lot of FOMO going on. And some of these, FTCS allowed some of the riskier side of crypto trading in general.

So it's very much a global platform, but they would allow you to trade derivatives that you can't really access as easily here in the U.S. It allowed you to take on more margin, more risk, and they actually lowered the amount of margin. But at one point, it was 100 to 1. So you could really gamble on this platform in a way. that you couldn't with others. So that was one side of it. It also catered to what they called sort of a power trader. So they were looking for the person, maybe the hedge fund, the high net worth individual who is trading more than $100,000 per trade versus your average retail trader. So that's been one thing with the FTX fallout in general. It hasn't necessarily been as many of the smaller

mom and pops. It's actually hit some of the high net worth hedge funds harder. And it's hard to to feel bad for some of these guys, because that's supposed to be the smart money here. But they were the ones really using FTX, and Sam Beck-Bidfried started his career on Wall Street, really was a quant trader, and designed this platform for somebody like him and said, hey, I couldn't access the things that I wanted to get. And it wasn't, there were no crypto exchanges out there built for really the pro-trader. So those were the people on there. I think to sum it up, it's chasing yield and it's chasing upside.

And that has blown up in people's faces. and also the venture capitalists that invested here. There was the party round effect where this company continued to raise money. And Sam Beckman Fried himself had this persona of being sort of this seemingly humble, self-deprecating genius in a lot of ways. And I think that was attractive to a lot of venture capitalists

that you talk to now. We say he fit the mold. We thought he was sort of a Zuckerberg. We thought he was this wonderkind who you wanted to bet on, and a lot of them did. And obviously, you've gotten burned as a result. And this kind of gets to the core of the issue, right? Because at its core, crypto is, especially crypto financial products, are set up the promise

and the reason why they got any money in the first place was that they would be trustless. So you didn't have to rely on some opaque entity. You could know where your money was due to the blockchain. That's the whole premise. So how does it then happen that these big players who've built their companies on the back of this new trustless revolution in finance were all based on trust and still convince the people. It doesn't seem to add up in my mind. Still convince the people responsible for making smart investments to trust them. It's a total contradiction, isn't it?

It is. The irony here is ridiculous. If you think about what this industry was built on, why it was created in the first place, it came out of, you know, 0,8,09 in the financial crisis. And part of the upside in what's great about this technology, if you talk to anyone who's been early in the space, has pointed to that exactly, that you don't need an intermediary. You don't need any sort of bank, you know, MasterCard and Visa were supposed to be disrupted by this. the problem here is even if the technology is perfect, even if it's this great thing that has this amazing upside, you've got to trust the onramps. And unless you're a hardcore software engineer, I think the average person doesn't necessarily know how to go out and use blockchain

and they need to trust the people that are letting them in the door. And they don't right now. And Sandbank, Medfreet, and FTX were the ones that were the most trusted in the the industry in D.C. and just had built this reputation of really being a poster child for consumer protection. And the trust that's lacking now in what's supposed to be a trustless technology is extremely ironic. And I think it also takes away from what a lot of people, the reasons people were attracted to this technology and industry in the first place has sort of blown up. So I think that's going to take a long time for people to feel comfortable. And FCX aside, there's a lot of these, I won't get too into the weeds, but decentralized exchanges.

So the idea that you could go, you and I could be trading, making a trade with each other and we wouldn't need, you know, a fidelity or somebody on the brokerage side and then you wouldn't need a New York Stock Exchange. They, the ideal for a lot of these people, a lot of them left Wall Street and said, oh, this technology could actually be really useful. Those are among the platforms that have seen the biggest hacks this year. So there's cyber security has been a huge risk aside from the FTX stuff. So the people that it, the irony of going and saying, you know what, I'm going to use a decentralized exchange because I don't trust the banks. And then getting ripped off by a hacker to the tune of hundreds of millions at this point. And that last year was a record year for hacks is another part of it that I think until we can trust and consumers especially can trust the on ramps and the middlemen that still have to exist in order to make this technology. mainstream, I just don't see how it takes off. Yeah. And that, I mean, you noted exactly the irony here,

right? The whole pitch was stay away from the mainstream financial system. You have to trust banks. Banks are bad. It's all opaque. And I'm not here to stand up for the bank. But it's unbelievable. If anything, they made the case to be in the centralized financial system, because at least there are protections in place. And how does crypto recover? If, if, if, if, in, In its iteration where it got all these billions of dollars, it could not live out its promise. How is it going to rebound from this and actually start to deliver on it? That is the million billion dollar question right now. I think, again, back to the optimist point of view, you talked to some investors and people

that have kind of hung on, and their take would be this has been a healthy, flushing out of leverage, a lot of lending was part of the issue here, that you had these daisy chain, of one person lens to the other person. It's backed by some made-up coin. They've said, okay, that's flushed out. Then you've got some of these players that are being accused of fraud and Celsius is another company, but the CEO was sued yesterday by the AG. Some of these big characters in crypto are now getting accused of fraud and going down for various financial crimes. So they've said, okay, this is maybe a good thing. If they can get through this period of craziness, then the industry might make it out on the other side stronger.

