On The Brink with Castle Island - Weekly Roundup 12/08/22 (FTX's Venture Portfolio, SBF's mining investment, BlockFi retrospective) (EP.380)

Episode Date: December 9, 2022

Matt and Nic return for another episode of news and deals. In this episode:  Brink Nation's surprising fan club in Bali We investigate FTX's leaked private equity portfolio FTX employees were raising LP money for funds from FTX Why was FTX acting as a fund of funds? What is modulo capital The Michael Lewis - IEX - FTX troika Why did FTX invest $1b+ in Genesis Digital Assets? SBF's possible incentive to invest heavily in a BTC miner How FTX's mining investment disadvantaged other BTC miners Who has the size to buy up FTX's private equity portfolio? Sam and Caroline secure high powered attorneys The Boston Globe's Caroline Ellison article We correct the record on BlockFi Restating the core issues with 3AC Democrats are criticizing Gensler for his inaction on FTX What's the deal with Sam's subpoena? What's the deal with the Coindesk most influential Does PoS make Ethereum a security? What's the deal with the Castle Island merch store? 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 to Britain's ailing economy with a new round of Conjecturee 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 the Bitcoin. Welcome to On the Brink. I'm Matt Walsh.

And I'm Nick Carter. This episode is brought to you by Coin Metrics. And here is the Metrics Minute. In today's Metrics Minute, we're looking at exchange crypto holdings. The Coin Metrics team looked into Gemini. They found aggregate crypto holdings of $4.8 billion. That's $2.3 billion of Bitcoin, $1.8 billion of ETH, and 700 million of other crypto assets. the Bitcoin held on the exchange accounts for 70 basis points of all Bitcoin,

and they did this assessment by reverse engineering coins held on the exchange by looking at deposit addresses and finding the cold wallets, of course. Another way to do that would be simply to do proof of reserve, which some exchanges have begun to do. Hopefully we see a lot more of those in the future. That's your metrics minute. And that was the metrics minute. And this episode is also brought to you by Talos.

Talos powers institutional access to digital assets. Whether you're on the buy side or the sell side, whether you're in TradFi or a crypto-native firm, you can use the Talos platform to access the entire digital asset ecosystem on a single point of entry. You can trade on the API or on the web-based GUI and you can connect to prime brokers, lenders, investors, custodians, exchanges, OTC desks. You can meet all the liquidity on Talos. They have the best leadership team in the biz.

So head over to talos.com. That's www.talos.com. So, Matt, I was looking at our analytics recently, and there's a strange spike of listener activity in a small Pacific Island nation. Did you notice this? Is that our fans in Bali? Yeah, I'm noticing a lot of Brink Nationers over in Bali. What's going on there? I'm seeing shockingly high listener rates per capita in Bali.

It's a fan group there. Is that my good friend Kyle Davies and all his people? Our analytics aren't that granular. But yeah, there's a On the Brink fan club. They must get together and drink Pinocaladas on the beach and listen to On the Brink. It's quite strange. You know, I really want to investigate this.

I didn't even know that they listened to finance podcasts. Well, it's a thriving digital asset ecosystem over there. The lending markets are vibrant. So it's not surprising. It's not surprising in the least. Yeah. looking into we'll look into that one we'll get back to you on our next episode but yeah we got a shout out to our fans in Bali really yeah really appreciate the support guys we do appreciate the support

we do appreciate it well the podcast had some had a busy week rea did an episode with robert miller over at flashbots as usual it was very intelligent episode understood not all of it if I'm being honest yeah ria always does the actual deep dives and then you know we just chit-chat with our industry friends. But those are always very thoughtful. We get a lot of positive feedback on that. Sometimes we get a lot of criticism because we don't do deeply technical ones. You do, I guess.

I mean, very occasionally. But that's why we have RIA. And you sat down with John Palmer of Sebo Digital this week as well. That was a fun episode. I actually went to a hockey game with John Palmer this week as well. A little known fact. Shout out to the Canacord crew. Islanders game.

went to an Islanders blues game the blues one it was amazing canacord just uh knows how to do it right i think hockey is the second best live sport behind ufc which is the best best so they have these um it's a box but it was right on the the ice unbelievable so you go underneath the seats and there's like a bar restaurant type of area but then you actually watch the game on the ice it's just in seeing hockey live just how fast they move and how big there. It's just such a cool sport to watch in the front row.

