Law&Crime Sidebar - 'I F***ed Up Twice': FTX Crypto Crash Makes High-Profile Investor's Shares Worthless

Episode Date: November 14, 2022

“I f***ed up twice," Sam Bankman-Fried tweeted the day before FTX Trading Limited filed for bankruptcy and he stepped down as CEO of the popular cryptocurrency exchange. Although Bankman-Fried reportedly lost $13 billion during the debacle, many high-profile investors' shares are now basically worthless. The Law&Crime Network's Jesse Weber and crypto journalist Laura Shin speculate on how this happened and what can be expected going forward after the DOJ and SEC launched an investigation into the crypto exchange.GUESTS:Laura Shin: https://twitter.com/laurashinLAW&CRIME SIDEBAR PRODUCTION:YouTube Management - Bobby SzokePodcasting - Sam GoldbergVideo Editing - Logan HarrisGuest Booking - Alyssa FisherSocial Media Management - Kiera BronsonSUBSCRIBE TO OUR OTHER PODCASTS:Court JunkieObjectionsThey Walk Among AmericaCoptales and CocktailsThe Disturbing TruthSpeaking FreelyLAW&CRIME NETWORK SOCIAL MEDIA:Instagram: https://www.instagram.com/lawandcrime/Twitter: https://twitter.com/LawCrimeNetworkFacebook: https://www.facebook.com/lawandcrimeTwitch: https://www.twitch.tv/lawandcrimenetworkTikTok: https://www.tiktok.com/@lawandcrimeSee Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

Wondery Plus subscribers can binge all episodes of this Law and Crimes series ad-free right now. Join Wondry Plus in the Wondery app Apple Podcasts or Spotify. Agent Nate Russo returns in Oracle 3, Murder at the Grandview, the latest installment of the gripping Audible Original series. When a reunion at an abandoned island hotel turns deadly, Russo must untangle accident from murder. But beware, something sinister lurks in the grand. View Shadows. Joshua Jackson delivers a bone-chilling performance in this supernatural thriller that

will keep you on the edge of your seat. Don't let your fears take hold of you as you dive into this addictive series. Love thrillers with a paranormal twist? The entire Oracle trilogy is available on Audible. Listen now on Audible. What's up guys? I'm here with my boy Sam from FTX. We're at Cryptobahamas conference. We're going to start today. We're going to do some TikToks for you guys. And it's going to be amazing day. We'll get started. We'll do a get ready with me. Sam, where are you going, bro? It was a total collapse of one of the biggest cryptocurrency exchanges. And investors, celebrities, and even politicians might all be feeling the effects. Cryptojournalist Laura Shin explains what happened and what to expect next. Welcome to Sidebar, presented by

law and crime. I'm Jesse Weber. For any of you involved in the cryptocurrency world or were even skeptical of it or we're unsure of how it operates. This story changes everything. You see, FTX, it's one of the biggest crypto exchanges in the world absolutely collapsed last week. And co-founder and CEO Sam Bankman-Fried, who many have dubbed the face of cryptocurrency, seems to be taking full blame by tweeting, I effed up. Now, this comes as Bankman Freed step down as CEO. FTX filed for Chapter 11. The reports of a federal investigation, into potential misuse of client funds, Bagman-Fried personally lost $13 billion,

and the investors are basically out in the cold. Now, this might sound familiar, this company, FDX, of this exchange, FDX because you might recall that Larry David did a commercial for FDX during the Super Bowl. Like I was saying, it's FTCS. 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. Now, they didn't quite age so well, or maybe it did in kind of a weird way if you think about it. I mean, this collapse affects some very notable people. Giselle Bunchin, Tom Brady, Steph Curry, tennis star, Naomi Osaka. They all received equity stakes in this company and in this exchange. And Bankman Freed donated $5 million to President Joe Biden's 2020 campaign.

