Front Burner - The collapse of the ‘Crypto King’

Episode Date: November 15, 2022

In the last two years, cryptocurrency exchange FTX spent millions of dollars on advertisements with the likes of NFL quarterback Tom Brady and Curb Your Enthusiasm’s Larry David. FTX also sponsored Major League Baseball, the Mercedes Formula One racing team and Canadian businessman Kevin O’Leary. Earlier this month, Bloomberg ranked the platform’s founder, Sam Bankman-Fried, as one of the world’s 100 richest people. He was sometimes referred to as the “King of Crypto.” But now, after financial leaks triggered mass withdrawals and a halt in trading, Bankman-Fried is worth effectively nothing. FTX has gone from a recent $32-billion US evaluation to bankruptcy. Today, CBC News senior business writer Pete Evans returns to explain how one of the world’s three biggest crypto exchanges was brought down so quickly.

Happy Holidays! I'm Frank Cappadocia, Dean of Continuous Professional Learning at Humber Polytechnic, and I'd like you to set a goal for 2025 to sharpen your skills and get promoted. Register for a professional designation, micro-credential, or certificate with Humber's Continuous Professional Learning and ignite your career journey this new year. Our experts deliver accelerated learning from resilience-based leadership to electric vehicle fundamentals in learning options that work with your ambitious lifestyle. Adapt, evolve, and excel. Go to humber.ca slash cpl to get started. This is a CBC Podcast. Hi, I'm Jamie Poisson.

What do you think? Are you in? You know what? I'm in. Let's call everyone. Hang on a minute. This is Tampa Bay Buccaneers quarterback Tom Brady in an ad with his then-wife, model Gisele Bundchen. And what they're recruiting for is one of the biggest cryptocurrency trading platforms. It's called FTX. In the last

two years, this was just one of multiple eight-figure ad campaigns from the platform. Another one was with Curb Your Enthusiasm's Larry David. Like I was saying, it's FTX. It's a safe and easy way to get into crypto. I don't think so. And I'm never wrong about this stuff never FTX also sponsored the MLB an F1 racing team with Lewis Hamilton and Canadian businessman Kevin O'Leary who praised its founder

big advocate for Sam because he has two parents that are compliance lawyers if there's ever a place I could be that I'm not going to get in trouble, it's going to be at FTX. Well, of all these people, I hope you actually listened to Larry David. Because if you've been keeping any kind of crypto on FTX, chances are you'd be kissing your entire investment goodbye right now. Last week, reports of shaky finances started a flood of people

yanking their money off the platform. FTX halted trading and the once $32 billion U.S. company is now bankrupt. It's pushed an already damaged crypto market into a huge price collapse, has scared investors into pulling billions from other platforms, and has become a major I-told-you-so moment for crypto skeptics. To explain how any of this is possible, I'm joined again by CBC senior business writer Pete Evans, who has a whole lot of crypto drama to take us through. Pete Evans, hello. Hey.

Great to have you. Let's start with FTX founder, Sam Bankman-Fried, who just weeks ago was a crypto billionaire and is absolutely not a crypto billionaire right now. crypto billionaire and is absolutely not a crypto billionaire right now. Tell me a little bit about him because he's quite a character even in this world of big personalities, right? Yeah. So Sam Bankman-Fried, SBF as he's known online and may be referred to in this interview. He's about 30 years old. He was born in Silicon Valley. His parents are profs at Stanford, worked on Wall Street for a bit, found that kind of boring, then moved back to the West Coast and sort of got into the whole cryptocurrency world,

which is sort of really kicking off then in sort of like the mid-2010s or so. In just the past five years, Sam Ankman Freed went from buying his first Bitcoin to becoming a multi-billionaire. The FTX founder is now worth an estimated $11 billion. His exchange is now worth $32 billion. And it brought in about a billion.

He's very much become the, one of the faces of crypto along with sort of a Vitalik, the founder of Ethereum. People have called him the crypto king, right? Yeah. I mean, you wouldn't think to look at, I mean, like when we think about, you know, zillionaires, it's like speed boats and Maseratis and private jets. Where's your car?

It's that one there. That's like what, a Toyota? Yeah, and it's a Corolla. Why don't you buy a Lamborghini, man? He basically lives with his roommates on an island. The place I live was intended to be an incredibly nice apartment for four people, and we've turned it into an apartment for 10 people. But it's nice, we'll cram to

he lives with roommates one of them a golden doodle named gopher and he likes to play video games in his free time sometimes on the job he like sleeps in this beanbag chair he sleeps in his beanbag chair at the office he kind of looks like jonah hill that's who's going to play him in the movie i think oh yes he does kind of look like jonah hill um so yeah so not much to look at him. You wouldn't think either this is some sort of genius or some sort of zillionaire who can do whatever he wants. He basically looks like your college roommate and would probably be a really good dungeon master for a D&D campaign. Okay. Tell me a little bit about the work that he was doing in the world of crypto. Like what was his mission when it came to crypto?