I played hockey in my younger days. I was a little undersized for the sport. And I would just get knocked out a lot. Really? Yeah. I wasn't much of an athlete, actually. Believe it or not. I grew up playing hockey as well.

It's a fun sport. Well, there were deals this week. There were deals. We got some deals. The first one up is Cyvers. This is a Web 3 cybersecurity platform. They raised $8 million from Elron Ventures and Crescendo venture partners. Next up, we have Karma with the C.

Their privacy-focused market infrastructure startup. There is a million from 2048 ventures and Flybridge. Next up is an acquisition. So Galaxy Digital has acquired GK8, which is a self-custody platform that was actually owned by CELC. So Celsius bought this in November of 21. And as part of that bankruptcy is offloading it. And so Galaxy is moving into it. I guess it's a self-custody platform.

You don't have to squint too hard to see that you could build a custody business on top of this, I suppose, right? So pretty interesting acquisition there for Galaxy. Next up we have Argus, a crypto-compliance startup. There is $2.8 million from CRV and others. Next one up is gridless. This is an East African Bitcoin mining business. They raised $2 million from Stillmark, Block, and others. that is the most unique deal of the week, I think.

A lot of mining stuff to talk about this week with GDA. Oh, yeah. Oh, do we have mining stuff to talk about? My goodness. Okay, next up we have tea, as in the drink. They're a tooling provided for open source developers. There raised $8 million from Binance Labs and others. And then we have Perennial, which is a defy derivatives platform.

They raised $12 million from polychain, variant, and a number of others. It's Brett Harrison, not Brent Harrison, right? Yeah. And then lastly, we have, this is an interesting one. Brett Harrison, of course, former president of FTXUS, former on the Brink show guest, I suppose, also, is reportedly raising $6 million for a new startup aiming to provide crypto training software for large investors. I like Brett, I think. You had a good podcast appearance

These are like the hard things about it It's like not everyone that worked at FTX is a scammer I think that this right I think that Brett's a good guy There is it's gonna be like a tough situation here For anyone that worked at that company Because you're always gonna have the stink of FTX on you But there's a lot of people that had no idea

Yeah I mean there were undoubtedly good people that worked At that organization I mean there are a lot of lot of people that used to work at Lehman that weren't implicated in the collapse. Well, Lehman, yeah, like, Lehman wasn't a fraud, but, like, there were probably a lot of great people that, like, answered the phones that made off, you know, I don't know. These are going to be really difficult times for anyone that worked there. And who knows, like, people that we think were, had no knowledge of this, it's, we're going to

find out they did and vice versa. So it's a proper cluster, cluster. Yeah, so I guess we'll just dive in to FTX. I mean, what else is there? All right. So I guess, I mean, I guess just fire up the bad boys track right now. Let's let it rip. I mean, maybe just play the, play the music. Automatic. Roll it. Bad boys, 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 when they come for you? All right. So I guess the first thing is the financial.

Financial Times had just an incredible scoop here. So that guy, his name is Kadim Schuber, and it also looks like Bryce Elder reported on this. This guy, Kadim, gets a lot of stuff. So they have the entire Alameda Ventures portfolio that came out here. And boy, oh, boy, is it a doozy. I think what is the total number here? Is it 500?

5 billion. 5 billion, I believe, in the aggregate. Yep. So I guess this answer, The answer's question of when they started dipping into customer funds is like pretty much had always been, I guess, right? I mean, where did the money go? Where'd the money go?

Like, we took it and we started just slinging it into venture deals and a bunch of self-dealing here. So let's just hop into some of the ones that hop out the most. I mean, there's 470 investments here. So they were literally the most active investors in the United States. the crypto space by volume, right? Like they were literally the number one. Well, why don't we go one by one and talk about the merits of each deal? First one is our friend Romnik, the head of product, the head of Corp Dev, the head of investment relations, Romnik Aurora. You know, he also runs a

venture fund called Toy Ventures, and it turns out they got $25 million from FDX customers. So I don't know if that's illegal, but it just seems completely irregular to have your head of product, head of corp dev, head of IR get a $25 million check from the business to run a side venture fund called Toy Ventures. That doesn't make any sense to me. And to be clear, you you decreed him a bad boy even before we knew about this. Well, I said he's been nominated for the bad boy club. I don't know if he's in it yet. This might be the kind of nail in the coffin for the bad boy moniker. If you're like, hey, I didn't know about this.

