On The Brink with Castle Island - Weekly Roundup 11/10/22 (FTX fiasco, Su Zhu and Do attempt comebacks, Proof of Reserves redemption) (EP.370)

Episode Date: November 10, 2022

Nic and Matt return for one of the craziest weeks in crypto history. In this episode:  Coin Metrics makes a key on-chain discovery regarding FTX's insolvency Will Castle Island buy the naming rights to the Miami Heat arena? What in the hell happened to FTX/Alameda? How big is the hole in FTX' balance sheet Was FTX/Alameda insolvent as early as Q2? How this is reminiscent of the Bitfinex/Tether transaction? What did CZ see that caused him to catalyze the attack on FTX? How did FTX pass an audit? Who will be affected by the FTX collapse? How this will affect the already impaired crypto lenders We revisit some of the recent departures from FTX/Alameda This explains why FTX was bailing out the lenders in Q2 Will FTX US be firewalled off here? Could this crisis have been forecasted? Did Sam perjure himself in front of Congress? Gensler's responsibility in the FTX fiasco Su Zhu is trying to do a redemption arc Why is Su Zhu surfing? Possible regulatory consequences What are the midterm consequences for crypto? A failure of corporate governance at FTX Some venture funds were attesting to the solvency of FTX while withdrawing funds FTX is selectively processing withdrawals to Bahamanian entities Silver linings from the crisis Proof of Reserves is having a moment Sam's crypto agenda in DC is thankfully dead SBF was somehow an LP in Sequoia and Paradigm Setting the record straight on Tom Brady Sponsor notes: Talos powers institutional access to the entire digital assets ecosystem via a single-point of entry. Connect directly to your preferred prime brokers, lenders, investors, custodians, exchanges, OTC desks and more, or meet them on Talos. Get started at Talos.com Subscribe to the Coin Metrics State of the Network newsletter

Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of Concentive easing. You print a couple trillion dollars, and all of a sudden, people start to worry. So out of this worry, we have something called a Bitcoin.

Bitcoin. Welcome to On the Brink. I'm Matt Walsh. And I'm Nick Carter. And this episode is brought to you by Coin Metrics. Big week for Coin Metrics. Here is the Metrics Minute. Yeah, hell of a scoop from the good folks at Coin Metrics this week. Shout out Lucas Nuzzi.

Lucas Nutsi, sorry, head of product network data. Lucas discovered this year that a, A huge number of FTT tokens were transferred from FTX to Alameda in Q2 of this year. Found some on-chain evidence for this. Four billion worth of FTT tokens, went to Alameda research. Seems like this was a de facto bailout. And a lot of suspicion that CZ saw this and knew that something was up. Shout out to the good folks at Coin Metrics for this discovery.

Could be the smoking gun here. Could be one of the smoking guns. Anyway, that's your Metrics Minute. Good Metrics Minute. All right. So we're going to talk a lot about that. Coin Metrics shining through with the research this week. This episode is also brought to you by Talos.

Talos powers institutional access to digital markets for people that don't want to trade on Ponzi scheme fraud exchanges. So if you're on the buy side or the sell side from traditional finance to crypto-native firms, you can get on the Talos platform. and you can do the entire life cycle of the trade. So you can trade through the API, through the web-based GUI, and you can connect to all the reputable players in the industry. Prime brokers, lenders, investors, custodians, exchanges, OTC desks,

aggregate at them all on Talos. They have a leadership team that is not stealing all your money and buying professional sports naming rights and shares in Robin Hood. So you should really go over to talos.com to learn more. How'd that one go? That was great. A lot of speculation that Castle Island and we'll be buying the naming rights to the Miami Heat Arena.

What would you say to those rumors? So there's a bunch of stuff I want to buy. So I guess we'll say we don't have direct exposure to FTX. So we're in a, you know, knock on wood here. We're in a better spot than most. And so we can be affording to bid on some stuff. But who the hell do you call right now? Who do you call?

The rats are scurrying off the ship right now. I don't even, I want to put in a bid on our portfolio companies on all these Alameda cap table positions. Who do I even call? We're buying. We're buying. Romnik, are you still over there? Romnik, have people gotten lawyers yet? We're buying, I mean, to be clear, we're buying for five cents on the dollar.

I think that's the best you're going to get right now. The price is going down. Yeah, every hour we'd knock off another cent. I mean, do we start this podcast with the deal section or do you just hop right over to SBF being a fraud? there actually were deals this week. I know some of Brink Nation said skip the deals, but you know, that's just not how we do things here on the Brink podcast.

We are nevertheless going to do the deals. There were deals. It's our duty to read them. Well, there's two deals in the Castle Island portfolio. So I'm going to start with Fortify, which is a company we're really excited about in the MPC custody space. They raised $18 million from Lightspeed, us, Electric, a number of others.

Alameda's on that cap table. Alameda, you're looking for a bid? You're looking for a bid Alameda? Anyways, the team over at Fortify is great. Can't wait to get Alameda off that cap table. Yeah, institutional access to DFI. Super cool, super needed, warranted. Congrats on Fortify on the raise.

Next up, TRM Labs, also in the SIF portfolio, blockchain intelligence firm. There is 70 million in a series B extension, led by Toma Bravo. Unclear if TRM has the mandate yet from the regulators to find all the personal money that got siphoned off by Sam and probably people around him. But a good time to be a blockchain intelligence firm. A lot of forensics, a lot of archaeology postmortems to be done looking at the blockchain. Next one up is Ramp Network. This is a digital asset payment infrastructure provider.

