On The Brink with Castle Island - Weekly Roundup 11/17/22 (John Ray's FTX filing, will FTX political contributions be repaid, what's wrong with effective altruism?) (EP.372)

Episode Date: November 18, 2022

Matt and Nic return for another week of news and deals. In this episode: Matt's blog post, 'It's Time to Grow Up' The Alameda - FTX relationship was always sketchy Would FTX ever have been able to go public? Why don't we have decent disclosure for token emissions? How do we put this crisis to use? John Ray's Day 1 filing about the state of affairs at FTX So what in the hell happened to the client funds at FTX? Will funds donated to politicians be clawed back? What's wrong with utilitarianism? How effective altruism is like Stalinism One theory on how Alameda lost money on Luna Some lending firms kicked out Alameda after the summer credit crisis Is Serum forking out coins which are due to FTX creditors? Why has the DOJ been so passive so far? We introduce some new bad boys Su Zhu and Kyle are trying to redeem themselves Do Kyle and Su have a new venture underway? Rep. Tom Emmer is elected as the GOP Whip in the House Will the Republican led House subpoena Gensler? Content mentioned in this episode: Matt Walsh in Medium, It's Time to Grow Up FTX CEO John Ray's Day 1 filing 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.

Welcome to On the Brink. I'm Matt Walsh. And I'm Nick Carter. And this episode is brought to you by Coin Metrics. And here is the Metrics Minute. For today's Metrics Minute, unsurprisingly, we're looking at some on-chain data related to the FTX collapse. Coin Metrics discovered a large transfer of over $4 billion worth of the FTT token on September 28th and some unusual activity after. across exchanges coin metrics tracks at least 120,000 Bitcoin and 1.4 million eth have flowed out of exchanges over the past week. There's a sharp increase in wallets holding on-chain small amounts

suggesting retail holders are moving funds out of exchanges. Bitcoin and Ethereum wallets with at least one unit of supply both reached significant all-time highs. That's this week's Metrics Minute brought you by Coin Metrics. And this episode is also brought to you by TALO. Talos, Talos powers institutional access to digital assets. Whether you're on the buy side or the sell side from Tradify to CryptoNative, the Talos platform aggregates all the liquidity in the ecosystem. Their integrated platform supports the entirety of the trading process from price discovery to execution and settlement.

Through their API or their web-based GUI, you can connect to everyone. Prime brokers, lenders, investors, custodians, OTC desks, you can meet them all on Talos. They have a leadership team with the deepest experience in the space. So head over to talos.com. That's www. www.talos.com. I don't even know where to start this week, man. I don't know where to start.

Well, there's some deals. Those deals got done a while ago, but there's some deals to talk about. I read a blog post. Yeah, so this is new. Is this your first? Is this your first blog post? Well, I write a lot internally.

I read a lot for our limited partners, but I don't read as much, not as much of a public-facing guy with the blogs. Maybe we can switch because I am, I've had enough of that. So we could do a swap if you want. I just got upset. So I had to write something about it. I'm just really furious that we keep on putting these sociopaths on a pedestal in this industry. So this was good, though.

I thought it was a good article. So this week in Castle Island content is all about Matt Walsh. So we can start with it. We can start with the blog post. First of all, very nice art on that blog post. Stable diffusion. Thanks for the help with that. That's a cool program, huh?

Yeah. So now you were never going to have to go to Fiverr and make custom art ever again for your blog post. You can just do it on stable diffusion. So what did you just put in a new dawn rising? Is that sort of a dawn of a new day? Yeah, something like that. Yeah, I mean, you saw me do it. It took like 30 seconds.

It was incredible. It's unbelievable. I can't believe that computers can actually do that now. Yeah. I mean, actually, this is my bull case. I know everything looks kind of bleak right now, but this is my bull case for GDP growth is these AI models are so incredibly good. They're actually going to pull us out of our recession that we appear to be entering swiftly.

That could be it. I mean, either that or everyone in the crypto. industry is just going to pivot to AI or Fintech. There's going to be a lot of funds, a lot of generalist funds that do a crypto dealer to that are going to have no crypto on the next pitch deck. Yeah. We're generalists. We do fintech.

Including us. Yeah, look, we've always liked AI. So, you know. We're not going anywhere. So it's time to grow up. That was the name of your blog post. Okay. Who needs to grow up and how?