This is not a good fact here to have the fact that the company spent $25 million of customer funds to put into a venture fund that you own. It's just the ugliest possible situation. So that's my first one. So the funds are actually the most interesting part of this maybe. I mean, the whole thing's interesting. There were so many funds that they invested in. I think it makes sense.

Not that they thought that, you know, these funds might necessarily do well, but basically they were a huge fund of funds. And they were able to basically align incentives with a lot of the crypto funds and get them to be part of the sort of SAM ecosystem. So I think that was a very canny move by them. Obviously, it's improper that they're using customer funds to do this. But, you know, they were able to get a lot of people on their side. So K5, I don't know what that is.

K5 is, that's the Hollywood guy. That's the Michael Kives or whatever. So they were the recipient of 300 billion in LP from Alameda. Then you have Modulo capital for a total 400 million. What's Modulo capital? Let's talk about Modulo. So Modulo, there's no way that's a real thing. I'm just going to say someone needs to, between now and our next podcast episode,

we need to have some citizen journalism onto Modulo. because as far as I can tell, that traces back to an LLC that is in the Bahamas in Albany that looks like it was incorporated right around the same time as Luna. So as Luna was collapsing. So this modulo capital thing is structured as $150 million initial investment and then a $250 million, quote, second subscription. Something's up on that one. That one smells really fishy.

That's just clear self-dealing. That's a lot of this is self-dealing. And next up we have Sequoia that had already been reported on. That's a good investment, by the way. If there's a way to make money back on this estate, that's probably going to make, that's going to make money. So certainly value there. That's a nice pick. He knows how to pick them.

Skybridge is on there. We knew that as well. Of course, then we have toy paradigm that was known. Multi-coin. I mean, there's like dozens of fund LPs in here. That part kind of shocked me the most, almost, of all of the things they invested in. They clearly had a deliberate strategy to go after funds. Yeah, there were in a lot of funds.

Of course, they bought the ownership interest in Skybridge, so that'll be interesting to see how that unfolds. I'm sure he's not very happy about Skaramuchi. Can't be very happy about that. You know, there's a bunch of smaller funds on there. The other one that's really interesting to me is this IEX thing. I can't figure out what the heck is going on. So IEX is a U.S. like Darkpool Exchange in Equity World, and they were the subject of the Flashboy story, Brad Katsuyama.

By all intents, they're good actors. I don't think that they're involved in any of this. I don't know. There's a common thread here, which is Michael Lewis, right? Well, I heard that Michael Lewis got introduced through Brad Katsuyama. That's what the rumor is. So he wrote Flash Boys, which, you know, know, I would say most industry people really hate as a book. And it is a hagiography of Katziyama and

the IEX leadership as in an overly rose-tinted depiction, right? And it appears that Michael Lewis was doing the same for Sam, right? He was kind of writing a very favorable biography. So it's sort of like the exact same playbook right there, a little, fun little detail there. I guess. So there was a story months ago that said that there was some sort of a strategic relationship, between IEX and FTX and that there was maybe a two-way investment that they invested in each other's businesses. I had never heard how much that was. But on this sheet of paper that the FT got, it's a $270 million investment and it's actually categorized as an acquisition. So I don't know what's going on here. Does IEX, are they owned by FTX? Could that possibly be right?

And as far as we know, IEX is pursuing licensure in the U.S., right? Well, so that's the other thread that's interesting. If you look at the Q2 Freedom of Information Act filings for the SEC, there's a meeting on there between IEX and FTX, ostensibly to discuss some sort of a joint venture to have a regulated venue that is overseen by the SEC. I don't know what's happened after Q2 because none of those FOIA requests are out there. I don't know what the, we got to figure out if anyone knows what the process is for SEC FOIA request, that website has not been updated since the end of Q2. So I don't know. It's possible that IEX and FDX had other meetings. We just don't know. But what were they talking about? This doesn't smell right. Yeah, I mean, it looks like IEX was one of the vehicles FTX was trying to use to get access to the regulated U.S. markets. There's a Bloomberg article even saying in November saying IEX was continuing on its plans to get into the digital asset market space in the U.S.

Even post-FTX collapse. but it's clear that they're deeply intertwined with FTX. I'd love to see more on this. It doesn't look good at all. Yeah, I don't know. It seems weird. So you mentioned the 300 million to K5 Ventures. That's non-crypto.