They've raised $70 million from Mubidala and others. Then we've got courtyard and NFT platform for a physical. physical goods. We like those. They raise 7 million from N-A-Y-C-combinator and OpenC. We have R-Shacks next. This is a UK-based digital asset exchange. They raised 28.5 million from Aberdeen. That's an interesting spelling for Aberdeen. Is that a new way to spell that? So yeah, they rebranded to be more like millennial and hip. But they're an old Scottish wealth management platform asset manager. I don't like the removal of the vowels.

Yeah, that feels very kind of like 2010 era. Not a fan of the rebrand there. We got texture. They're a Solana yield platform. They raised 5 million from P2P Capitol, Sino Global and others. Next one up is Coin Metro. This is an Estonian digital asset exchange.

There is $7 million at a $180 million dollar valuation. Two exchanges this week. So two new ones, one less. two steps forward one set back next up we have nttt docomo that's japan's largest mobile phone network they've pledged to invest four billion into web three infrastructure uh japanese government owns a third of that company telco and decentralized wireless i really like that category we're going to have a podcast we're going to have a podcast we're going to have a podcast with an expert in that space in the coming weeks we're going to do it this week but i don't know if you heard other stuff happened either

some events. And the last one is Notified. This is a Web 3 messaging platform. There is 10 million from hashed and race capital. So it looks like there weren't as many deals this week. That's because you don't want to announce a deal the week that the largest exchange in prop trading firm blows up simultaneously. Yeah, I mean, craziest week in crypto ever, right? For sure. Number one. Yeah, I would say the last two days are the worst two days in crypto ever, in my opinion. Worse in Gox. Worse in Bitfinex hack. Worse even than three arrows, Luna Celsius.

I think the worst. All right. So I guess let's start with what has happened since the last time we recorded this podcast. And we're going to release this on Thursday evening as soon as we can, basically, because the situation is moving so fast. and this might be outdated by the time we actually published this. But last week we referenced that there was abnormalities, irregularities, rumors going on between FTX and Alameda.

We talked about the fact that just to set the stage, Alameda is the largest proprietary trading firm. It was started by Sam Backman-Fried. Then they started in an exchange called FTX. It's been known that Alameda trades on that exchange, which is hugely problematic in a regulated market. You know, I've always thought that that would prevent FTX from going public. Turns out it doesn't really matter at this point.

Let's kind of rewind to Q2. Lucas Nuzzi has a great tweet. We'll put it in the show notes. It appears that in Q2, Alameda research blew up along with three arrows capital, along with most of the lenders and a lot of the prop trading firms. And that FTC bailed them out with FTT and that they effectively, have been using customer deposits on the exchange to bail out the prop trading firm that's owned by the founder Sam Bank been freed.

That's where we are right now. The exchange withdrawals have been halted. They've been turned back on and we'll talk about for who, but they've been halted and estimates range from $6 billion to $10 billion of customer deposits that are extinguished. What did I miss? Yeah, I mean, so look, we don't have concrete proof right now that Alameda wasn't solving in QP2, but that's sort of our best guess for what happened here. That explains why CZ and finance felt empowered to go after them.

That explains where the hole came from, that they must have commingled customer deposits on FTX with Alameda's balance sheet or they siphoned off funds. I would compare it to the Bitfinex tether. transaction, very ersatz, unorthodox transaction, whereby Bitfinex lost $850 million, dipped into the cookie jar over at Tether to make themselves whole, give them an IOU in return. I would say it's likely that something similar to that happened. Alameda did a self-bailout from FTX, and then FTX was effectively insolvent for a number of months. kind of explains why Alameda seemed to have maintained strength and functionality throughout the collapse in May June of this year. But then eventually CZ caught wind of this.

And with a few tweets, sank. Sam Bankrupts-Fried's Empire questioned their solvency after that coin dust leak came out. caused FTT to sell off, further impairing Alameda's FTC's solvency, and catalyzed a massive run on the bank, a $6 billion withdrawals, I think. Total notional deposits in the $16 billion range on FTCS, they couldn't accommodate that. They didn't have the liquidity, which is a cardinal sin for an exchange. They've now effectively halted withdrawals. They're looking for $9 billion. in a bailout, which I don't think will be forthcoming from anywhere. And Gordon Assam is still defiant, still limping on, still active, still trying to find a way out of this.

I doubt that that's possible. I don't know who will bail them out, aside from maybe Jerome Powell. Nobody has the firepower to do that. The Binance deals collapsed. Binance took a look at the books, didn't like what they saw, stepped away, and now FGX is on their own. CZ is a pivotal player in this, not in a nefarious way, but I think that he must have seen on chain something like what Lucas Nuzzi at Coin Metrics found on chain around the FTT FTT transfers and probably knew that this was a house of cards.

And he probably decided to let's get the cascade going and just see how big of a house of cards it is. Who would have known that they were using customer deposits like this? he probably had no way of knowing that. But he set this thing in motion. And honestly, thank God he did. Because what would have happened if this gap just kept on getting wider and they kept on using more and more customer deposits?