I mean, so that would be the ultimate optimist point of view. And then the more pessimistic take is that, yeah, this was your shot. You had endless money, free money, zero interest rates at a time when people were getting stimulus checks, wanted to take on risk. You had this influx of users, and you kind of blew it in a lot of ways. Yeah. And I think there's people that are frustrated that have done a lot of work or left their career in various big tech companies or wall. Street and are pissed because they did see the upside, but then traditional financial crimes like what F.TX and San Bernard Frieder being accused of have really tainted the reputation here.

So insane uphill battle for this to really take off. And it may end up being, like you said, in terms of making the point on, you know, it's kind of proving the point that you might need banks or middlemen, like Visa and MasterCard have spent a ton of money on partnerships in some of the banks. So the outcome here that's probably not ideal for anybody who's a purist when it comes to Bitcoin or blockchain is that maybe the banks just use it. And it's just kind of a boring backend banking technology. And that's all it is. We'll see. Yeah. And even the optimistic take that you lay out, the optimists sound delusional. Because again, what are they talking about? They're talking about leverage.

They're talking about the end of these crimes. The whole system was set up to, you know, it's the system. It's the actual fundamental system. It's not the leverage, right? It's the system because, you know, even if you, at the end of the day, the collapse of FTCS wasn't the leverage. It was the Ponzi scheme element. And that just completely negates this whole idea of your funds are safer because they're on this blockchain ledger.

And the hacks, same thing. A lot of people clearly use that as sort of a marketing gimmick to say, I mean, back to the example of Celsius. So Alex Mishinsky, who I mentioned, who's the CEO, former CEO and founder there, their whole pitch was banks are not your friends. You used to wear this T-shirt that said that. And they've got people who didn't trust the banks and who didn't trust the traditional financial system, but, you know, maybe didn't understand the technology or didn't do the diligence or be in the fine print. and you talk to some of these customers, and it's awful to hear, but these are a lot of people who saw the headline 19, 20 percent yield, thought it was essentially safe and the same thing as depositing their money at a bank, but what was really happening on the back end was a lot

of sketchy lending that ended up blowing up. And that the whole trust thing, I think, is a huge, huge part of this. That depending not, it's hard to speak to their, motives, but is a reason why people got it in the first place because they don't trust traditional finance. So it's a, that's a huge theme of this that I, regardless, I can think going forward, the rebuilding of trust will take a while. Yeah, if ever. And at least my perspective. You mentioned something interesting to, in terms of blockchain that I, when I started covering this, I was thinking the same thing. Like, you, oh, yeah, you can just track it and you can see where everything goes. When you've got one of these companies, say it's FTX or Coinbase or,

whichever exchange. The way that it shows up on a blockchain is essentially a blob. So you can see money moving on and off, but you can't really see what happens within the blob. So they may say, oh, well, you can track it and you can see some of the outflows and inflows. But whatever happens internally in that blob, you can't really track. And it has nothing to do with blockchain or trust. You've just got to trust whatever private company or exchange or wherever you're holding your crypto. There's a thing without that trustless element, what is this at the end of the day? Right. It's not, it's nothing. It's speculation on coins that may or may not be worth worth something, anything. There's nothing. There's no cream filling without that element. So that's exactly right. One of the things, too, that there's been interesting ideas, whether it's some of these economy. So take gaming as an example. This has been one of the big things that these. have pointed to to say, oh, well, this is actually a great idea. If you had a Roblox example

that you could take your Robux or your money that you make on Roblox and you could take it off and that could actually be a real tangible currency, that's a good idea, right? Like, I mean, that seems, that seems interesting. But until somebody builds one of these games that's better than what's already out there and people actually start using it and don't think, oh, I'm just using this because it's a gimmicky blockchain video game. They're using it because they actually genuinely think it's better. That is yet to be proven. There aren't things out there that consumers look to to say, oh, great,