K-5 Ventures. I don't know what's going to happen there. That looks like most of the money in that fund is probably from FTC's customers. $20 million to Stock Twits, which is interesting because I think StockTwits was pursuing a, powered by FTX model. So maybe that's the price of doing business there. You mentioned Modulo.

There's a bunch of LLCs like Rockbird LLC. Usually these venture back companies aren't LLCs. So that $10 million. I don't know what that is. Someone's going to have a field day getting to the bottom of all these things. There's a lot of stuff that's going to be a zero too. I mean, a lot of these tokens are just done. Yeah.

So there's the broader kind of startup portfolio here. I think one that we have to discuss is GDA, Genesis Digital Assets. This one is huge. What is this? $1.1.1 billion. I mean, that was their biggest single investment, basically. So GDA, are they, they're the biggest miners in the world? They are the biggest miners. So Sam was on the board of that company, and by all accounts actively involved, they were not well known because they're not public.

but yeah they are in the mining space are known to be i think probably by hash rate literally the largest miners and here's my take on this sam first of all i think sam was actually being smart here by investing heavily in a miner i always thought exchanges would invest in miners because the same way they invest in staking businesses so they can sort of gain influence over the protocol the way to gain influence over Bitcoin is to have a lot of hash rate, right? It doesn't give you direct influence, but it gives you some. So I think Sam was the first exchange studio to realize, hey, we should actually own a chunk of the hash rate so that maybe when MEV emerges on Bitcoin, we can be on top of that. Maybe we can give our clients priority access to Bitcoin transactions, things like

that. So I think that was, that kind of maybe explains why they were so giglong into it, because it's just a totally outsized investment. It's a normal. The other interesting thing is if you see this as kind of artificial in a way because they're siphoning funds from customer deposits and investing in this, this is a billion dollars of capital that probably wouldn't have otherwise been invested in the Bitcoin mining sector. So it's like a billion dollars worth of extra hash rate that sort of in the counterfactual world where FTX wasn't doing this fraud wouldn't have existed. And so if you understand the miners all compete with each other to earn the same pool of rewards, This disadvantages other miners tremendously. And so it kind of explains why other miners are so down bad right now. There is an artificial injection erroneous of a billion dollars plus into mining that wouldn't have existed in sort of like a free market situation. And so now all the sort of like other miners are now going bankrupt because of this because

they can't compete. A bunch of these miners are only out of business, I would say, because there was hash rate inflows from customer deposits that is not in line with the free market. It's unbelievable. If you really trace it, I mean, there's a bunch of these bankrupt miners would still be in business if he hadn't done this investment, I think. It was a subsidy which made, it was a subsidy to the GDA, which made other miners structurally unprofitable. It's crazy.

It's an insane thing to think about. And it's not consolation to the shareholders of these public miners that are now bankrupt, but it's an explanation. Do you really think that Sam was thinking about like MEV on Bitcoin? Is that really, is he that sophisticated to be plotting out? I don't know, man. Yeah, I'm in the camp of like Sam is smart, not an idiot. Well, he's clearly smart, but is he thinking like that's a lot of money,

$1.1 billion to a Bitcoin miner? I don't have another explanation because Bitcoin mining is not historically good business to invest in, to be honest. So there has to be some sort of non-economic motive there. That is my best explanation. I did think that exchanges would eventually get into this game the same way they're really active and staking, things like that. Where does GDA operate?

They were known for being in Kazakhstan. I don't think they have as many operations there. I think they're active in Texas, places like that. But yeah, to my knowledge, they're still active. And I actually think they're really well positioned now because they were so well. Well, they're able to buy all the equipment. Yeah, but you couldn't sell that. You couldn't, you couldn't return that capital, right? I mean, they're presumably they've invested in. Yeah, I would imagine it's in the form of A6 and electricity now. Well, I don't know how any of this gets resolved at some of these startups. I mean, you're going to go and you're going to have, presumably you're going to say we're going to run a process here. We're going to have a secondary buyer come in and buy big chunks of this portfolio. Can't be one buyer. I mean, this is a huge $5 billion ticket. So you'll have a bunch of secondary players that come in. And, You know, you have a bunch of assets that you want to own.