So he was a, like many people in crypto, he's a real true believer. He thinks sort of like this is the future of finance. It's not just some sort of dodgy corner of the internet. It's going to be regular folks like you and I are going to use it. So he was very interested in sort of taking crypto into the mainstream,

like making it not just a sort of den of online illegal activity and making it a thing that would improve people's lives and sort of make transactions and commerce better. So he was the founder of this exchange called FTX, which as of two weeks ago was the second largest one in the world, meaning it processed more cryptocurrency transactions than just about everyone in the world. cryptocurrency transactions than just about everyone in the world.

And explain to me what FTX is like when we say that it's an exchange. What are we talking about here? I mean, functionally, it's a bit like a sort of a foreign exchange kiosk you might see at the airport. They're not going to sort of invest your money for you. You give them dollars and they will give you a different currency in return. They'll take a little take to run their business. But I give you $100 and you can buy $100 worth of Bitcoin. They're not going to invest that for you.

They're not going to do anything to help you grow your Bitcoin just like pure clay to buy and sell cryptocurrencies like Bitcoin. And this wasn't some unknown platform, right? Like some pretty big names and funds were invested in this thing, right? Yeah, yeah. some pretty big names and funds were invested in this thing, right? Yeah, yeah. From sort of Wall Street names, SoftBank, Blackstone. The Ontario Teachers' Pension Plan had a stake in it,

which they put in last year. Celebrities got involved. You mentioned Giselle off the top, Tom Brady and Giselle. They were sort of heavily invested in this as well. Want to do one more? Hang on. There's a possibility of a trade. A trade?

Are you sure? Not a trade trade. I'm trading crypto. FTX is the safest and easiest way to buy and sell crypto. It's the best way to get in the game. Sort of like went across the gamut of sort of Wall Street lending their sort of credence and their gravitas to what he was doing, but also sort of regular folks to sort of lure in people like you and I to say, yeah, this isn't just for sort of Wall Street weirdos and crypto people.

This is for regular folks too. Yeah. And in his quest, I guess, to normalize crypto and to bring it to the masses, to legitimize it. I know he spoke about this last year when he testified in front of Congress. And what did he say? So basically they were looking into some of the mistakes of the great financial crisis, like your Lehman Brothers back in about 2008 or so. He basically went up there and said, listen, I'm happy to be here. This is great. Crypto is the future. Regulation is the answer.

It's great. All those problems you guys had with Wall Street, all the excesses, all the secret dealings and funny mortgages and repackaging stuff, that can't happen in crypto. This is great. If you look at what precipitated some of the 2008 financial crisis,

you saw a number of bilateral bespoke, non-reported transactions happening between financial counterparties, which then got repackaged and re-leveraged again and again and again, such that no one knew how much risk was in that system until it all fell apart. If you compare that to what happens on FTX or other major cryptocurrency venues today, there is complete transparency about the full open interest. There is complete transparency about the positions that are held. There is a robust, consistent risk framework applied.

Yeah, it's kind of ironic now that people are calling this massive downfall the Lehman Brothers of 2022. Take your pick with collapses. I see a little bit of Lehman Brothers in it, a little bit of Enron as well. Theranos. I see a little Theranos as well. Sort of, you know, the hubris of like, it gets very exciting, gets a very, very big, very fast kind of a black box and really knows how it works. And then once you start peeking into the black box, people don't like what they see and So let's talk about how it fell apart. I think the best place to start is earlier this month

when an article about FTX appears on this crypto news site called Coindesk. And what does this article say? So basically, SPF is not just the head of FTX. He's the head of about 130 other companies as well. The main one is his private investment arm, which is a company called Alameda. Alameda doesn't take sort of customer funds. That's sort of his way of investing, making money for himself.