This is going to be brutal, but it could have been a lot worse even. I mean, it's pretty bad. But, yeah, what's remarkable is just a couple days ago, Sam tweeted that they were fully liquid, that they could honor all deposits. He even tweeted that they were gap. They'd gap financials. audited financials is the crazy thing. They actually did have audited financials. I don't know

who the auditor was, but... Was it Arthur Anderson? I don't know. I mean, there's going to be a lot of scrutiny on that audit. You know, and the fact that Alameda was a customer on the account, maybe that's what the auditors were looking at, but the inter-dealings there and whether, you know, who knows? Maybe this didn't even go through the audit. It appears that Sam has the ability to just unilaterally move funds on the platform. So maybe he was just moving funds around during the audit. Who knows? And, you know, the craziest thing is this took everyone by surprise. I mean, if you listen back to our podcast last week, we were very critical of them. But even I didn't think that they had just intermingled customer deposits with their own prop trading firm. I just couldn't believe that

they would do something like that. It just nakedly fraudulent, if true. I mean, I thought that, Maybe the prop desk was in trouble, but I would have not, in a million years, thought that he was stupid enough to take customer deposits to bail out his own prop shop. I cannot believe he did that. It's astonishing. And it stung a lot of people that had avoided successfully all the previous hacks, rugpoles, etc. So many friends of mine, traders, crypto-o-Gs that had successfully navigated the credit crunch and the collapses. earlier in the year were stung by this. Even FTX employees. A lot of them had their funds on the platform and they were hung out to dry. Think about the scale of who's impacted here. I mean,

you have $10 billion of deposits, it looks like, on the platform. That's individuals, that's funds. You know, hedge funds here are massively impacted. Massive institutions, endowments, pension funds. You have equity holders here who, of course, that's going to be a zero, but They raised about $2 billion. The last round was at $32 billion post money. There's a pension fund in Canada in this deal. You have NEA in this deal, Sequoias in this deal, paradigm. You have the top names, not only in crypto venture capital,

just in venture capital in asset management. You have BlackRock on the cap table here. The scale of destruction here is something to behold. Now, of course, you have the lenders. You know, all these lending firms and OTC desks that have exposure, not just to FTX, but to Alameda, who has billions of dollars of loans outstanding. It's going to take weeks to work through the second order effects here

and the bankruptcies that will come out as a result of this. Yeah, I mean, remember after the collapse of Luna, Terra, there was a latency of a few weeks before it became clear that the land was deeply impaired before the three hours thing occurred. It'll be the same thing again. I consider this a continuation of the crisis in the summer when there's a bit of a delay and then there was that credit crunch. Same thing here.

Alameda was one of the main residual borrowers after June 2022. They're out of the game. Probably firms being wound down almost certainly deeply underwater. are last leg down here for the crypto lenders. And that's kind of the immediate fallout here. And for the crypto lenders, it's coming at the same time that the Bitcoin mining industry is imploding and miners are defaulting on loans.

And so it's putting a bad situation on top of an already bad situation, really. And speaking of the lenders, you know, we're going to have a lot of investigation going on into this deal and the people at FTCS that knew about this. It was obviously not just Sam. You can't run a fraudulent enterprise like this without having a good number of people understand what was going on. Some of those people working on the bailouts, the quote-unquote bailouts for the lenders are going to come under tremendous scrutiny for the fact that a core negotiating prong for FTX in all of these deals was that Alameda would get to keep their lines open, their loans open with these lenders.

So these were heavily negotiated by people like the head of product and venture investment at FTX. And so these will all, you know, who knows who makes it through, but these will all ultimately be investigated. And there's fraudulent criminal activity that went on at various levels of the stack at that organization. Yeah, I'd say we're in the same point now where a lot of people think, oh, they just kind of made an oopsie. Of course, it's becoming more clear by the hour that this was likely fraud, you know, siphoning away customer deposits, which are rightfully due to the customers, gambling with them via Alameda. That's fraud, in my opinion. I don't know what the court of the Bahamas legal context says about that. So kind of similar to when people thought three hours just made a bunch of

bad trades and they didn't realize that, no, they actually lied to their lenders and misrepresented their balance sheet. So I think we're kind of in that same period of suspended disbelief where people think, oh, well, they just made a bunch of mistakes. No, I mean, the reality is going to be that there ought to be criminal penalties here without question. Oh, and no doubt. And it will go to many people at that organization. And so think about some of the things that have happened here. And so you have Sam Trubuko, who's the head of Alameda for a long time, and he left several months ago. Why would he leave? Yeah.

He claimed he wanted to enjoy his retirement and, you know, hang out on the boat, on the water. That's not it. He knew what was going down clearly. Sam Trubuco clearly knew what was going on. Clearly knew what was going on. Yeah. How could you not? How could you not?

The head of product. How do you, how are you the head of the head of? of product in the head of venture and corp dev at a firm like this and you don't know what's going on when sam's telling you that a core thing in these lending negotiations needs to be to keep the lines of credit open to alameda you just say okay thanks boss and you're building products that connect retail do you ever check like where the cold wallets are this company never had cold wallets that were tracked on chain so either you're the dumbest head of product of all time and the dumbest corp dev person or you're in on the fraud.

Which one is it? This also does explain why FTCS slash Alameda was bailing out the lenders. It completely, yeah. Why were they the lender of last resort? Oh, it turns out they're bailing themselves out. What do you want with Voyager Celsius and BlockFi? You want to keep the retail spigot open to Alameda. It was absolutely vital to FTX and Alameda to keep the Block Vy, Voyager, and Celsius.