this decentralized social network or this decentralized video game is way more fun to play. I don't really care what the tech is. That seems to be what they were waiting for, and it just hasn't happened. So again, back to the optimist's point of view, maybe it's just too early. Maybe this is a decade from really taking it. off. But you could also say they had a solution looking for a problem in a lot of cases that there's a lot of things that just don't need to live on a blockchain that are just working perfectly fine right now. And that might have been part of the issue. Exactly. And you think

about NFTs, for instance. And it's like, well, do you need NFTs? Or could you just buy like the new skin on Fortnite? And that's your digital, you know, good transaction. That oftentimes can be good enough. The bored ape example, I think, was like the height of Yeah, let's go into that. And it's just human nature. It's like you go, there's so many examples of this over history, but that gets back to sort of the FOMO effect

and the free money effect that that just to me was like the crystallized example of people paying a million dollars for a JPEG of an ape. So, who knows? But yeah, the NFT example were great. I think you could rationalize and you could see a use case and kind of, okay, I could see how maybe that would make sense. But in order for it to work, you have to have full buy-in.

And in order for, I mean, it's the same with any currency. In order for people to think that it's valuable, you just ought to agree that it's valuable. The same with gold or the U.S. dollar. And now that the trust and confidence in crypto is drying up a bit, that's going to be a lot harder to achieve, especially for things outside of Bitcoin and, you know, NFTs in general, that that market is completely collapsed. Last week we had Elliott Brown on from the Wall Street Journal and we talked about the end of froth in tech and a lot of the recession receding hype that's happening after zero interest rates are gone. And this seems like it may be the ultimate example. And I think there might be

some positive uses for this technology down the line. But this entire, industry of decentralized finance that emerged around trustless trading and the blockchain, that seems to be done for and unwinding. And FTX was sort of like the prime example. And it was almost like the perfect arrow to the heart where you have someone like Sam who you spoke about if he can't be trusted. And his firm is Ponzi scheme or something close to that. We'll see in court, right? Then what's the story with the rest? So let's talk a minute about. Sam, you were down in the Bahamas speaking with him, what, three months ago and have been in touch with him a bunch? What is your, we won't spend the whole podcast on him, but I'm just kind of

curious, like having sat down with him, having heard his mission, and then having seen what was actually going on at FTX and Alameda. Are there any lessons to be learned there? A hundred percent. I have thought about this a lot. And a lot of his, I mean, feel. dup. There's things we interviewed him multiple times. We did a profile on him, which is pretty rare also for CNBC. A lot of these print articles and Forbes has covered him. But it's really rare that we would take the time to go down and do something. And we're so breaking news oriented. And that was in a scenario where he was newsworthy enough that we thought it was worth it to go down and really find out who this guy is. And a lot of the things about him made this story

even more interesting. The idea that he was given, he signed the giving pledge was set to give away 99% of his wealth. He had the whole effective altruism thing that we now know. He's admitted as a front that he didn't believe in. And he was a compelling, interesting, very bright CEO. And so at the time. You know, you, we'd asked him questions about Alameda. He, in a lot of his interviews, if what they're saying, and the prosecutors are saying is true about this being a fraud of epic proportions, you know, he lied to our faces. So we've asked him questions on the conflicts of interest, Alameda, the revenue that they were bringing in. He was estimating a billion dollars in revenue for FTX. That's clearly untrue. We've, you know, asked him directly about some of

this stuff. And he lied about it. If, you know, if what, again, allegedly, I don't want to throw up under the bus until obviously there's a lot wrong there, but legally we'll let the courts figure that out. But he, you know, he boldface told us when he was bailing out these other companies and spending hundreds of millions of dollars to do it, in hindsight, we now know that it was to cover up other stuff at his other companies, that he was saying that he was doing it to really be the white night of this industry and to go in and save other companies and be the good guy. And, you know, you, as a journalist, it's an awful feeling to feel like we didn't catch it early, that we didn't, you know, see some of the red flags that now in hindsight, it's easy

to go back and say, okay, that some of this stuff didn't add up. I would also point you, there's been a lot of analogies to Theranos, to Bernie Madoff. One of the interesting things about this is how quickly it unwound and how quickly the rise and fall of FTX happened. So we had been covering this company probably for a year and a half. He's only been around for two years. So he was not really on anybody's radar until I would say 12 or 16 months ago. and the company went bankrupt in a matter of four days. So in order to, there were things that we were looking into that probably would have