It's always been kind of murky, the relationship between the two. He sort of claimed, you know, like door A and door B are entirely separate. They're not mixed at all. And then basically this story had this leaked financial report showing that on the books of Alameda, there's about $15 billion in assets and a good chunk of them, almost 40% of what they had on their books was actually this token called FTT. FTT is a token that gets used on the FTX platform. It doesn't really do anything. It's sort of the only reason you'd want it is if you were trading something on FTX. When about $7 billion worth of FTT

showed up on the books of Alameda, people started to wonder like, well, why is this here? Where did it come from? Whose is it? And that's when sort of more and more questions started. Like one of his major investors,

a rival crypto exchange called Binance, had a couple hundred million dollars in ftx and the days after this story came out they said listen like nothing to worry about but we're gonna take our money out of ftx and put it somewhere else we don't really like we've been seeing going on here and that sort of made the like what's going on here what did binance see yeah in your books what do they know that i don't know but back back up, like what is everybody worried about here? Like that the $7 billion in tokens are in Alameda. What's the problem with that? Well, so a couple of things.

Basically, if those tokens are somewhere they shouldn't be, the question is why and who put them there? Like presumably this is SBF put them there himself. They're his own sort of personal stash. Basically, like the amount and the volume of what was going there made people make the leap that is he sort of borrowing assets of other people that are on the books at FTX? You know, is he borrowing my Bitcoin that I've stored at FTX and sort of using it to make money on the side for himself? Yeah. Just to be clear, the allegations are kind of like a birdie Madoff-esque Ponzi scheme, a house of cards. Right.

Basically, when you have that much of an asset on your books there that shouldn't be there, it's kind of hard to explain. And the more questions get asked, the less the answer started to make sense. So functionally, people who were sort of either investing in FTX or just keeping their money there as users

started to have questions as to like, what's going on? Is my money safe? Once half a billion dollars comes out, that sort of seed starts to be placed in the eyes of investors and users are saying, okay, so if they just lost $500 million ish, that's $500 million less they have to give out to other people. Maybe I should get my money out. So I'm going to ask for my money back. And then you ask for your money back and maybe they had enough to pay off. You know, some of us,

once you have the sort of like the blood in the water, it becomes impossible to sort of stay above that and keep the sharks at bay. Right. Maybe one way to look at this is like a good old fashioned bank run, right? It has all the hallmarks of a classic bank run. I mean, one of the best ways to describe it was in that old Christmas movie. It's a Wonderful Life. Yeah. Don't look now, but there's something funny going on over there at the bank, George.

I've never really seen one, but that's got all the earmarks of being a run. So yeah, basically, you know, people come into the bank. They heard a rumor that the savings loan doesn't have enough money to pay its bills. What happened? How did it start? How does a thing like this ever start? All I know is the bank called our loan. When? About an hour ago, I handled all our cash. All of it?

Every cent of it and still was less than we owed. Holy mackerel! So like Mr. Smith comes in, wants his $242 back. Mrs. Jones wants this. And Jimmy Stardust comes and says, Listen, calm down. Your money's here, but it's all invested in the community. Don't do this. Give me some time. I'll give you your money. I'm good for it. Well, your money's in Joe's house. That's right next to yours. And in the Kennedy house, and Mrs. Maitland's house, and a hundred others. Heartwarming scene. Everyone, they all get along. They all agreed not to do it.

Bingo! We made it! Look, look, we're still in business. We've still got two bucks left. Well, look, let's have some of that. Let's celebrate. But the whole system is sort of built on this conceit that we're not all going to ask for our money back at the same time. Because like some of my money is invested in your business and in like producer Derek's house and that kind of stuff. So all this drama is going on. There was a point last week where we heard that Binance, so the company that initially felt like something was off here, was going to buy FTX to save it. The head of that company is this guy CZ, who's also really well known in the crypto world. And they had apparently even struck a deal to buy it.

But then that deal collapses. And what happened there? Right. So the first time FTX came into something that reached my level of doing a story was I think two Mondays ago. If you weren't paying attention to the crypto space, you wouldn't have heard of it. Yes, which I try very hard not to. You're not missing out. I'll keep you informed.

That was much as most of the crypto space is a very sort of like collegial, hey, come on in. We're going to the moon. We're all in this together. They have the same sort of personalities and drama and rivalries that anyone does. Like, you know, like Apple and Microsoft don't like each other and they compete. It's a friendly rivalry. And these guys are the same, right? So this

merger deal was sort of very hastily announced early last week. People were sort of, you know, questions were already swirling. But this sort of white knight deal comes in, you know, FTX needs money to handle some liquidity problems. CZ is sitting right there. They have a bunch of money. Yeah, sure. Well, you know, that's a nice looking exchange you got.

We'll merge. We'll figure something out. We'll work it all out. Not much happens for the next day or two. And then basically that deal falls apart. CZ comes out and says, yeah, we're out. I don't like what I'm seeing here. And then all of a sudden the snowball that's been rolling down the hill gets positively huge.