All right. So I basically just said, I'm pissed. I'm pissed that the industry continues to put these eccentric sociopaths on a pedestal. Basically, everything here is just set up structurally to steamroll retail. And we just put ourselves in these awful positions where the technology actually allows you to do a lot of great things. And then we have these centralized scams and frauds that just emerged. So Sam Bankman-Fried would have been scamming people if it was over baseball cards, if it made more money than cryptocurrency, is the reality of it.

The guy cares absolutely nothing about this industry. industry doesn't care about self-sovereignty over money, doesn't care about self-sovereignty over data. It was just a huge piggy bank for him to get rich and to do this effective altruism, BS that he was set up to talk about. So I think there's a bunch of stuff that we can do to get this industry back on track. And I basically use this blog post to lay out a few bullet points on just common sense things that I think we can all start working on to get us out of this. Yeah, it makes sense to me. I mean, I think this will be one of the narratives, from the crisis is let's just refocus on the fundamentals here, whether it's actually committing

to defy non-custodial finance or working on exchange hygiene, proof reserves, prioritizing depositors, giving them segregated, you know, segregating operating capital from deposits, giving them priority in liquidation, updating our securities laws. You list all these things in the threat. I mean, it makes sense, right? Let's put this crisis to use. You know, don't waste the opportunity now. We really just need to start to burn down the parts of this industry that are just rotten to the core and get the people that are complete con artists out of it now. And there's two ways to do that. Either you go around and you just take out the con artist one by one, which doesn't seem very scalable, or you just set it up with, you know, not only regulation, but you set it up with social pressure

to improve these things. And you just put the scaffolding in place. And so take things like conflicts. A bunch of these conflicts that we're looking at in the crypto industry around firms owning prop trading shops that are exchanges and around having insider dealing. I mean, these were things that the financial services world solved in the 1930s. You know, key legislation in 1930, 1933, 1934, 1940,

these would have actually, if you just took some of that common sense, whether it was law or not, if you just forced it on some of these centralized players, then we would have been in a much better position to deal with this. It's unbelievable that you read a book like reminiscences of a stock operator, and that was in the late 1920s, and that's how like FTX was being run. Or even look at Glass-Degel. That erected barriers between the proprietary trading part of these investment bonds in some banks, right?

So, I mean, yeah, the Alameda FTX thing. was always sketchy, right? It was never not sketchy. We were looking at an old FTX pitch deck from 2019 and a lot of people thought this stuff was unforeseeable. Alameda was scrawled all across that pitch deck. The whole thing was about we have this big prop trading firm, we will bootstrap liquidity. Alameda will operate the exchange. It was all about relying on Alameda to bootstrap FTX. I guess the plan was to eventually pull them out of the exchange once it hit maturity or something. They did not do that. I just never understood from, you know, we've talked about this before in different forums, but there were a lot of investors in that deal that were generalist

venture funds that had asked us what we thought about it. And one of the common refrains that we said was you can't go public if you own a prop shop, if you're an exchange. It's just, it doesn't happen. So how are you going to do this? And, And there was, it was like no one thought of this. But, you know, one guy was like, hey, they'll go public in Hong Kong. That was one of the big checks into it. It's like, all right, do they have predatory laws? I don't know the laws in Hong Kong around going public.

But can you really go public when you're just ripping off your customers with a prop shop? That just makes zero sense. I don't think you. Is it the right thing to do? Can you go public in effectively China as a crypto company? I don't think you can anymore. Sounds like a bad piece of underwriting. So I don't know.

A lot of this was just laid bare. I mean, there's other stuff that is also involved in the FTX scandal, which is not going to bubble up as part of the bankruptcy, but we should address now, which is token vesting schedules. So when does FTX kind of come off of these vesting schedules with Solana and serum and a FTT and a bunch of these other things? And why isn't that all disclosed to retail that's buying these things? Why do you not know it? That would be the first thing that ought to be disclosed. right, is clearly these things have investment like properties. There should be some sort of disclosure. That is the number one thing I think you would disclose is who owns what part of the