Zs lines open so that retail would continue to put money into this scam. That's exactly what happened. Yeah, the perversity of bailing out your lenders with FTCS depositor funds is unbelievable. It's unbelievable. FTX has a U.S. entity. It appears to not be impacted here if you take them at their face value, but who knows. the head of that group, Brett Harrison, left pretty abruptly, you know, what, like a month ago? So, you know, you wonder, I have no reason to believe that Brett knew anything here, but who knows?

You know, maybe he found out and didn't like what he saw and left. So, I mean, I just, FTCX's track record of claiming the different parts of the organization of fired Walled off is pretty poor. So I wouldn't be surprised of FTCS was also implicated here. Oh, people will use their subpoena. a power to check and just see, okay, can I see that invite? So, you know, all these funds that are like onboarding and talking to FTX. All right, let's see the invite. Who's actually on that call with you? Oh, it was, why is this guy of an Alameda email address? Why is this guy that you say works for

Alameda work in the FTX office and get processed payroll the same way? And why is he sit next to the guy at FTCX? Why does Alameda trade on the FTCS exchange? So to people saying it was important. possible to forecast or see that anything might be awry here. Look, I'm not saying we had knowledge that there is effectively a fraud going on here, but there were red and orange flags. There definitely were red and orange. We talked about them last week. We've been talking about them for years, to be honest with you. Do you see a publicly traded company? Do you see an exchange own a prop desk and trade on it? Do you see Ken Griffin own the New York Stock Exchange? It just doesn't happen. is the biggest thing and that turned out to be the biggest issue the alameda ftx relationship i mean the charm

offensive in dc frankly the super bowl adds that you know orange or yellow flags but still like why invest so many resources in that i just don't get it i mean do you think he's actually sam's out of his mind like why would you go to dc and do this whole song and dance why would you perjure yourself in front of the Senate Agriculture Committee and say that you don't use customer deposits when you were blatantly doing it since Q2. I don't understand what goes through someone's mind. Yeah, that testimony is false. There's no way around that. And I think Congress is going to be pretty damn offended that the number one crypto emissary came to Congress, didn't tie shoes, looked like a disheveled hobbit.

Correct. And just told a bunch of lies. Correct. That's exactly what happened. So look, probably low on his list of priorities, as I said, but probably may become a major priority here. If he ever spent on US oil again. I mean, and why was he doing all these deals? So did he just take like $500 million from depositors and personally buy a stake in Robin Hood?

Is that what happened here? This is insane. Well, where else did he get the money? Yeah. And so he just bought Skybridge? Like, didn't he just buy half a Skybridge or 80% of Skybridge? With what, just FTX deposit or money, he just decided to go buy the Mooch's company? Are you kidding me?

Who does that? I mean, the whole thing, it's like you have short-term liabilities. You can deal with withdrawals at any time. As we knew, based on the bank runs that we saw in mid-year, And now you're creating a maturity mismatch because you have long-term assets. But you can't liquidate easily. You're investing in private equity. You're investing in private companies.

You can't liquidate those easily. Why on earth would you do that? Buying sports naming rights, buying, I mean, ads everywhere, putting the sticker on MLB, it's just you have to be really sick in the head. I just don't, you know, I don't understand it. it's the worst sort of shattering of confidence that this industry has ever been through because Sam was so visible he was perceived as credible he veiled all of his ambitions in this effective altruist moral framework it worked I mean a lot of people believed that they bought into

that they're like oh yeah this kid he's not in it for the money we should trust him like he's in it because he wants to buy a bunch of mosquito nets or fund AGI research with his money. So I guess that made him trustworthy in the eyes of people that bought into that. So there's going to be a lot of scrutiny in this industry from a lot of different perspectives. And I think there's one take that I'm starting to see in the popular press that just around, hey, crypto is a scam. All this stuff is unregulated. It couldn't be further from the truth, guys. these guys were an unregulated offshore entity that got started in Hong Kong and then moved to

the Bahamas. But Coinbase is not offshore and unregulated. Fidelity is not offshore and unregulated. New York dig is in New York City. So there are entities here. They're playing by the rules. They've been playing with one hand stuck behind their back competing against an unlicensed offshore venue. And no one in the U.S. regulatory apparatus has done anything about it. So we, we, We've looked at all of these kind of offshore unregulated exchanges and really questioned how much longer can they continue. FTX issued an unregistered securities offering in the form of FTT. Meanwhile, Coinbase is sitting over there at a tremendous disadvantage from an asset listing

perspective and the fact that the liquidity is all going to the offshore altcoin casino, but they've been trying to play by the rules. So all of these US firms have been at a structural disadvantage from a liquidity perspective. you really have to call out the SEC here in terms of just not being more active, I think. Completely. I mean, Gensler now belatedly is, you know, is making noises about FTX. But part of the responsibility is his because he muzzled and hampered the onshore exchanges. People naturally gravitated to the offshore ones outside of the regulatory scope.

Turns out one of the offshore exchanges was completely unreliable. They were not safe. And because the U.S. regulatory environment was so hostile, they pushed users abroad to these inferior exchanges. And now tons of Americans lost money on this thing. Tons of Americans, tons of funds. You're talking about pension funds have lost money. You're talking about endowments.

You're talking about foundations that have. capital on this platform. It's really a shame. And I think the scrutiny will be on all sorts of parties, but certainly the SEC. I mean, you're going after Kim Kardashian for touting an unregistered security and you're having a 30-minute meeting with Sam and with Mark Wedgin. I mean, it's a total joke. Like the SEC has missed everything here. I mean, the SEC is going after library credits and taking victory laps. What are you doing? Like FTT was right under your nose. You're meeting with this Hobbit in your office like for 30 minutes. Come. Come on. It's alarming because there's clearly going to be regulatory recriminations here.