taken years to report in the way that Theranos, John Kerry Roo, is the gold standard for investigative reporting. And he reported on that story for years and years. And it didn't unravel as quickly as FTX did. So a lot of lessons to be learned. Is there something about crypto that, because they don't have to be. have this, crypto firms don't have the same rules as modern financial firms. Yeah. Is there something about them that allows them to lie more easily? And if there is, does that

change the way that the public and journalists covering this space need to approach these companies? One of the things that's quite different is the global nature of this asset class. So they had a portion of the company was in the U.S., but it was only about 5%. 95% of this company operated overseas where the regulations are different, to put it lightly, but there's certain places where there's almost no regulation that they were likely operating in, and it's a private company. So covering, you know, covering private companies in general can be extremely difficult because they can cherry pick on their financials. They don't have to disclose anything to the same level as a public company that's filing quarterly. So,

that's part of it. That it's a private company. It's a global company. And you just don't, that level of opacity makes it hard. And a lot of times you're taking somebody at their word. So you don't have access to some of the financials. You don't have access to the documents that might have shown this. And not to mention, talking to BC's, there's been questions over diligence and how did this happen and, you know, some of the big soft bank sequoia, everybody that invested. If this is traditional financial fraud and none of this was living on the balance sheets. They have explained it as they, what they were shown and the financial documents in the data rooms, you know, look legit. So if it is traditional financial fraud, you can see a world in which it's not that

they did no diligence and signed of a dotted line without looking. And there's lessons for Silicon Valley, too. But it does make it inherently difficult. And it also, as a journalist in crypto, I've struggled with this for a long time. But if you're a skeptic, you're sort of, you know, you're a hater. You're, it's really hard to be in the room with hundreds of crypto people and keep that level of skepticism. So it's a reminder that I luckily have great editors and a team around me that you, if you bring them a scoop or something, there's always the level of like, what? Like there's this hype that goes on that you just have to remind yourself that, yeah, you're not a part of the industry. you're there to hold these people accountable and to get certain information to your audience.

So being at these conferences and being in just covering this industry in general, I would say, of any tech sector of any industry, this to me is one of the hardest to be a healthy critic and skeptic of because of some of the hype that was going on. It is so much. Yeah. So much Kool-Aid. and the animosity towards the people that weren't believing. And it's almost, it does feel like, okay, if you're going to have a cult, this is sort of, how do you do it? You have this big, you know, benefit at the top.

And then you, you otherwise the outside, right? You say, have fun being poor. You don't, they don't do, they don't do the GM on Twitter. How fun being poor is like just crystallizes a lot of the momentum and feeling of people asking questions. pushing back. So, and it's a good reminder going forward. And yeah, I mean, it's, it's a tough lesson. Like, I wish I could say we saw all of this coming, but I think Sam to a lot of people did represent an ethical side of this. And clearly, he was, he was lying. And that's not who this guy was. So. Right. And clearly the investors could have done more diligence and talked about

this last week. But when you brag in your blog post that the guy you're funding with a lot of money, he's playing video games while he's meeting with you, Red Flag. Speaking of Red Flagg's last question, I'll ask about him, what was the deal with the Bahamas? I mean, was that not like a sort of screaming signal that there was like something weird going on there? So his whole pitch about Bahamas. Better vegan food. Yeah, better weather.

But was that there hadn't, there wasn't clear regulation in the U.S. And he had even said in interviews with us, if, if Congress could get something passed, I would think about moving my company back here. It's because it's impossible to operate within this regulatory structure where there's no clarity. And that's the reason we're down there. And Palmas has done a good job of setting up its securities regulation. And also in crypto, a lot of these companies do operate offshore. And they were, in some ways, Coinbase, it is founded here, built here, regulated here. But they were growing faster than Coinbase.

They, in a lot of ways, were outdoing some of the smaller exchanges that were more regulated. So from a business perspective, the thought was that he was growing faster and he was able to move faster being abroad. And obviously, he was able to cut corners and pull off a massive alleged financial fraud as a result. But it always raised questions. There were tax questions, too. Is this a way for him to just avoid paying certain taxes? And that's still a huge open question, but it was Bahamas, Antigua, and then they had global entities in almost every country you can imagine. So one of this M&A spree where they would buy up smaller crypto companies just to get a license in some of these places

in Europe and all over the world. So they were really, uh, all over the place. And despite how much money they were spending on Super Bowl ads and stadiums, they really did not have much of a presence here in terms of the overall market. People, yeah, I do love how the Bahamas in the end were very happy to hand him over to U.S. authorities. And I think they sent out the press release before the American authorities could. Yeah, there was a sort of back and forth with the bankruptcy courts there and the regulators. Well, he's an embarrassment to them. So they, of course, wanted him out and wanted to show like they were being proactive.