cap table. What is the emission schedule? What do the unlocks look like? Otherwise, you know, retail could be buying the exit pump. You know, they could be the exit liquidity for the funds that are longing these tokens and having them invest. So that is the most basic. thing. We still don't have that as an industry. And that has the potential to be a next big scandal of the industry. So why don't we just clean it up now? I mean, it's never going to get worse than it is right now, right? So, yeah, knock on wood. But let's just solve the things that are obvious and right in front of us and that are just JV type of things. It's Bush League out there. So we'll put that one in the show notes. You also had a pretty funny quote in Bloomberg. I'm going to repeat it here. As far

as far as I can tell, the extent of the diligence was the kid went to MIT, talks fast, leaps on a beam bag chair, and Sequoia is in. That's about, that's about right. I mean, just the amount of FOMO that went into this deal over the last three rounds in that company is just staggering. It's just the kid must have felt like he was in one of those carnival things with the dollar bills just flying in the air and he was just pulling down as many as he could. I mean, because the new revelations that are coming out,

are almost unbelievable, almost unbelievable. So this filing from John Ray, who is now the current CEO of FTX, not an enviable job, I think, but probably an interesting one. Definitely. So the key quote in that filing, he says he's 40 years of legal and restructuring experience. He oversaw the Enron wind-up recovery, quote, never in my career have I seen such a complete failure of corporate controls, such a complete absence of trustworthy financial information has occurred here, from compromised systems integrity and faulty regulatory oversight to the concentration control in hands a small group of inexperienced, unsophisticated, and potentially compromised individuals. This situation is unprecedented. What does he mean? Compromise how?

Who compromised them? I mean, what do you read into that phrase? Honestly, I think he's implying that these people did so much damage that they must be foreign agents sent to, like, destroy crypto or something. Because that's the explanation I'm settling on because the mess that is now being uncovered is the most shocking thing I've ever seen. It's just, it's absolutely incredible. So why don't we, let's do just the quick deals of the week. None of these deals actually got signed up this week, obviously. But we'll do a quick deals of the week.

And then we'll come back to FTX and then we'll do a bad boy section. Okay. So yes, there are deals in the Castle Island portfolio. So first up, we have Rev. That's with 2 Vs. They're a defy marketplace infrastructure protocol. They merge from stealth. They announce a $5.5 million seed from us, Libertus Capital and Tribe Capital.

And the other one in our portfolio is Duke. Juke. Juke is two Hollywood executives that have formed a digital collectibles platform focused on film and TV intellectual property. They also came out of stealth and they announced funding from us, North Island Ventures, and Multicoin. So we actually just released our Juke episode today by the time you listen to this podcast. It'll be yesterday. So check that out if you want to hear more about Juke. Next up we have Matter Labs. They are the developers of the ETH layer two scaling solution, ZKSync. They raised 200 million from all. light speed variant A16Z and others. Next one up is Quenta. This is a digital asset focused fintech platform, and they are going public via a spec merger with blockchain co-investors.

Blockchain co-investors, long-time investor in funds and directs in the blockchain space. So congrats to that team. Great to hear. And now we have Yokoa, an NFT fraud detection startup. There is $4.8 million from collab currency, Volt, and Brevin Howard. calling yourself a fraud detection platform, that might be the only way you get money in the next three weeks.

I mean, I like the idea. There is a lot of, there are a lot of counterfeit NFTs floating around and not a lot of controls for that. So I completely get the idea. It'd be nice to have that in real life, just fraud detection. Yeah, we could use a bit of that in this industry. next one up is joe pegs this is an avalanche focused nfti marketplace they raised five million from ftx we yeah don't know right okay let's just go to go to the next one then we have play ember web three gaming monetization platform there is 2.3 million from shima capital big brain holdings

and warburg cirrus all right so that was the the deals of the week um a lot of people wanted to announce their deals this week, but two Castle Island companies, just brave enough to stand out there and say, deals are a thing still. Still gone. Yeah, okay. So I guess let's start with John Ray the third, his day one bankruptcy filing. I would love to have, I just kind of want to get a webcam on this guy and see his shocked expression as he trawls through the insane morass that is the FTX back office.

Well, I guess the first thing is, and it's part of the filing, is he had to address what happened on Friday night, which started to happen late. It was like 10 o'clock on Friday night, and I'm sitting there on Twitter, I guess where I spend all my time the past couple weeks. And $370 million of funds were hacked off of the FDX platform after they had already declared bankruptcy. And you had people coming out and saying that it was not us. Like it wasn't the liquidator. It wasn't the new CEO moving the funds. Looks like an inside job to me. Yeah, actually, of all people, Sam, the man himself, confirmed apparently and leaked DMs to a journalist that he thought it was an inside job.