No question about it. They could have done so much more to prevent this in the first place. But they're not interested in preventative medicine. They're just interested in coming down and clamping down hard after a crisis. It's true. And so, you know, what happens here to some of these like treasury deals that have gotten done with these layer one protocols? It looks like the FTCS team did a great job cutting these aptos and sui treasury deals where FTX and Alameda get to manage the money. So who else is going to lose money in this? It's just so many people. Reminiscent of Three Arrows. I mean, we're adding Sam to the bad boys segment for sure.

Oh, yeah. He's a bad boy. And speaking of which, this clown Suu is back, does this guy think he gets to do a redemption arc right now? where are you, Suzu? You're a fugitive from justice right now and you're popping back in and saying, you know, I crashed on the wave. It's like, what are you talking about, dude? You haven't even, you haven't even. We have to roll the music, Matt. All right. Roll the music. Roll the music. Yeah. What you're going to do. What you're going to do? What you're going to do? What you're going to do? What you're going to do when they come for you.

So Suzu and Doquan are back. Doquan. They think, yeah. Do they think morality is great as. on a curve and because Sam is now a worse villain, that they look less worse, and so they can just come back. This guy's suzoo is a complete sociopath scumbag. I cannot believe that this guy popped back up telling a story about crashing on a wave and going surfing. It's like, what are you talking about, dude? You've been served with a subpoena or they're trying to serve you. They can't find you. You haven't given up the fireblocks instance so that people can try to actually get the money back that you stole from them. You lied to all your lenders. And there you're popping back up and it's like hey it was a fall from grace as if you just like

picked a bad stock or two and you you were down 30 that year it's like what are you talking about you're a fugitive you're going to be on like the most wanted list here and uh what what are you saying that threat it was something like uh you know to the people that criticized me like you know i hope you find peace like you were just doing it uh to find a scapegoat or something it's like dude we criticized you because you're a fraudster that's why you criticized you You're being criticized because you stole $4 billion from your counterparties. This is not like maybe the words you were looking for were I'm sorry and I'm working to make this right. I didn't hear that.

Yeah. And Doe Kwan, he's appearing on Up Only. I mean, that was amusing. He had a pumpkin background. It's very festive. But Doe, like, turn yourself in, bro. Just because Sam has committed a slightly. larger and more damaging fraud.

It doesn't give you free reign to come back. It's like, are we going to get like Mark Carpellis popping back onto the scene here talking? Like, just go away people. Like, what is it about this industry that attracts fringe sociopath behavior? We can't move on from this until we've purged these lunatics until they're literally behind bars. They all need to go to jail. Look, I'm not a status. But you break the law.

A fair and trustworthy society punishes wrongdoers. We can't let these crimes go unpunished. And believe that there's any justice in the world. I mean, you have entrepreneurs here that are trying to build companies of consequence that are really just ambitious and, you know, fair-minded and ethical people. And all we're talking about is these scumbags. Suu and Sam Bankman-Fried and all the people that work for Sam Bankman-Fried.

It's just, it's awful. And Alex Machinsky and all these scumbags. Yeah, it's not just a matter of losing money. You're losing other people's money and you lied about it. We have laws about that. I mean, this will set the industry back, but you hope that what happens here is you get a little boomerang into the regulatory authorities here.

And we get some spot market clarity here. We get someone to really come in and oversee the crypto spot markets. I mean, I don't know how long we'd have to talk about this. Just get an act of Congress together, figure out if it's the SEC or the CFTC, lay down the rules for these tokens, take the Hester Perth Safe Harbor proposal, put it into action. She had the idea like three or four years ago. It's still the best idea that's ever been presented on how you conform these things into existing laws. Put it in motion.

I don't understand what's taking so long. So actually on the regulatory front is crazy because all this FDX stuff was going down on the day of the midterms. And I was wrong about the midterms. I thought the Republicans would take both houses. Looks like they just took the house. One interesting consequence of that is McHenry is now going to chair the Financial Services Committee taking over from Maxine Waters,

who was pretty ineffectual in that seat, if we're honest. He has a pro-crypto agenda. Emmer is going to be more senior on that side as well. So the House will be newly empowered to promote a pro-crypto agenda. The Senate will likely stay Democratic pending some of these results. So not really a mandate for the Republicans by any means, just pretty much status quo. I would say some green shoots over there in Congress. but I think their ability to stymie Gensler will be less now.

Certainly McHenry's been a critic of Gensler, so perhaps they'll be able to stop some of his kind of ambitious, aggressive moves against the cryptospace. But overall, I would say, pretty mixed electoral result for the cryptospace. Yeah, I think, well, maybe there'll be some investigations into the SEC. had a tweet today that he believes that Gensler was working with Sam Bank

Benfrey to establish a monopoly for FTCS, which is a pretty powerful allegation. I mean, we'll see what that happens out of there, but I mean, I didn't jump to that conclusion, but I am very interested to hear what he has to say on that.