I mean, there's stuff on that list that I would love to own at that last round price. But then could you imagine a world where they just go to some of the companies and the funds and just say, give me the money back? Yeah, I mean, would it even be sold piecemeal that, again, we're talking about hundreds and hundreds of individual investments? The question is, if there's investors that's big enough to scoop up something that has a book value of, let's say, $2 to $3 billion. Do they, the folks that are that big, do they even want this stuff? you know like yeah i mean you're not going to have like a harbor vest come in and buy five billion dollars just in one swath they barely do anything in crypto yet so i would have to think that it would be but the crypto guys that maybe have like the sophistication to sort through this and find the wheat

from the chaff none of them have the size there's no one that big in crypto there's no one even close to that big there aren't even secondary players for like lp interest in the crypto space yet it's such a nascent field yeah so i i don't know i feel like some some legacy fund has to come in and buy the stuff at an insane discount. Actually, because there is value in the portfolio. It's not like zero. Like there's definitely value in here. Well, if you understand the portfolio, if you actually get a banker in there that understands

crypto, then you go and you pick the best assets and maybe you make 10 times your money on some of these ones. But others, you're just getting out for pennies on the dollar. So I think you actually need to understand the portfolio. Yeah. It's what do you value medulla, medulla on? It's like, Madulo could just be like the bar tab down there. Who knows?

Yeah. Like, what's the Aptos? They put 75 million into Aptos series A. What's that worth? Not 75. What, yeah. I mean, you could go down this list for the remainder of this episode. In other FTX news, he has hired, SBF has hired Mark Cohen as a defense attorney.

he represented Jolaine Maxwell in her sex trafficking scandal so I guess that's a high-powered attorney these attorneys are probably like hard to come by at this point if you're Sam well here's the thing so this supports my like Sam is actually smart thesis I mean he's portraying himself as an idiot with the recall of a goldfish but he's obviously

knows what he's doing he clearly still has the resources to get some of the best counsel in the world, as does Caroline, by the way. So, you know, even though he did his press tour and is now portraying himself as a bumbling idiot who apparently didn't have oversight over any of FTCs or Alameda's operations, like the guy has some of the best resources in the world.

Yeah. Yeah, he absolutely does. So don't buy the Sam narrative that the guy is broke and mentally unsound. In other news, there's a story that Brooke late last night that Sam is now under investigation for market manipulation related to the Terra and USDA collapse. That's an interesting wrinkle. Yeah, I mean, add that to the list. There are now, what, a half dozen different agencies and prosecutors that are investigating FTX for different things. That one would kind of be low on my priority list, whether or not they manipulated

Terra Luna. Well, I mean, I'm interested in that one, actually. I, I think, think that's our friend kyle is uh talking a lot about that i think he thinks that ftx was out to get him um i guess the theory would be that they just were short luna and that they maybe toppled the us t-peg or something right yeah i mean it's becoming very obvious that well a number of things toppled the us t-pack but i think we said this at the time i think i even wrote this in my um my sort of like Captain Hindsight little piece about Luna. My belief is that it was the sale of the UST to Genesis and others that caused the peg to topple because they immediately de-risk that UST to other stable coins. So the amassing of the reserves, the Bitcoin reserves that Luna was trying

to do, I think that is what killed the peg because they try to find billions of dollars of sell side liquidity in a market where there just wasn't by side liquidity. So I don't think you need a convoluted sinister explanation. I think the simple explanation is Tara tried to liquidate billions of dollars of UST and there just wasn't demand for it. Yeah, I think that I think that's right, but that doesn't necessarily mean that this allegation is not right either, that they were, Alameda could have been very short. I guess both UST and Luna. They could have been involved. I mean, I wouldn't rule it out. So you were quoted in interesting Boston Globe article, which was oddly sympathetic to Caroline Ellison. I guess I'm

used to that now at this point. What do you make of this one? So I was quoted. I had a quote that was not very nice that got trimmed down. I did say that I thought that this was a fraud and that my suspicion is that she was deeply involved in it. But my quote was something along the lines of a reaction to some of these YouTube videos that are coming out of her. And the quote was something along lines of if you're in the trading industry, your jaw hits the floor when you see how unsophisticated this whole operation was. But the piece, as you point out, is, I would say it's incredibly sympathetic to her. And the title is Caroline Ellison, MathWiz, and Newton Native was bound for success. And then she got into crypto, which kind of makes it sound like she just kind of

stumbled into Sam's orbit and got got into crypto and then became this evil person or something. It was just a- It portrays her as a victim almost of Sam and just like the crypto space as if it's some like evil industry that just choose up good people and turns them sinister and dark. My favorite line in it was they reached out to a classmate of hers in high school, a high school classmate. And he said, didn't surprise me that she ended up CEO so young. She never cheated. That was definitely not

her. So talking about her cheating in school. So yeah, I mean, you know, great consolation to FTX depositors, I guess, that she never cheated in school. That means that she could have never done anything wrong subsequently. This will be an interesting one because she is in New York, if you believe, Twitter. And there's all these pictures of her at the coffee shop from that autism capital Twitter account. And there's also a report that she's hired Wilmer Hale, which is where Prit Barara works now.