I mean, not that anything he says now is reliable at all. I think he's deeply, deeply delusional right now. But even he thinks it was an inside job. It could also be the case that I think the entire security team just quit their job. probably and probably left a gigantic hole in their security infrastructure. So also wouldn't surprise me if it was just a plain old opportunistic hack, too. I just don't know. I mean, this is brutal for the recovery, right?

I mean, that's a meaningful amount of money. I guess it's not going to change the fact that it'll be pennies on the dollar for depositors here at the end of the day. And it probably take 10 years to figure all this out. I do wonder in this hack if they nuked the database. Do you think that there are still customer records and do they know what the balances of the deposits were? Is it possible that this hack was just a way for an insider to just completely torpedo the internal system? I mean, you'd have to imagine they have a snapshot somewhere. But it also just goes to show like the nature of this liquidation, wind up, whatever, is so utterly shambolic.

And this would have been preventable. I mean, if it had been more orderly, you have to imagine. You know, you keep the security team in place to tied things over. But just the way it happened, people just leaving the Bahamas, quitting, unclear. It was a number of days where it was clear that there had been fraud, that this was headed for bankruptcy, and it was still under Sam's control. I mean, that latency is just unforgivable. It's absolutely wild. Another wild thing in this filing, which is about 30 pages, probably worth reading.

So Alameda Research, which is the prop shop side of this fraud empire, they loan $4.1 billion to related parties. That included a $1 billion loan to Sam. It included a $543 million loan to FTX Director of Engineering, Nashad Singh, and at a $55 million loan to Ryan Salam. there's also a $2.3 billion loan between some subsidiaries that are like questionable here. And then there's of course the quote, never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. And that's John J. Ray again.

Whoa. Yeah, so I think we're starting to answer the question of kind of like where the funds went. It appears that they were just siphoned out of the entity in the, the form of personal quote unquote loans, aka just illegitimate distributions to the key executives and principles. I mean, that seems to be where a lot of the money actually went. There's this concept in bankruptcy called fraudulent conveyance, and it will be, there'll be a lot of money that people will try to claw back. I mean, but how do you get some of this back? I mean, some of this went to, like, I guess Joe Biden will probably have to

give back $11 million, right? I'd have to think. A bunch of these political contributions will have to come back. Yeah, the worst part of it is it's very opaque where the money actually went. I mean, there were some political contributions that were disclosed, but then there were some that was kind of shadow money, like super PAC money, which is just very opaque, the extent of that. But, I mean, I compare it to like a local mobster engaging in racketeering, like paying off local politicians and things like that, you can't keep that money. That money is the proceeds of

crime. There's no world in which you can retain that money. You as a politician can't take money from fraudsters and criminals and then just hang on to it once the fraud is exposed. There is no world in which any of these politicians, whether on the left or the right, I mean, the Republicans receive this money as well. There's no world where they can morally retain any of this money. It was not legitimate. These were not legitimate political donations. Yeah, they can't legally keep it either, is my guess. It'll be it. So, you know, and then the private equity stakes in Dave, the private equity stakes in Sequoia, multi-coin, altimeter, these things will all need to be sold. Presumably the, yeah, the partnerships over there are already putting plans in place to do it.

It's just, it's insane. I mean, there's like effective altruism and quote-unquote investments into groups affiliated with Will McCaskill here, it's wild. Yeah, there's now a whole genre of literature out there in the popular press, which has not covered itself in glory throughout the situation, which is dismay that some of their cherished causes are now having funds withdrawn or promised funds are not materializing, which is just, yeah, we get it. Your nonprofit focusing on AI safety is not going to get the funding that was promised,

but we sort of have bigger problems here. That wouldn't be my angle as, you know, a corporate press journalist attacking this story. I don't know anything about effective altruism, but seems like a total scam to me. I mean, it's becoming more clear. Well, Sam did kind of dunk on it in those leaked DMs and suggested that it was at front.