Yeah, I'm glad that I'm now as a more senior member on the Hodge Financial Services Committee, along with McHenry, will be empowered. We'll have more of a voice. Hopefully we can get Emmer back on this show, planning to do that. If his schedule opens up, he did tell me last time we had him on the show that he had four pieces of regulation that he wanted to put forth post-Republicans taking control, but unclear whether the Senate would work

with them now on that. I mean, again, this is Sam's doing. A lot of the especially the Democrats, Sam was donating to will feel very hard done by. They're going to feel like he made a fool out of them. You know, they brought him in and, and made him the sort of golden child crypto emissary in Washington. And he kind of rugged everyone. So I don't know why they'd be positively inclined towards crypto space now. Some of these senior former regulators that work at FTCs are going to look really bad coming out of this. And I'd be shocked. if Mark Wedgin knew about this, there's no way he's that deep in the weeds, but this just looks terrible.

Like, this looks awful. You know who else this looks awful for is the venture investors, not to pile on, but like no board of directors. Are you effing kidding me? This clown who's never run a business before, the Chia Pet, you know, sleeping on a beanbag guy, is running a $32 billion business with an associated prop shop that he owns and you don't want to put a board of directors in place. Like, what the fuck?

I mean, read some of the hagiographies. Even the press didn't cover themselves in glory here. I mean, every piece about Sam was this uncritical, obsequious, hagiographic type thing about how he was so unkempt and adorably autistic and he slept on a beanbag and he played League of Legends. You didn't really seek to investigate any of the obvious orange, red flags here? Just because he was an effective altruist

that gives them a free rein. It's unbelievable. The other thing is some venture funds that were in the SAM orbit don't want to punch down on some of our industry colleagues, but a lot of reputational hits there. Obviously, all the Big Sam trades of last year are now being unwound, the Salana trade, Serum, FTX, FTT, etc. but some of these funds that were withdrawing from FTX while simultaneously attesting to the solvency of FTX effectively giving themselves exit liquidity that was a pretty bad look if you ask me yeah I think that'll be

coming under investigation for sure I mean Sam is desperate right now can we talk about the fact that it is 304 on Thursday Eastern time and this guy is still in the same seat. This guy is effectively a road trade. They're moving funds around. Are they still, they're still trading? In 2008, when Sochgen had Jerome Curvelle, the rogue trader, you know, it's like, what, $5 billion loss, did they let him hang out for two or three more days and just try to win it all back on one trade? What is going on right now? How are the investors not going in there? How are the regulators not going in there? I don't understand how this guy's at FDX headquarters,

sending emails, making trades. He has control of the private keys right now. Guys, what are we doing? Yeah, I mean, if you're Sequoia, like, okay, you wrote it down to zero. That's great. Go to Nassau. Go save the industry. Intervene.

Yeah. Call up a regulator, Sequoia. Yeah. Do something. Don't just sit idly by while this guy continues to tank the franchise. And, I mean, it's even worse now because now they're selectively processing withdrawals. so they halted withdrawals for everyone and then now you have some like rogue withdrawals here just came out that they're processing 100 cents on the dollar withdrawals to Bahamanian

entities so I'm sure there's some local police directive that they have to do that but what's up with that you can't give everyone else five cents on the dollar and give a tiny elite group a hundred cents on that the dollar that's completely absurd everything about this is bad nothing is good about this right now i cannot believe that this is being allowed to continue um okay bright side uh number one sam's not going to donate a billion dollars to democrats in 2024 for me personally that's a positive okay depends on your stance number two proof of reserves it's happening you're having a moment with this proof of reserves and i think it's probably well deserved. So proof of reserves for those of you who are living under a rock

is where exchanges take a very sensible approach and they prove cryptographically that they have your money, which is a very interesting thing that you can only do with really a blockchain. And so why wouldn't you do that? I don't know. I don't know why you wouldn't do that. You might not do it if you can't do it. If you can't do it, if you're like stealing all the customer money, that's maybe a good reason not to do it. But I think if you're a customer, you should demand a proof of reserve or you should hold your own keys. So I've been fruitlessly banging this drum for four years. Correct.

For literally four years. And I've had very limited success in actually getting exchange to do it to. Crackens credit, they did it. Bitmex did it. A handful of others. There was actually an initial proof of reserve wave after Gox in 2014, 15. then nothing basically for years and years. Then there is some resurgence of interest,

but now 30 exchanges have said they're going to do it, including Binance. That's great. Biggest exchange in the world. That's great. So it is becoming normalized. And the reason everyone has to do it is, for this reason you're stating,

is you need to know via negativa if someone is sketchy. So you don't expect Gox or Kodriga or FTX to have done it because they would not have been able to do it because they would have been exposed as insolvent. But so for that signal to work, you need everyone else credible to do it. So that's why I'm encouraging Coinbase to do it, even though they've said they haven't announced their intention to do it. They just said, well, look at our audits. The audits are fine, but if you get every exchange doing it, then it becomes very clear who the Straglers are, who's not doing it.

and so even if your clients have no reason whatsoever to mistrust your solvency, you still ought to do it. We should normalize it in the industry because it's a self-regulatory measure. Later on, we're going to get some sort of onerous top-down regulation, which is going to suck, I'm sure. This is a crypto-native way to prove that your liabilities match your assets. and just a word on proof reserves on the nomenclature. Everyone thinks it just means the reserve side of the balance sheet, the asset side. That's not true. When I talk about proof reserves, I'm talking about yes, disclosing the assets,

also disclosing the aggregate liabilities. That's what it refers to. It's a term of art that refers to both sides of the balance sheet. It is possible to do the liability assessment. Probably you should bring an auditor. The number one auditor that does it is Arminiott. you know they've been on the show before. There's others, but they have by far the most engagement, so they know how to do it. Yes, it's not completely trustless. Nothing in this world is.