It's not like a great tagline for the Bahamas that you can come here and hang out and do financial crimes and they'll stand by you. Definitely. There was a heightened awareness of that on their end. And he, I mean, in terms of his impact on the local economy, too, they threw this conference with salt. Which is Scaramucci's firm. Yeah, exactly. So Anthony Scaramucci's firm, they did crypto Bahamas. And I mean, that company was pretty significant to the local economy, too.

You had events like that, but they also were building this headquarters that they spent, I think, $60 million they'd committed to and not necessarily broken ground up, but they compared it to Google's headquarters. And we're just making it seem like, oh, we're bringing this tech company here, we're driving the local economy. So being down there, I mentioned we were down there in August interviewing him. And then we went back when this whole thing erupted. And, I mean, it was all over the local papers.

Everybody knew about it. And there's a sense of disappointment, too. I think they're going to, the job creation, the economic stimulation coming from FTCS, there were a lot of young people living down there that obviously are not anymore. So there's a sense of disappointment in NASA that they're just losing that. Yeah. And again, it's a further crime that SBF did. to just wave that money in front of them and it was all, well, okay, we don't know if it's a

crime yet, but you catch my drift, wave that money in front of them and now it disappears in these legal proceedings. So I definitely want to talk about what the broader implications are going to be for crypto, both this loss of trust. And then the actual money itself, there's a lot of money. So where it goes and who it's going to impact. We'll do that when we come back right after this. Kate Rooney is here with us. She is the crypto reporter extraordinaire for CNBC, if you've turned on CNBC at all in the last, I don't know, three, four months, you've probably seen her.

Okay, we'll be back right after this. Hey, everyone. Let me tell you about The Hustle Daily Show, a podcast filled with business, tech news, and original stories to keep you in the loop on what's trending. More than 2 million professionals read the Hustle's daily email for its irreverent and informative takes on business and tech news. Now, they have a daily podcast called The Hustle Daily Show,

where their team of writers break down the biggest business headlines. 15 minutes or less, and explain why you should care about them. So, search for The Hustled Daily Show and your favorite podcast app, like the one you're using right now. And we're back here on the second half of big technology podcast with Kate Rooney from CNBC. Let's quickly talk about where the money from FTX is going to go. So it's a lot of money.

And you mentioned in the first half that a lot of it is coming from bigger investors. What are the chances that these bigger firms and the retail investors that have the money get the money back? So on the bigger investors, well, one thing that the number that they've put out there in terms of the whole or the money that's missing is $8 billion. There's questions over if it was worth $8 billion because they're marking it. It might be marked in some of these FT. T-T tokens. So that's what the team that is the new team at FTX, John Ray, who for those who don't know is in charge of restructuring Enron and is using basically forensic accountants to try to figure out where all the money is. So I think that's step one is they're figuring out how much is missing if it was there at all, if you deposited your money and it was a classic Ponzi scheme or if there are, there's money out there to make people whole. And they've already said that there are some, I mean, ledger action. is one example of a company that FTX had bought that was solvent, and they said, oh, we can actually

firewall this, and this part's okay, and these customer deposits are all right. So I think that's what the team right now is through the bankruptcy court figuring out, is where all the money is and how they can actually repay customers. As far as making any of these investors whole, one option is that another company comes in and buys out FTCX or the remaining asset. And that would be some way to make customers whole. It might not be a dollar per dollar. It might be 50 cents on the dollar. A couple analogies to look to.

I mean, so Mount Cox was one of the big early crypto exchanges when bankrupt suffered a hack. And customers got repaid about a decade later. So I think the expectation is that even if people get repaid, there's not a lot of hope that it's going to happen soon. So I think people that have lost money are are writing that off as a loss. It's hard to handicap, you know, if they'll get their money back, how much they'll get back. And there's certain tranches too of investors. A lot of people are now, there's class action lawsuits. There's the VCs themselves who may have some sort of claim here. And so it's messy. And I think it's probably too soon to tell with any certainty if and when anybody's getting the money back.

Sam had something like $450 million of his own cash. I put quotes around that, right, quote unquote, his own in Robin Hood. Is he going to be forced to give that up? That's a big deal. He says part of it he needs to defend himself. It's about 7% of Robin Hood. So he had bought on the open market, well, through this shell company, emergent technologies.