It was reported that he donated almost $36 million to Democrats. and he even had suggested that he would donate more than $100 million to the next presidential election, although he kind of retracted that. But it doesn't look like they can count on him in an upcoming election. So how did all of this happen? And what can we expect next? Well, to make sense of all of this, I'm joined right now by cryptojournalist Laura Shin. She is the author of the Cryptonians, the idealism, greed, lies, and the making of the

first big cryptocurrency craze. And she is the host of the Unchained Podcast. Laura, good to see you. Thanks for coming on Sidebar. Yeah, thanks for having me. How did this happen? I think that's the best way to explain it. Because a lot of us are not familiar with this language. So in the basic layman's terms, how did this exactly happen? All right. So this is going to be a slightly longish story, but I'm going to try to recap it briefly as best I can.

FTX, as you know, was a crypto exchange. And the owner, Sam Bankman-Fried, also had a trading arm known as Alameda Rie. Now, earlier this year, there were a number of other crypto companies that kind of went under. There have been a few bankruptcies in this sector this year. And it appears at least, you know, so far, we don't have all the facts. But at the moment, it looks like FTX had some difficulty with its trading. And at that time, Sam Pinkfinfried and potentially, you know, other officers at a very high level, very small number of them decided to actually loan the customer. funds over to Alameda research. And this is something you should never do. I mean, it's for

obvious reasons, hopefully, but especially in crypto, simply because you may be very well aware that the history of crypto exchanges is that they often get hacked. And so what the successful exchanges have learned is that security is the number one most important thing you can do in crypto, is just keep the coins secure, which is hard enough in itself. But for the company to have actually done something to put the funds at risk in the first place, that was absolutely shocking. So what happened was they did this in secret. Very few people knew. And another key piece that you have to know is that FTX had its own token, which is called FTT. And customers could use that token, for instance, to get discounts or to get rewards, different things like that. It's

sort of like, you know, a Starbucks coin or a McDonald's coin or whatever. And by the way, Laura, this is something that was given to, I think it was Steph Curry, right? I think this was given to some of these notable figures, right? This FTT? Yeah, exactly. So what happened was a couple weeks ago, Coin Desk, which is one of these crypto news outlets, had leaked financials of Alameda research, and it showed that their balance sheet was actually heavily reliant on FTT to the point where, if I remember correctly, I think the amount of FTT on their balance sheet was greater than the circulating amount. And so clearly, you know, if they were to try to sell this token, the amount that was listed on their balance sheet is not what they would recoup.

One less bit is that a rival exchange owner, the exchange's name is Binance, and it's headed up by a guy named Chang Peng Xia, who goes by CZ, and CZ said, hey, you know, this FTT token, you know, it doesn't look like it's a good thing to have. And in an ironic twist years ago, he had actually invested in FTX, and then as the two became more like rivals, Sam Pinkfinfried bought out his stake from CZ, and part of the purchase included him paying CZ in FTT tokens. So CZ at this point in time, now that their rivals, actually has $580 million worth of FTT that he owns. And at this point, like I said, they're rivals. He tweets that he is going to sell the FTT because, you know, looking at this balance sheet made him uncomfortable

while holding this amount of FTT. So the CEO of Alameda research, I know it gets confusing. My name's Caroline Ellison tweeted at him, I'll buy it from you kind of like, like not on the exchange, but we'll do like a deal between us. I'll buy it from you for $22 each. And immediately, of course, everyone's like, what's important about $22? CZ response, he's just going to sell it on the open market. You know, it looks for a while like the price does hold it around $22.

dollars, but at a certain point, it starts to drop. And customers of FTX become concerned about their crypto on the exchange. They just want to make sure, you know, they don't know what's going on. And they've seen these leaked financials for Alameda. They don't know what it means for FTX, but they know that they're owned by the same person. So people start withdrawing their money. You can think of it as like a bank run. After this happened, Sam did tweet that on one particular day, they saw $5 billion worth of withdrawal. So obviously there was just a huge amount of activity on that exchange. You were trying to process all these withdrawals.