But from the sort of story we're piecing together here, it did seem like he was a class. classical utilitarian or consequentialist, which is a very sort of evil and messed up philosophy, in my opinion, four years. I did four years of philosophy. Okay, so somewhat credentialed on this matter. Naive utilitarianism, like benthamite utilitarianism, is one of the most sinister philosophies that exist. So basically you just take the aggregate of all beings with intelligence and that have the ability to feel pleasure and pain. And then you try and ascribe moral status to the sort of net amount of utility that's created among that entire group, which composes like all the humans on

the earth, maybe even all entities with some ability to feel pain. Future humans also come into it. And then you try and just sort of quantify the aggregate amount of goodness or badness that an individual action would create. And then you take actions on that basis. So obviously it's an insane thing to try and do because the computational, the upfront computational cost of trying to determine the goodness or badness of an action is inconceivable. Right. There's no amount of, there's not enough like GPU hardware in the world to figure out whether a single action is going to bring to bear goodness or badness. That's why we have like moral shortcuts. So that's why we have moral rules, right, which is the sort of competing philosophy, which you refer to.

deontology. And so normal people follow moral rules because we're not these insane AI supercomputers that can determine the aggregate goodness or badness of an action. But the problem with utilitarianism is through that you can justify crazy stuff, crazy bad stuff that has an upfront badness to it if you think there's a lot of downstream goodness that outweighs it. Right. So that's why it's so sinister and bad. That's why I would compare it to Stalinism or Maoism where okay, you have a purge, you have a genocide or something, but it's in service of the Great Revolution. It's in service of something better down the road. It appears Sam actually thought this way.

So maybe he thought, okay, yeah, we cut some corners here. We committed some light fraud, but we're going to direct the funds to AI safety, which is going to save us from the AI apocalypse, so it's for the greater good, right? we're going to direct the funds to animal welfare, you know, veganism advocacy. So it'll save us from this much bigger, you know, so we still are maximizing the amount of utilities in society. So this is like how these people actually think. And it's an inhuman philosophy. It is truly unhuman and it robs you. It robs normal people of their dignity because you just treat people as as as a fungible mass of utility. And you're trying to maximize.

maximize aggregate utility. So anybody that I meet that professes to be a true benthamite utilitarian, I'm incredibly skeptical of those people. The fact that Sam was one always rubbed me the wrong way, and now we see just how devastating that philosophy put to action can be. You can't make this stuff up. It's really crazy. You know, digging in a little bit more to this bankruptcy filing, I'd been speculating, along with some others in the industry, that part of this around how they lost so much money was due to Luna and the fact that during Q2, they were presumably on the other side of the trade as the liquidity provider of last resort on FTX and were gobbling up a lot of Luna as it was chucking there. It was selling off

in that three arrows debacle. That was actually confirmed. So in the bankruptcy filing, it says that there was a quote, secret exemption from liquidations on the venue for Alameda. That basically means that Alameda was able to run negative balances on the exchange. So they could go negative infinity on the exchange. Everyone else would get liquidated and blown out. So I mean, it's anyone who doesn't think this is a fraud has a broken brain at this point. Yeah. And this is actually an important piece of the puzzle, I think.

If Alameda was taking the other side of user positions as Luna was selling off, if a lot of traders on FTX were liquidated on their Luna position and it kept dropping, as it did, dropped to zero, could be that Alameda had the assumption that there would be some mean reversion that Luna would eventually stabilize at non-zero. And so Alameda assumed those positions, bought them out, but then ended up with an immediate, significant loss as Luna kept dropping, right, as there didn't prove to be any liquidity on the body. side. So Alameda by trading against customers that were getting stopped out and getting liquidated on Luna, Alameda could have ended up with an enormous loss. So I do think that is part of the puzzle here. I'm sure

more, we'll learn more about that in coming weeks. Let's also talk about some of the second order effects here. So we're going to start to see a lot happen here and it's already starting. So digital currency group last week, I guess maybe early this week, time is blending together. So they injected $140 million into Genesis, their trading and lending arm that suffered exposure to FTCS. Then Genesis just yesterday came out and said that they're suspending their lending business. So they're halting withdrawals on their lending business. I believe that books a little bit over $2 billion. So, you know, speculation there around duration mismatch and the size of the whole, basically.

But it is, it's a shame. I mean, I hate to see this. the DCG guys, the Genesis guys have been some of the most stand-up people in this industry for a long time. It's a mainstay firm. I personally hope that everything's going to be all right for the team over there. Yeah, I'm super dismayed to see it. DCG and Genesis has been an industry behemoth, and they created a lot of the credit that helped this industry grow and mature.