Don't let the perfect be the enemy of the good. Do a proof of reserve. Add up all the client liabilities, let your depositors verify that they're included in the liability set, and then compare that to the assets. Cracken's done it. Bitmexes did it. There's an open source code that you can use. there's auditor is ready to do it. There's no excuse now. Win a shred, win some credibility back by doing it. I think it's a total no-brainer. And I have a whole repository resources at my website,

Nick Carter.com. It's all there. It's proof of reserves. It needs to be the industry standard ASAP here. There's absolutely no doubt about it. You know, people need to protect themselves. You know, proof of reserves, you need to, pay attention to this stuff.

And so you should be demanding that for sure. People also, you know, need to take a look at some of the things that are still up and running in the FTX orbit and get off. Like if you're an FTX access customer, get off that thing. Ledger Live on the hardware wallets, the swapping stuff runs through FTX access, I believe. I think Stock Twits has something powered by FTX. You got to get off that. Shut it all down. Everything needs to get shut down.

This guy's still in the Bahamas punching keys and responding to, did you see he responded to the, what is it, Forbes that does the billionaire list? And I asked him if he was still a billionaire and responded that I don't have enough information. This guy's out of his mind. This guy's done 26 Adderalls today and he's still trading crypto. Yeah, maybe we knew something was up when Caroline was talking about how many operas she does in order to be functional. Maybe that was a good indication that you don't. don't want to have your assets with them or make a venture capital investment in these guys.

So there's one other silver lining here. There's not a lot. I'm really reaching for the silver linings. What's that? The Stanford Law Department is going to get not be number one. Is that, you know, they're going to go down the rankings? That's part of it. Sam's crypto agenda was bad, in my opinion. It was focusing on C-5 platforms on these obscure derivatives regulations, which would have empowered the FTX business model and no one else, basically. And so he wasn't in D.C. representing the crypto industry. He was representing himself. So now his agenda is discredited. His bill that he was pushing in the house, the DC CPA, I think, that's dead. Actually, the main guy responsible for writing in the house lost reelection. So that thing's dead in the water. And now maybe we can

appoint some more credible, more neutral emissaries to Washington to the extent where they still have demand to communicate with the industry that are pushing a more crypto-native and values-based approach here, emphasizing the importance of defy. Sam was willing to sacrifice defy at the altar of CFI. The lesson from all this is let's refocus on the ways that the crypto industry can actually protect customers, which is non-custodial financial infrastructure, such as DFI, proof reserves, right? Ways to make these exchanges more accountable using crypto-native tools. Sam wasn't interested in any of that.

He wanted to push his niche derivatives regulation that would empower FTCs and create regulatory barriers to entry. At the very least here, his kind of noxious agenda has now been totally marginalized. All right. So as we're recording this, the information just published an article that said that Sam Bank been freed has quietly invested as a limited partner more than $500 million into Sequoia Paradigm and other venture capital firms, including Altimeter Capital and Multi-Coin. Ugh.

The circularity here is insane. Ugh. This is so bad. So he invested in the VCs and invested in him and did very light due diligence. So Sequoia, you know, they won't allow like. And it's the hardest fun to get into. I mean, I wish I was, I used to wish I was an LP in Sequoia, but you used to wish. You can't.

Yeah. You're an LP and Siv though. Yeah. So much, much better. At least we don't have that liability. But so you can't get into Sequoia. I mean, it's like the best venture capital fund of all time, performance wise. Yeah, by the numbers.

And it's just a crown jewel. And they kick people out and you, you can't get access. But this slob. looks like he lives under a bridge that was just stealing customer of money, just took that customer of money and became an LP in this thing. Yeah, I need to address something. So I was wrongly called anti-Semitic because I called him a goblin earlier. That was not anti-Semitic.

I just think that he resembles a goblin, to be clear. And also I think his decomposition over the last six months was indicative that something was wrong. he was like a normal looking guy and then he just became increasingly like hunched over and unhealthy looking pale and unhealthy clearly something was wrong just by his demeanor i mean it's got to be a big burden to know that you're stealing 10 billion dollars meanwhile you're going up and you're meeting bill clinton and tony blair and having in-person meetings with you know gary gensler on capital hill yeah and uh maybe the Cryptoperson that testifies in Congress, maybe they can tie their shoes. How about that? You know, this like persona he cultivated of being this like lovable, like autistic guy,

unkempt, unable to dress himself. Yeah, maybe put a belt on. Fidgeting like crazy. Stop looking like a slob. Yeah, like just dress up, bro. And I think the whole thing was contrived. It's kind of like, so like Warren Buffett always cultivated this like dottery, you know, evuncular. kind of friendly uncle kind of demeanor so that people wouldn't realize that he was the ruthless capitalist that he was. I think Sam did the same thing with his insane effective altruism philosophy and then his own aesthetics, which I think were very cynical. Like they were designed to mislead. They're meant to portray him as like a boy genius operating on a level way above everyone else such that he couldn't be bothered by no more concerns like dressing yourself properly

and not wearing shorts on stage and shorts and sneakers like I think that whole thing was contrived I think he you know now that that run is over he's actually going to learn again oh yeah I'll put on a suit oh I think yeah he'll no he'll put on a suit it'll be an orange jumpsuit because that's what he's going to be living in for the next 25 years this is wire fraud at a massive scale at minimum. He stole customer deposits. He's out there. Him and his head of product are out there negotiating these lending deals with these companies that are on the ropes and he's trying to get them to hold the Alameda positions. How many frauds has this guy done? I mean, get real. He should be on the run with Suu in the Maldives or wherever Sue is right now. I wonder if he has an extra room.