Meanwhile, he's tweeting things like the assets are fine. FTX is fine. Your money's safe. And ultimately, the crypto worlds was shocked to wake up last Tuesday morning and see that both Sam and CZ had tweeted that Binance was now going to buy FTX. And this is just huge news to have, you know, these two rivals, one of the bigger one, agreeing to buy this. And sorry, do you have a question? Yeah, I do. My question is how much of this is an upset to the cryptocurrency industry? Because again, it seems like this is a lot of people

were skeptical of it to begin with. And to have this, such a major player to have this, what is it, the second largest exchange belly up? How big of a hit is this? Right. Well, yeah, just so let me get to the part of the story. It just happens very quickly. What happens after this? They say that they're going to buy FTCs. And so people think it'll be made whole. but there is concern about the top exchange buying the second largest by trading volume. And then after they take a closer look at the financials, finance decides to pull out. And what's so shocking here is that it doesn't make any sense that troubles at Alameda should cause FTX to, I mean, at that point they might have been saying that they were having liquidity

issues, but it doesn't make sense. If you put your money in a crypto exchange, it should just be sitting there with them keeping it safe. like I said, the security thing is typically the biggest priority for a crypto exchange. And so it just didn't add up. And eventually it came out that they were actually insolvent and that, you know, as I said, FTX had loaned this money to Alameda, which they never should have done. And, you know, it looks like I think the figure that I saw maybe in the Wall Street Journal was that about $10 billion worth of customer funds had been sent over to Alameda and for their collateral for the loan, Alameda had sent back FTA. FTT, which, of course, the value of that collateral had just dropped dramatically. I think at points last week it was like $4 or something.

Ultimately, on Friday, FTX announced that it was going to file for bankruptcy. They have like 130 different entities that were all going to file at the same time. This actually affects their U.S. entity. FTX U.S. Alameda was also filing. And there were a lot of other crazy things that happened after that and slightly before, but that is the basic gist of it. Okay.

And thank you for that explanation because it can get rather kind of, complicated, but just overall, if you can explain to a summary of how much this affects the industry moving forward, and should people ever trust cryptocurrency moving forward? Yeah, so crypto people would say that this is a problem with traditional finance. And if you're aware, like the kind of guiding ethos or philosophy of crypto is decentralization. And FTX was the exact opposite of that. It was a centralized exchange. It was corporate entity with a CEO and, etc. And so they're saying that the reason all of these bankruptcies and crypto have been happening this year with centralized institutions is it's sort of crypto's version of the great financial

crisis. And that highlighted the risks of having centralized entities. And crypto kind of, you know, had its number of also centralized entities. And they're just highlighting really what the risks are of traditional finance and having these centralized institutions. So to their mind, they believe that actually what this highlights for them is that they really, you know, should not blur that line. They should go more toward the decentralized route. And what that would mean in practice is, for instance, there's this whole world of what's called decentralized finance. And what you can think of it as is just using software programs to replace the tens of thousands of employees that existed at like Lehman or Bear Stearners or whatever, right? So you just code up a few

different smart contracts and you can have a little exchange that is simply software. And there's no board or CEO or whatever. You don't have to hire an IT department, nothing like that. You just have a token that's associated with those set of smart contracts. And that token has incentives built into it that incentivize different behaviors on that network. So for instance, if you create a decentralized exchange, then you can have what are called liquidity pools, which is just people putting up their tokens so that there's liquidity for both to trade and have and to do their transactions. And so a lot of people are saying that this kind of is their moment where they're going to double down on the decentralized aspects of crypto. And so, you know, for the broader

world, I do agree it's definitely a black eye because FTX, it did the Super Bowl commercial. It had commercials with Tom Brady and Jasell and Sam Pinkfinfried was often on Capitol Hill testifying, and he was probably really the face of crypto for a number of lawmakers and regulators. He was definitely, definitely the CEO who spent the most face time in Washington. So for the wider world, at the moment, probably people will perceive that this is a problem with crypto. But crypto people would say, no, no, no, no, no. This is a problem with centralized institutions. And what we need to do is just build more decentralized institutions. That's one way of looking at it. I want to read you something here, Lauren.

want your perspective because the question I have as we read this is what is going to happen to the notable figures who developed a relationship with FTX invested in it. You know, we talked about how there were political donations made by Sam Bankman-Fried. So I'm going to read you something from the New York Post. The New York Post says, quote, several representatives for the big name celebrities claim that stars never invested their own funds in FTX and only received pieces of the company as compensation and therefore only lost money, quote unquote, on paper. But New York Post quotes, one banker turned tech execs sees it differently. And he said, assume every celebrity invested, but people are too embarrassed to admit it now.