So active situation there, we don't know exactly what. what will be the fate of that or GBDC gray scale for that matter, trading it at a shockingly low premium. I'm sure more to come on that one too. I also took note that that Bank of the Future platform that was supposed to buy salt lending, they dropped their plans to acquire that company because salt apparently had exposure to FTX. So in process, M&A, not a good time for that.

Yeah, I mean, we talked about this last week as well, but I think the most immediate reverberation here will be the continued shakeout that began in the summertime, especially the lenders here getting hit especially hard. Now the lenders of the joint crisis of the Bitcoin miners all going bankrupt. So the minor financing industry

extremely challenged as well. So really just a continuation. Anyone that's a levered player, really, right? It's like the levered players are just being chased in this industry right now. So just we sort of paused our credit crisis. and now it's resuming. There were firms that did re-underwrite Alameda, and I will give credit. There were firms that re-underwrote Alameda after the initial credit crisis found that Alameda

couldn't satisfy their underwriting standards and subsequently cut them off. So it is certainly possible to learn and evolve here. Then you have these token teams. So we're hearing a lot of public stories around token teams, around hedge funds that had big positions. on the platform, you know, oxygen and maps, which are two of these FTX-affiliated tokens. It looks like that all their money on FTX, so it doesn't, you know, that's over, I guess, presumably. I don't think that can continue. I have to imagine serum is done for you.

And serum is, there's a lot of the fork going on in serum to fork out Alameda slash FTX. So some of these will presumably just fork out the FTX thing, which that'll be a first time that this John Ray ever encounters something like that, where there's enterprise value that just gets forked via open source protocol. Yeah, I mean, assets which are due to the creditors, effectively vanishing into non-existence due to the impact of some of these token teams, I'm sure he's gnashing his teeth of that one. There's class action lawsuits popping up against some of the celebrities here that have endorsed FTX, like Larry David, Brady, Steph Curry.

You know, there's going to be a lot of lawyers trying to get some spotlight there. That'll be tough. Yeah, the DOJ finally woke up. I think today was announced that they're looking into it. Hope they can get their act together and get Sam out of the Bahamas. It seems like the Bahamas is actually a bit of a nuclear umbrella for Sam right now. He seems to be operating normally, still tweeting, although I don't think anything he tweets should be treated is reliable. I'm pretty dismayed overall at the local governance in the Bahamas,

clearly not a place real businesses should be doing business. They let this whole catastrophe unfold without stepping in, could have stepped in much earlier, have to imagine that eventually the DOJ gets involved just on the scope of how many Americans were affected. And of course, FTCNALMATA had some intersections. They had some nexus of control. in the U.S. So I do think this is ultimately U.S. jurisdiction, but hoping the DOJ is able to step in here. It's unbelievable that the Bahamas is contesting the bankruptcy filing itself and saying that it needs to be in the Bahamas. I just, can we send in a SWAT team to get these guys out of there? This is crazy. Isn't the Bahamas like a colony? Come on. Yeah. I mean, at this point, we're justified,

I think, in annexing them because they clearly don't have the legal and political resources to engage with a fraud of this magnitude with worldwide reverberations. This belongs in the big leagues. I think the Bahamas need to kind of step back here a little bit. All right. So this is the bad boys podcast. The roster of bad boys grows every week. The bad boys have been at it again.

So I guess we will cue the music. What you're going to do? What you're going to do when they come for you? Bad boys, bad boys. What you're going to do? What you're going to do? All right, so I debated not even bringing this up, but Suzu and Kyle, these absolute snake rats, they're back. Kyle Davies was interviewed on CNBC.

Apparently he's in Bali. And they're trying to just use that as this is a redemption tour. And they have this convoluted argument that Alameda was just chasing their positions and liquidating them with no explanation around what the hell he's talking about. But they're trying to do a redemption arc and just blame everything. on FTX when they lied to their lenders through their teeth is just the most despicable thing I've ever seen in my life. Yeah, guys, they're being a larger fraudster doesn't mean that you didn't commit fraud. The fact, Kyle Davis, you're hanging out in a non-extradition country for a reason, bro.