And at the time, it was seen as him potentially trying to get a toehold on Robin Hood to make some sort of acquisition. And so when people thought they were solvent, the thought, again, was that he was going after Robin Hood or one of these U.S. trading apps to try to get customer deposits. And so that's sort of the backstory of how he invested in the first place. There has been some infighting on who has claimed to that. And there's Lockfi, which is another company that Sam Bankman Fried and FTCS bailed out that said in bankruptcy court, okay, well, we should, that's part of FTCS. We get, have rights over that, an entity in Antigua is saying the same thing.

And then FTX, the company is saying the same thing and saying, wait a minute, this is part of our whole bankruptcy proceeding. And then on top of that, Sam Bankrupted himself is saying, wait a minute, I, that's, yeah, that's mine. I bought it separately. It's not a part of FTX. Yeah. And that's a total mess. And so this week, the prosecutor said they were seizing that, or they got approval to do that. They were going to seize that and then figure it out.

And he seemingly doesn't have access to it right now. He told Andrew Ross Sorkin, my colleague at CNBC, and he's also in the Times, but that deal book interview that he had $100,000 in liquid assets. So it does beg the question of how is he able to afford some of the top employers in the country? and he's got to have more out there, but I think that that's one of the things that came out of the bankruptcy court or no, sorry, what was his? There's a million different proceedings going.

There is his arraignment this week was there was an update to his bail hearing where they said he's not allowed to access any FTCX or Alameda funds. And so there's certain freezes on what he can actually get to and move around. And he needs approval to get a loan or to spend anything other than, or over $1,000.

So it seems like he's being monitored pretty closely, but that is a significant portion of wealth. Maybe not when we thought he was a multi-billionaire, but at this point, you know, could be significant. And there's about three or four parties fighting over who actually gets that. And it's been hurting Robin Hood stock, as you can imagine. Oh, I can imagine. It's not good to have any FTX or SBF money in your business right now.

And there's a lot of businesses. some have returned the money some haven't but the bigger question here really is what happens and to go back to what we were talking about at the top what happens to the rest of this trustless financial industry that you really had to trust a lot it's not only the money that came from fdx although there is some we'll cover that but it's also the loss of people's faith that this is actually something that is worth investing in because of all the holes that have just been shown in this one instance. I want to ask you about Binance because they are sort of the, I don't know, have a love, hate, maybe more hate relationship with FTX or I have had it. And almost set a

bunch of this in motion. They had a serious withdrawal issue where I think people withdrew like what, something like a billion dollars in a week, a day, something along that lines. Can Binance survive this? So that, again, open question. And they're now trying to prove that they have the amount of reserves that they say. Sorry, they're another big crypto exchange. Yeah, exactly. So now that FTX is off the, I mean, insolvent, bankrupt, gone away. They, some estimates put them at 80% of global trading volume for crypto. So it's hard to understand how big of a player they are now in the global industry. And so CZ, the CEO, also was involved early on in revealing some of the issues at FTX, and they were a big competitor, but they also were an

early investor. So there's a lot of background there. But now that FTX has gone under, there's a lot more scrutiny on exchanges in general and finance now being the big globally by far. So they have tried to come out with, they call them proof of reserve. So they're not a full financial audit that you would think about in the traditional sense, but they're a way to at least try to show that they've got the amount of deposits that they say they have, and then they can meet customer withdrawals. If you deposit a Bitcoin, there's one Bitcoin sitting there. There were a ton of questions around that. They came out with this proof of reserves report and they had an auditor do this report.

So it wasn't an audit, but it was by an auditing firm. And they came out and said, hey, good news, guys. We're going to show you some of our books. And this should give the market confidence. There were more questions and answers, I think, by that report. Part of it was it was only Bitcoin. And there's hundreds of other assets that are traded on there. It didn't seem to be one for one.

And then about a week later, the auditing firm that was working on this, basically quit and said they deleted the report, said that they were no longer working with any crypto firms. And CZ had also said in an interview that none of the big four auditors, so the Deloids of the world, KPMG and those guys wouldn't work with crypto firms in general. And I had talked to a ton of people that week who said, no, no, no, we work with Deloitte who are in crypto, some of the bigger U.S. companies here, they work with Deloitte, they work with Grant Thornton and say it's not an issue of they don't understand crypto and it's so complex. It's an issue of your company's not auditable and you're not in a position where you have

enough financial statements to make them comfortable. So there's still a lot of questions because their auditor quit. These proof of reserves to most people don't tell the whole picture. And it's also sort of cherry picking of it's only a snapshot in time of how many assets if they have. And Binance has some of the same potential issues as FTX. There's an exchange token that was part of the reason FTX at least started to crumble. There clearly were bigger issues there, but a lot of what the lending that was going on and accounting was backed by this FTT token that was created by FTX and whatever they said. It was the same thing. Exactly. exist in Binance. So they have an exchange token. That's one thing people pointed to is a potential