What's your take on it? Oh, gosh. You know, without. In other words, do you think the celebrities, these high notable figures, they actually lost a significant amount of money as a result of this? Because I haven't exactly reported it. I don't want to say definitively anything about it. I did see a few headlines saying that Tom Brady and Jasell had decided to double down

and put, I forget, $65 million or something into FTCS, but like I said, I have not looked into this myself and just seeing a headline on the internet these days doesn't really mean very much. So I can't, I just really can't comment on that. There's also this criminal probe or the potential criminal probe, the federal investigation about the potential misuse of client funds. Do you see that, and by the way, I'll also announce that there was an article that there's a criminal investigation in the Bahamas where apparently FTX was based. Do you see that as legitimate at this point? I mean, what might they be looking into? Do you see this as a situation of, because again, you provide an excellent explanation

of what happened. Do you see this as more of misjudgment or maybe a mistake versus they were deliberately engaging in something that was wrong? Oh, I mean, yeah, I'm not speaking in a legal way because you're right with the jurisdictional issues and everything. I don't know the laws in whatever country it ends up playing out in, but just kind of in the common way people use this term, it does look like fraud. Sam, you know, as I mentioned, was tweeting things like FTCS is fine, all the assets are fine, like, you know, just basically indicating that they were solvent the day before they had to try to sell themselves to Binance. And two days before it became obvious that they actually were insolvent. So he deleted those tweets. All of those things, I think, indicate a certain

level of fraudulent activity. And as you mentioned, the SEC, CFTC, DOJ, some of the state regulators, they're all, they've all started investigations. When you have DOJ involved, I mean, I think that likely means that, you know, criminal charges are on the table. And I think I heard that SEC's investigation might be also looking at criminal charges. So just from the basic outlines of this story, I would be very surprised if it didn't go in that direction. What about the political realm? As I mentioned, he made significant donations, mostly towards the Democratic Party. How is this news going to affect? And from what you're seeing in the reporting, is this going to affect the political angle at all? It might. I already did see that Elon Musk tweet.

We did something about how because he was the second largest donor to, well, it may not have been that specific, but, you know, Sam was the second largest donor to President Biden's presidential campaign and in general, Democratic donor, although I should caveat that by saying his co-CEO was actually a huge donor to the Republican side. And so they had a bunch of tweets this year about how they were contributing to both parties. I do already see it being turned into a bit of a political football with Elon Musk tweeting things like that because he was a Democrat that therefore there would be no investigation. And I actually felt the need to tweet back at him, oh, just so you know there's actually already a number of investigations. You know, the reporter

and me just had to correct the facts. But between that and then I saw like some tweets by Ben Shapiro kind of indicating the same thing. But I mean, it's just like a political theater type of thing because the actual facts are that there are these numerous investigations. So, you know, political people will do what they do, but it doesn't take away from what's actually happening. And by the way, I should note that the Miami Heat were also kind of involved in this because they signed a $135 million deal last year to rename their stadium, the FTX arena for the next 19 years. And Miami-Dade County said, a spokesman for the county said that since they negotiated the transaction, that they're going to explore every legal remedy if FTX can't meet its financial obligation. So there's a lot of fallout from what is happening here. Laura Shin, thank you so much. Appreciate you taking time to explain this really complicated topic to a lot of us. And a lot of us are still learning more. about it. But what a development, to say the least. Laura Shen, thank you so much. Thank you. And thank you so much, everybody, for joining us here on Sidebar. Please subscribe on Apple Podcasts, Spotify, YouTube, wherever you get your podcast. I'm Jesse Weber. I'll speak to you next time.

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