It's unbelievable. These guys think that they have a comeback tour is not going to happen, guys. If they're so confident in the rightness of their position, come to the U.S., come to the U.S., Come hang out. We'll buy you dinner. Come to New York. We'll buy you dinner and we'll serve it to you between a plexiglass wall because that's the only way that anyone's going to get to talk to you in the United States. How did CNBC, look, I like CNBC.

They're great. Why are they giving Kyle Davies a platform to spread its lies? I mean, these guys, they haven't meaningfully apologized. They haven't set anything right. There's companies that are out of business because of what they did. Yeah. What they absolutely just lied on their documentation to their lenders. It's guys, you're fraudsters.

Just exit stage left here. Morality is not graded on a curve. Sam being just about the most odious creature that has ever walked the face of the earth doesn't vindicate the three arrows guys in any way. And it doesn't even appear like they have a coherent argument as to how the FTX failure somehow vindicates three arrows. You want to know like a good first step besides saying sorry, Kyle and Sue, is the liquidator. to NEO, they're publicly keeping logs of this whole case and they continue to say that you're not

cooperating. So they don't have possession and control of your fireblocks instance. They don't have good documentation on all your rogue trades. Why don't you just get into compliance and start to help people get their money back? Maybe that would be a good start. And these guys are apparently trying to start another business. Have you heard this? Yeah. I mean, I think this is why they came back and now they're on some press tour is they want to raise money again and redeem themselves. I don't think that's how I'm hearing it work. I mean, so there's no way that this is going to be crypto related, right? Because there's no exchange, there's no OTC desk on the planet Earth that would do business

with these guys because they're complete scam artists. So there's no ability for them to come back into this unless they want to just trade on defy. And maybe they can raise some money. I mean, look, Saudi Arabia gave a lot of money to SoftBank. There's a lot of people that can raise money, right? So maybe they can raise some money, but I'm actually hearing that these guys are starting something outside of crypto, that it's something in the hotel space.

So who would want to stay at a hotel financed by Kyle Davies and Suu? It's like, how quick does it take to get your credit card stolen at that hotel? That's the hotel from hell. Can you imagine? Maybe they should start an AI company. for that's a pretty hot space right now. Well, and then we have another entry to the bad boys club. Really?

New. Yeah, new. So I'm going to caveat. I'm going to give a legal disclaimer that this is just, hmm, I think maybe someone should take a closer look at this, all right? So I'm going to caveat that. Okay. You have my attention.

I'm just going to say, these are some interesting people to take a look at here. You know, you would figure if you were the head of product at an exchange. you would know how the product works, right? So you would know if there was like a secret backdoor that let someone run negative equity on the platform. Like you would know that if you were ahead of product, right? Yeah. You'd probably want to know like where the crypto stolen

or where the crypto stored on the products. Like you'd want to know how the cold wallets work. So if anyone in like the engineering group or anyone asked you like, how's the product work? You'd want to know like where the money goes, right? Yeah. So I think maybe we should have some people ask the head of product how he thought it went. And so that guy, let me find his name.

That guy's name is Romnik Aurora. So I just want to know if anyone's asked him how the product works. So that's person number one. Okay. Who we should ask him some questions. Person number two, you know, remember FTCS did a lot of corporate development. and M&A work. So, you know, Celsius and Voyager and BlockFod, they cut these deals. You know, they cut deals and part of those deals were to keep these affiliated party transactions up and

running, right? Like it was an FTX deal, but Alameda was a big part of it in the structuring and some of the communications. So you would think that the guy who runs Corp-Dev and M&A would be like aware that he was negotiating on behalf of two firms, right? So what's, Why am I caring about Alameda? So you'd think that guy would be a good guy to talk to if you were like the Department of Justice, say, right? That's the reason. So let me dig up that guy's name. That guy's name is also Romnik Aurora, actually.

That's Romick. That's curious. That's actually the two guys with the same name. The third and final one that I think is really interesting, particularly if this case goes to wire fraud as a case is the guy who is like shepherding all the money with Sam. So the guy who is meeting with investors and telling them what the numbers were and putting the numbers on paper and putting a data room together and explaining to people how Sam had all this money that he was able to spend.

And was it a secondary equity transaction that he's taking off or was he making money from Alameda, the guy who's out there like selling. So it'd probably like the IR guy, I think, that you'd want to know. Like that guy? What's his name? Let me get that guy's name. Oh, this guy's name is Romnik Aurora. So it's...