But here's the thing. We even industry have failed to put it. these people in jail. It's because we can't find him. Suu's like tweeting, how have we not found this guy? He's on an Android phone. All right. That narrows it down a little bit. Yeah. Doesn't Elon Musk have his location? Come on, Elon. Where's Sue? I mean,

was using a VPN? Show him a new Alt-L-1 with no vesting schedule and the guy's going to show up, okay? Just tell him where to be. Drop the IP address. I mean, that's the thing. It's like none of these guys have faced consequences. They're all happily on the run somewhere. The world's a big place, apparently. And they can just run from the law indefinitely, it seems.

So I'm actually not that optimistic that Sam is actually going to face any kind of real consequences here. This is going to be a race to get to see who goes first to flip and go state's witness. I think Trubuko is probably going to try, but he clearly knew a lot. I think Brett Harrison's a candidate for someone who maybe didn't know and, you know, jumped in. but I don't know. What you do, if you're at FTX and you knew, what you do in the next 24 hours matters an awful lot. Do you think the Adderall shortage really precipitated this crisis?

It seemed like they really ran on Adderall over there. Is there an Adderall shortage in the Bahamas? That could explain a lot, actually. Globally, I think. Oh, really? Okay. Yeah. Can we talk about this Tom Brady thing for a second to, like, come on, guys.

You want to set the record straight on Tom Brady. So, I mean, he, didn't have a good year though to be clear all right so first of all like another reason I hate ftx is because they're trying to drag tom brady through the mud like what are you guys doing don't get tom brady associated something that you know is a Ponzi scheme you know tom brady's not getting in there and seeing that you don't have cold wallets so he kind of takes you out your word here you don't do the full diligence i mean he associated so now retrospectively if you're next time you're doing a deal tom you call lucas nuzzie a coin metrics and you say guys i need to engage coin

here to see if this company actually has any money. I don't think anyone has besmirched Tom Brady's reputation this much since the Indianapolis Colts and Roger Goodell. And frankly, I am furious about it. So he lost Giselle. He clearly had equity or FTT tokens or something. I'm sure he was getting in-kind compensation for his sponsor deal. He's reputationalally very connected.

He's best buddies with Sam. I don't think he's best buddies with Sam. I think he just thinks that Sam has a chia pet hair and a lot of money. He's not friends with Sam. Tom Brady's in, it's in first place in the NFC South. People are asking like, you know, they don't have a winning record,

but people are acting like, like if the playoffs were to start today, he's in it and he's probably going to win the Super Bowl unless the paths are there. So let's be honest. Like, Brady's not done yet. Yeah, he's got a good TD interception ratio. Good job, Tom.

Unbelievable game last week. come from behind. It would never end up. Like no timeouts, 37 seconds left, 65 years ago. Of course, we're going to win. Tom Brady.

Automatic. Automatic. Well, all right. I guess we should get this up because a lot will change. Maybe we'll do another one tomorrow. Do you think they can get this guy in jail? I heard that there's an armed guard

in front of the FTX compound. I'm not joking. The reports are that they're not letting anyone in. So, hey, guys, like, maybe that's another. these US regulators paying any attention here. It's like this is what happens. They go offshore and they have armed guards and you can't get in there. And it's all U.S. people's money they're losing.

If you are an FTX depositor, I would recommend going to NASA. You can take a sea plane from Miami. It's pretty cool. Literally lands on the ocean. It's a short flight. I think that's your best chance to get some money back. just because of this two-tier Bahamas able to get money out, nobody else's. It's also the weird Justin Sun angle we didn't talk about.

Is that even worth talking about? Justin Sun sees some headlines and wants to get in there. I don't know. I don't have enough time for Justin's Sun. So, yeah, Justin's Sun, I think, is like guaranteeing Tron and associated token deposits on the platform is funding those positions. So if you're under the Justin Sun nuclear umbrella as an FDX depositor, you're apparently good. Whatever.

Assuming your deposits are only in Justin Sun tokens. I just love how he manages to worm his way into every story. Like, you know, good for him. Yeah, good for him. I don't know. All right, we got to do better. This can only get better from here, but maybe it gets worse for a little bit. Yeah, I think yesterday was the worst.

and I'm not saying it's up only from here, but it's hard to imagine how it could actually get worse. I mean, some of the things we think will happen here in terms of further insolvencies. Like, yeah, that'll happen. But in terms of like the magnitude and unexpected nature of this crisis, I can't see it getting worse.

All right, everyone. Last week I said have a dangerous weekend. I'm never saying that again to end this podcast. That was very inauspicious. That's what happens. I said, doomed us. Someone requested me to not say, have a safe and healthy weekend.

I said, have a dangerous weekend. Everyone had a freaking dangerous weekend. And then the worst. The worst weekend happened. I'm very sorry. I feel like I'm partially responsible, but trust me,

I didn't take any of the money. And we're not on the platform. Anyways. Yeah. Have a safe and have a healthy weekend. If you're impacted by this FTCS debacle, many of you will many of you were it'll get better careers are long people came back after mount gocks it gets better yeah i mean yeah if you're a credible and honest operator all those people

are still around build through this put your head down and build through it see you next week on monday