So if I'm her, I was turning States witness like 10 days ago. So I wouldn't be surprised if she's in there telling everything she knows in the hopes of getting a lower sentence. Yeah, I mean, she is,

even though Sam is sort of falling short of calling her out directly, saying it was really her fault that Alameda got this negative margin balance. Most of what he's saying basically implies that knowledge and responsibility falls on the Alameda side of the house, which she ran. So you would imagine her motive is to protect herself here and turn state's witness.

I don't see another path for her, to be honest. I think we're going to see a bunch of these folks, turn state's witness, maybe even some of the bad boys. So I never thought that the bad boy section would, really trigger such a heated and vivacious response from the bad boys. Yeah. Maybe Sam will one day come after us too. Maybe.

I feel like Sam has enough problems, but yeah, I think you're in the crosshairs on some of this bad boy stuff. Yeah. And I honestly resent that because, you know, I'm, I was just really this, I was sort of just like the color commentator. I wasn't really the guy calling him the. actual shots in the game or whatever. I feel like you are really the architect of the bad boys section and I'm just the sidekick. All right. All right. You can, that's fine. I'm the rob and you're Batman.

Yeah. And yet now the bad boys are trying to debate me. Well, you're the you're the partner with the most Twitter followers here. I mean, that's just what you get. You get the, you get notoriety and you're going to get Kyle Davies lashing out of you. I'm just a nobody on Twitter. Well, I think, we should change that and I think you should become the public face of the podcast and the firm. And I should fade into the background. I will. That's an okay trade. That's an okay trade.

I will clarify some stuff if you want. Okay. So, well, Kyle is relentless for some reason. And it's kind of like a one-sided rivalry. I don't have an animus against the guy. I mean, like the legal system will work its way out. And that's really his problem. Right.

like the fact that he owes a lot of people out of money, almost certainly lied in the process of the collapse of that edifice. That's the issue he has, not an issue with us. He may be lashing out because he wants target and he wants to renormalize himself. Apparently he's a Bitcoin maxi now. He's interesting. They can have him, you know. But yeah, maybe we should correct the record on a few of his erroneous statements here.

And I'd actually like to say, I am willing to talk to Kyle Davies. I'm willing to have a podcast with Kyle Davies. I am extraordinarily reluctant to do it under the current setup where they're not cooperating with the liquidators. And I'm extraordinarily reluctant to give him airtime in a world where we don't know what his liquidity situation is. So if there was a way, I wish there was a proof of anti-reserves is what I was talking to one of our portfolio companies today. and they had a great idea. They were like, what if you could have an anti-reserve proof on Kyle Davies

where it was, can you prove to me that you don't have $500 million of your creditors money on some hardware wallet? It's hard to prove. But, you know, there are forensic investigations going on right now. And let's just say, I believe those guys have a bunch of money that's going to probably get recovered at some point. So I mean, I don't think Bali is like a cheap destination, you know? Yeah.

I don't think he's living in a hostel either. Yeah, I mean, if this was on the up and up, Kyle, I think you wouldn't be in a non-extradition country. It's like, I get that you like the weather. So that's the first thing is I feel uncomfortable giving a mouthpiece to someone who's living on the lamb and who has a bunch of money that doesn't belong to him. So, but let's just put that aside because that wasn't part of the original critique. But I think that is a gating factor to me getting comfortable giving this guy airtime. And also, to be clear, we don't owe this guy a debate on anything. We're not on the same moral plane here, right?

we are in business. We're deploying capital productively. We still have a fund. There are no creditors after us. We are not hiding in a non-extradition company. We're not rebranding ourselves as a Bitcoin Maxi because they're the dumbest community that might accept you back to their arms. We're still doing exactly what we set out to do. This guy is running from his creditors, probably the law, and grousing about it and picking a target. he thinks that that's going to be his way to create its redemption arc. Yeah. There's no like equal footing between the two parties.