vulnerability. And the onus is now on them. Your CEO has been quite vocal about saying, we're good, we're good. But that has been the famous last word of a crypto CEO in 2020. Every single one. We are fine. Yeah. It's like the last thing you want to hear. What happens if finance goes down? That would just would not be a good thing. And that's what I, Honestly, a lot of crypto investors I'm talking to, it's hard to get people to talk about it because they are so worried about what it would mean for the rest of the industry. And so I think it would be huge. And that's really, I mean, other, Coinbase, obviously, there's other exchanges. But on a global stage, that is the last man standing.

And if that exchange goes down, I think the damage it does, again, to trust. what global regulators say about it is just, is massive. And people within the industry who are still holding on and think it's valuable almost don't want to talk about it because they, I think there's a huge sense of fear about what it does in terms of contagion and dragging down other companies. I mean, it's, again, too soon to say. And they may well be perfectly solvent and fine, but it goes back to the same issue that it's a company domiciled abroad and doesn't really technically have a global headquarters. It was originally in Hong Kong. It's sort of one of these distributed decentralized companies, but there's a lot of worries around it.

And it may very well be good, but I think there's more questions now because of FTX, and it's up to finance to prove to global regulators, to customers, and to everyone out there that is a potential investor, that they are a safe platform where you can store your money and that it's not going to advantage overnight. There's this kind of global waterfall of other companies that have been hit by FTX that are starting to either fall apart or struggle with some serious losses. They might be directly hit, but I'm talking about Genesis, Gemini, Silver Lake Capital. Sure. Sorry, Silver Gate Capital Corporation.

How big is the fallout of this? Is this all snowball effect from FTX failing? And is it going to be a set of dominoes that ends up taking out a good chunk of this industry also? Because it does seem like we talked in the beginning about leverage, right? And this gambling on margin that's potentially going to create some bigger problems here. So it's partially FTX, but it actually goes back to even earlier last spring when there was a collapse of this Luna terra cryptocurrency that we won't get to in the weeds with. but it was supposed to be what they call a stable coin. It was supposed to be pegged to the price of the dollar. That thing collapsed. It brought down a bunch of hedge funds, which started sort of this lending domino effect, and a lot of people got hit by that. And FTX at the time appeared to be immune.

But what we know now is that Alameda, which is the sister company of FTX, had actually taken a massive hit. And part of what FTX was doing was trying to plug the hole there. And so while it seemed like a relatively quiet time over the summer because some of that had happened and and people pointed to that saying oh well crypto survived this so this is actually a good thing it made it through this lending crisis and the worst is over and meanwhile it was the tip of the iceberg and under the surface there was that's unbelievable happening so that that was sort of the the onset of all this flashword to ftX is in the lending market and just in crypto in general a huge counterparty to some of these so Genesis had already been hit and Genesis by the way is one of it was really the first

lending desk in crypto so they were market maker did a lot of the lending that went on there and again were one of the more trusted names had been around the longest had already been hit by what I mentioned earlier in the spring they when FTCX goes under said that they had I think it was about a billion dollars in exposure blows up their lending operations and that started another domino effect. So Genesis is that one company, lending company I mentioned, Gemini is another consumer. That's the Winklevoss twins, right? Winklevoss twins of Facebook fame.

Of course. Of course. Winklevoss twins are involved. Exactly. Of course. They started a consumer crypto exchange. One product that they had was called this earned products that you could get higher yield. You could deposit your money and on the back end, it would get lent out and you'd get

higher yield. It was inherently more risky. But that was happening to Genesis. So when the lending dried up there, Gemini had a bunch of customer money that was locked up. And now they're getting sued. There's class action lawsuits. They're up against the ropes because their customers are pissed who are saying, well, wait a minute. Well, now we can't access our money. So the Winklewas twins are now going after the parent company of the lending company. And they have been trying from what I'm hearing to settle all of this outside of a bankruptcy court. So to go back to Genesis for a second, it's owned by this massive holding company in crypto called Digital Currency Group, DCG. They own Genesis. They own the gray scale Bitcoin trust that a lot of people use as a proxy