And everyone's saying, what is going on? It's funny how, you know, basically CZ went from being a guy throwing a life preserver to his old rival to basically coming up in a lifeboat, shoving his head under the water. Yeah. Yeah. about shoving his head under the water. Yeah, yeah. And just as a small sidebar here, I will just say for people listening, there is a incredible meme about all of this.

It's like the scene from The Office where there's a fire. Does anyone smell anything smoky? The characters in The Office are named different characters in this crypto ordeal. And basically you have to listen to this entire podcast

to even understand the meme, but I would highly recommend you take a look at it. Oh, fire! Oh, my goodness! Oh, my God! Okay, it's happening! Everybody stay calm! What's the procedure, everyone? What's the procedure? Stay f***ing calm! Wait, wait, wait, wait! Everybody just f***ing calm down! Happy Holidays! I'm Frank Cappadocia, Dean of Continuous Professional Learning at Humber Polytechnic,

and I'd like you to set a goal for 2025 to sharpen your skills and get promoted. Register for a professional designation, micro-credential, or certificate with Humber's Continuous Professional Learning and ignite your career journey this new year. Our experts deliver accelerated learning from resilience-based leadership

to electric vehicle fundamentals and learning options that work with your ambitious lifestyle. Adapt, evolve, and excel. Go to humber.ca slash CPL to get started. Hi, it's Ramit Sethi here. You may have seen my money show on Netflix. I've been talking about money for 20 years. I've talked to millions of people and I have some startling numbers to share with you. Did you know that

of the people I speak to, 50% of them do not know their own household income? That's not a typo, 50%. That's because money is confusing. In my new book and podcast, Money for Couples, I help you and your partner create a financial vision together. To listen to this podcast, just search for Money for Couples. Where is this guy, Begman Freed, SPF? SPF. SPF, okay. Where is SPF right now?

Because before all this, he was worth $16 billion. Where he is right now is an excellent question. I'm led to believe he's in Bahamas, where he always has been, where he lives with his mansion with his 10 roommates and his cool land parties flying dune or whatever. In terms of his value, it's not an exaggeration to say you are literally worth more money than Sam Bankman Freed today, Jamie. I am not worth a lot of money he was ranked on the bloomberg billionaires index a few weeks ago and he's literally at zero now because i mean he must have some sort of like material possessions like a house

and some cars and whatever else but functionally he is not a billionaire all of his stuff is either tied up in like litigation trying to sort out who has the money or literally vanished to some sort of unknown wallet. And then on top of all of this, there's another revelation that we've learned about in the last couple of days, which is that it's possible that the exchange got hacked. Right. So when this story ended, a big air quotes there, Alameda and FTX and a bunch of other companies affiliated with SBF had gone bankrupt.

They were basically in cold storage. They're going to figure it all out. Later Friday evening, there started to be a word from FTX users that there'd been some sort of hack. Basically hundreds of millions of dollars that should have been in certain accounts was being moved sort of undercover to different accounts. We don't know where, we don't know who owned them, but they were on the heels of this bankruptcy news. Obviously it doesn't look good, you know. So that was the first bad surprise on Friday evening. Later through the weekend, what we learned from more reporting on this is that there was a whole other thing where SBF had been moving billions of dollars

through this sort of backdoor he'd created. So basically, the internal auditors, the internal people who would sort of watch these red flags, they weren't aware of that $10 billion that went from basically customer accounts on MTX into this pool on Alameda. $1 billion of that is completely gone. We don't know where it went. No one's saying anything, but it's not in any wallet that anyone's aware of or that anyone has access to.

I'm going to take a wild guess here that everybody who can possibly investigate this has jumped on there right now. I mean, it's no surprise that for a story with so many acronyms like SBF and FTX, every acronym in the world is looking into this. The SEC, the CFTC, the DOJ, they're all in on it. They've all been sort of worrying about crypto generally speaking and they've all launched investigations over the last week or so trying to figure out what happened where's the money where's it gone and who's going to get paid out first and talking about who's going to get paid out first like what kind of recourse do the investors have right i mean it's all going to shake out in the next sort of days, weeks, and months. But like, this is why the crypto people like to say,

oh, you know, Wall Street's rigged, the financial system's gamed, the guys there can cheat, they get their money first, they can get money out, you know, inside a trade, all that stuff. Come to us because it's a free-for-all, it's all transparent, it's good.