That's a strange. Interesting coincidence. They're all the same person, it appears. So I don't know. Like, if you were trying to run a scam, I mean, these are three high profile jobs, right? You would want to have like hitters in all three of these roles. But, you know, maybe if you wanted to hide something, you'd want to just find one guy so that you could just keep it tight, right? Yeah.

Yeah, so that's, yeah. Okay, so. We'll revisit. So that's Romnik Aurora's three roles, maybe I'd take a look at. Provisional membership in the bad boys. Provisional, TBD on a full inclusion. But a strong candidate, I would say, for the bad boys. Strong candidate to be a bad boy.

Needless to say, we're going to put Sam in his, you know, sex cabal is probably in the bad boy camp too. Yeah, Sam's fully in there. No question about that. There is other news this week. Other news items broke this week. What else happened? So Tom Emmer, one of my favorite members of the house, was elected in a narrower race as the GOP whip in the U.S. House. Oh, I love Emmer.

So, well, we like him especially because he did our show. So that was nice of him. So congrats to Emmer and the team. That's great news for the crypto agenda as we emerged from this crisis. McHenry, the Republicans have officially won the House, narrowly, very narrowly. The red wave did not materialize at all. But they did prevail in the majority. That means two things.

One, it means a number of things. Two for our purposes. McKenry now, also pro-crypto guy, pretty Gensler skeptical, is now the chair of the House Financial Services Committee, taking over from Maxine Walters. Second thing, I only just found this out recently. the Republicans in the House now gained subpoena authority, whereas before they just really had sort of letter-writing authority. And so that means they can actually start to investigate these links between Gensler and FTCS and Gensler's failed oversight over FTCS, even though he had personal meetings with the FTX team, Gensler's dereliction of duty there. So I expect that to be a theme of this next House regime.

you know what I would be really curious about so if I had subpoena authority I would be really curious if the SEC is pressuring cryptocurrency exchanges to come in and register with the SEC that's what I would be curious about and what's the there's a tussle is my I think there's a tussle between the CFTC and the SEC and I want to know is there a power grab going on there why don't we just get it all out on the table yeah don't we subpoena some of that why don't we support? pin us some of the exchanges to see what the SEC is saying to them. Yeah, I mean, all word out of the exchanges, really any crypto market participants that have willingly talked to the SEC has been that there's only bad things happen to you when you go in and talk to the FCC who acts so inviting towards crypto market participants, but when you get in there, then, you know, you tend to be harassed. So it hasn't exactly been a fair deal. The SEC has been offering to crypto firms. No, not at all. Well, it'll be interesting to see how these regulators, you know, what their posture is towards the industry. I think it's going to be a tough

few months here, maybe longer than that. I think we're going to have to battle here. But, you know, some of this will be good. We need to get some regulatory clarity on the spot market at minimum. Yeah, I mean, I do think that will be the consequence of all this. I mean, we'll see if the crypto hawks get their way in Washington. I mean, apparently there's going to be. There's going to be hearings. We'll see if, you know, all this FTCX drama, I think, has only catalyzed the need for common sense consumer protection principles in legislation, whether that's, as we said, segregating client deposits, maintaining privileged status and liquidation, requiring basic controls of exchanges, any kind of disclosures, potentially even proof of reserve. So there is

the possibility for this to go in a, decent and responsible direction. There's also the possibility for Washington just to nuke the industry, which is not out of the question now. Yeah, I think it'd be hard for them to shut it all down, but maybe what we get is some common sense regulation. I mean, it's pretty clear the biggest beneficiaries of this are going to be the regulated onshore entities.

So you got to tip your hat to Coinbase and Fidelity and Bank of New York Mell and all the folks have been playing by the rules since the start, you know, Crackin, all these players that were playing with one hand tied behind their back. On the proof of reserves front, I would say very encouraging overall. I have it on authority that at least two dozen exchanges are now looking into proofs of reserve. I will note my skepticism on some of these exchanges' ability to pass a proof of reserve attestation. I think everybody wants to do it, but I'm not sure they actually understand how rigorous a true proof of reserve. A supervised proof reserve can be.

So let me note my cautious optimism on the prospects for proof reserve. All right. That sounds great. Well, we'll get this episode out quickly because everything is changing quickly in this industry. Have a safe and healthy weekend. And we will see you on Monday.