for investing in Bitcoin. It's they applied to become an ETF. They've got to, a huge venture portfolio. And when Genesis went under the thought was that DCG would be able to plug that hole and at least maybe flows up Genesis without having it hit the rest of the portfolio, the Winklewoss twins come out, or Cameron Winkel boss in particular, puts out this open letter accusing Barry Silbert, the head of DCG of basically intermingling, co-mingling funds, said that he's negotiating in bad faith, really putting, going after him in a big way and sort of shifting the blame from, oh, we got our customer money wrapped up in this lending issue,

but actually at the end of the day, it's Barry Silver's problem and gave them a January 8th deadline to respond. And so the outcome of this is the genesis, from what I'm hearing, will likely end up in bankruptcy. And that's sort of the, it's kind of priced into this point. That is the expectation. But it might be involuntary that a lot of times when these crypto companies have filed, it's because they don't have any other option. If there's another counterparty that's saying, wait a minute, you owe us money and they're not able to negotiate in good faith, then it enters sort of this forced bankruptcy, which is a potential outcome. But never say never in crypto, it's like living in dog years doesn't even get close to how quickly things can happen. So let's just end with, we have like

I'll maybe a minute or two left. Let's end on this note. I'm curious, there's something that's, you know, some of this stuff is so ridiculous. It's easy to laugh at. But there is something that's a little bit sad here. Like there's a downside, right? Which is the vision of having a more ethical banking system,

of providing banking access to people that haven't traditionally had it to cut down on fees when it comes to sending money, you know, one place to the other. it seems to be if not if not killed and then extremely delayed and and weakened is there is there something sort of sad about seeing that that vision you know however fanciful it might have been just take a you know I mean just an unbelievable punch to the gut it is really no it is awful in a lot of ways and some of the use cases that we talked about earlier in terms of not having a middleman are also remittances and being able to send money abroad. And some of the early use cases, that's where you've seen a lot of uptake.

And also in emerging markets where people talk about investing in crypto in the U.S. And say, why would I hold Bitcoin as a store of value when I could just hold my money in a bank account? But if you live in Argentina or Turkey or a place where inflation is 70%, you can completely see the value. And there's currency controls and the appeal to invest in crypto. is a lot higher for a lot of people in emerging markets and sometimes in a tougher financial situation where you may be more drawn in to get that 20% yield if you're really struggling versus somebody who says, I'm not going to take the risk. I'm going to hold it in a bank account. So some of the really victims of this that have lost money and have it tied up in these exchanges

are some of the most vulnerable people out there. And so there really is an awful underside of this whole thing. And especially in those higher yielding products. it's really, really sad to talk to a lot of these everyday investors who put their life savings in some cases into these platforms. And it's not just, there's a lot of Schadenfreude out there and talking about the VCs and some of the wealthy hedge funds that lost money. But there are absolutely average investors, average Americans, and the downside and promise of some of the money-saving good things about remittances and making the financial system more accessible and inclusive have really been put on the back burner.

And for regulators, I think the bar is going to be even higher for them to approve any of these things without having FTCS in the front of their mind saying, we don't want to get burned again. And so instead of taking a risk on a new technology that we don't really know about and you say it's got this great potential, you know what, we're going to stay a little slow and try to figure it out. So hopefully it ends up in a place where there is some sort of upside and the optimist are right in some way. And there's the technology useful and there's, you know, not total carnage.

But yeah, it's been tough for a lot of people. Kate Rooney, thanks so much for joining. Thanks, Alex. Great to be here. And that will do it for us here on big technology podcast. Thank you so much for listening this week. It's great to have you on, Kate. Really was looking forward to this for a long time

and finally got a chance to make it happen. That was awesome. Thank you, Nate Gwattany for mastering our audio every week. Really appreciate you, Nate. Thanks again. Thank you, LinkedIn, for having me as part of your podcast network. And thanks to all of you, the listeners. A reminder, this show is now bi-weekly.

So we do the big interview on Wednesday. And then on Fridays at around 2 p.m. Eastern 11 a.m. Pacific. Ron John Roy and I hop on LinkedIn, You can tune in on my LinkedIn page, just search for my name, Alex Cantorwitz, and we will do 30 to 45 minutes of Q&A and a discussion of the week's event. And then we will post it on the feed here for you to listen to if you miss it. So again, two shows from now on, a Wednesday, marquee show, and then Friday we talk with you, we talk with each other about the week's news.

So we're always chiming in on the week's news. It's been pretty fun. Last week was awesome, and I think this week is going to be pretty great as well. all right well that will do it for us here on the show thanks again for listening really appreciate you as always if you haven't gotten the chance to rate the show that would always go a long way so please rate it five stars if you can and other than that we'll see you next time on big technology podcast