A free-for-all is not good whenever things go wrong, right? Like if you're in a Wild West casino and somebody robs you, you want there to be a police force there to go get your money back. Right now it's very much up in the air what that's going to be because this industry, SBF claimed to be trying to welcome regulation. It's not regulated. It's not right now. I mean, like there's sort of, there are a few platforms that are publicly traded and they are subject to rules about the SEC, about things like insider trading and having their audit and financial statements and all that kind of rules about the SEC, about things like insider trading and having

their audit and financial statements and all that kind of stuff. But most of these things are just like privately held companies. I mean, FTX didn't trade on the stock exchange. It was just mostly one guy in his house in the Bahamas. So it's very much an open question how they're going to get money back and who might get what, if any, comes out of it. And we've talked about some of the big institutional investors that invest in FTX. But do we know, like, was it a bunch of little guys, too? Like, I guess my question is who has really gotten hurt here? Right.

So there's probably two things. People who invest in FTX, meaning, like, they put money to get an ownership stake in the platform. Those would be, like, mostly Wall Street major platform. These are, like, your SoftBank, your BlackRock, your teacher's pension plan, that kind of stuff. In terms of people who use the platform, that's basically everyone. I mean, the anonymity of these crypto wallets means we're not going to get an exact list of it. Some of these like huge wallets with thousands of Bitcoin worth tens of millions and hundreds of millions of dollars down to people like you and I who might have had the bad luck for last summer. You were thinking all the FOMO, man, I want to get into crypto.

It's the future I hear. Let's just like pick one at random. Should I listen to Matt Damon and go to crypto.com? The four simple words that have been whispered by the intrepid since the time of the Romans. Fortune favors the brave. Should I listen to Tom Brady and go to FTX? If you went to FTX, your value right now is

zero. You might get that money back, and I don't know when that might happen, but right now, if you log in, you're staring at a big red zero. This has obviously been a really bumpy year for crypto. What kind of impact does the fall of one of the biggest and most, I guess, quote unquote, trusted trading platforms have on the wider market? Right. So there's a Wall Street concept known as contagion.

And that's basically something bad happens. The question isn't, like, has it been contained? It's how much does it spread you mentioned layman brothers before layman brothers didn't matter when it went down sort of in and of itself it was more like well where the money go you know that matters for their owners and their employees and their customers but who had money there who was invested in them who lost that money who now needs to make that up somewhere so the impact there is going to be huge i mean if you basically say like the number two crypto trading platform in the world is now functionally gone, maybe it comes back in some new form, but it's basically gone. All that institutional money has been vaporized. Now, some of these guys, you know, uh, the beauty of diversification is you have a billion dollars,

you put $5 million in a bunch of different pots, some of which are going to go to zero and the ones that go up is how you make money. So yeah, like most of us's you will survive from this but it usually takes a couple months to see exactly how much of hit because it was all it was all in a black box we didn't know it was inside the box and there might be some more scary seeds to come out of it for now the stakes that we do know from all the companies who come out and admit it and they've said they've lost their money they've given us a number they said listen we've written this off. Maybe we'll get some back, but it's okay. We can withstand this. Yeah.

Yeah. I mean, certainly the teacher's pension plan has said like, you know, we're okay here. Right. So that's on the investor side. How far that's going to spill and like, and what might they do to make up their loss is a big question. In terms of users, I mean, here's the thing. If you had Bitcoin or Ether, any one of these tokens on FTX, that's gone.

Let's be optimistic and say, you're going to get back some of it, maybe some portion of what you had before. It probably doesn't look as impressive now. Like, you know, even if you're sort of a Bitcoin maximist, it's going to a million. It's how we're going to buy everything in 10 years. At the very least, you're a little less confident that now because now you're wondering, well, yeah, so maybe I shouldn't have stored it. I mean, I got to get like a cold storage wall to to sort of carry on with me that kind of stuff yeah and that actually explains why i mean bitcoin itself has no reason to have gone down from this it's not the actual asset that went down but it did it's down to about sixteen thousand dollars from about twenty

thousand dollars before all this right because prospective investors and investors are like this is too this is too wild west right i mean like it's one thing to say, oh, Bitcoin is volatile for the long term. It's quite another to live through it and actually know that you're able to say, yes, I still think it's going to go to a million. So I'm going to put more money into this. Because at the very least, you're questioning, like, what is this sort of this ethereal asset that I have now? Yeah. Although, Pete, I have been asking that question for years. For the life of me, I do not understand crypto. But thank you. This was a lot of fun.

Always happy to be here. All right. That's all for today. I'm Jamie Poisson. Thanks so much for listening, and we'll talk to you tomorrow.