It is entirely a one-sided rivalry. Yeah. And to be fair, we're not even playing, we were never playing the same game as him anyway. So there's stuff that he's talking about that is sort of red herring stuff about FTX and the involvement of FTT and serum. And I have no idea about any of that stuff. And I'm not taking a view on it. It's you could have gotten cheated by FTX in a million ways.

And I actually wouldn't question that. And that's also largely irrelevant. Like stealing from creditors, it doesn't matter how you lost in the markets. You took the L. Your fund went to negative $3 billion. Like, I don't care what you thought Sam was doing, okay? Yep. You lost.

I don't care if you sold secondary on BlockFine made $1,000. Your ultimate destination was negative. You can't take victory laps for intermediate steps on the way there. And let's talk about the BlockFine thing. I do want to get back to my core. criticisms just so that they're all recorded on one podcast, my critiques of Kyle. But let's just get to, and I guess my allegations, really, but quickly just on the BlockFi thing. So this is a red herring, too. And so Kyle seems to, seems to want to just keep on saying, well, we invested in BlockFi. It's like,

yeah, we invested in BlockFi. And it went to zero. I have absolutely no issue with us losing money on BlockFi the way that it all happened. I come away from that. experience believing that that management team acted with complete integrity. By the way, it went to zero in Q2. And the reason it went to zero was because they took an $80 million loss on a collateralized loan to three arrows. So there's been a bunch of reports that it wasn't collateralized. So it was collateralized. The collateral was GBTC and it was running away from them. And so they took an $80 million loss. There is a critical decision made by that board, which we were not on the board for the record. Critical decision made by Zach, in

Flore and that board that operating the business would put customer funds at risk if they continued. They were on very thin equity capital. And so they decided to do this deal with FTCS, which was basically a wipeout for shareholders, but they believe would save the customers. And they believe that FTX was not a fraudulent exchange. And so in Q2, all of the investors in BlockFi were effectively wiped out to zero. And, you know, we went about our lives. There's been a lot of reporting, by the way, that's just factually inaccurate around the way. that that lending book worked. But a lot of things in the press that probably at some point would make sense to have Zach or someone at BlockFi come out and talk about, frankly, because there's

a lot of misinformation. Kyle talks about the GBTC trade going bad. That was like a year before this, and that had no impact on customer deposits. And so the company lost some money on a proprietary trade, and they went past it. That's a red herring. So we invested in BlockFi. I am completely fine with it. I have no regrets about us bringing Zach on the show. It was not, you know, we asked him the sort of salient questions that people want to hear. There's actually some of our most listened to episodes ever. So hosting Zach for a discussion is entirely within a remit. That's what we do. That's what every venture capitalist does with their founders. There's nothing at all reprehensible in that. I couldn't agree more. So, you know, I think this Blackfite thing is a

red herring. But, But my core critique, really, of three arrows, and it remains this way to this day. And if Kyle wants to actually speak to some of these points, beyond the first one, which I said was just where are the assets now and why are you not cooperating is, number one, I believe that three arrows lied to their lenders. I believe that they lied to their lenders about what types of trades they were engaged in, whether or not they were a market neutral fund versus just a fund that goes completely long, a bunch of alt-l-one chains. And I think that they misrepresented the state of their financial health. So that would be my first assertion. My second assertion, and I think this is a fact at this point, is that those guys took money from affiliated funds and just swept the cash.

And so that shouldn't be very controversial at this point. So that would be warbler capital. That would be starry night, and that would be defiance. And so they grabbed that money. So, yeah, if you want to have a conversation and say you didn't do that, then there's a lot of limited partners out there saying that you did. So I'd be curious what the perspective is. The third one is I think there's just a bunch of,

bunch of shady dealing, like this deribate fundraise from U.S. investors, this warbler capital fundraise. I think it's just been a bunch of shadiness and misrepresentation about what you actually were, who regulated you, if you were regulated, could you be, you know, raising money from U.S. investors. So that, to me, just feels like that should qualify as a bad boy club type of thing. And then the last thing I would say is just that, you know, when they knew they were insolvent, they kept on borrowing from people. So that's it. borrowing under false pretenses and lying to your lenders, there's a word for that. This isn't just, oh, you know, their fund blew up.

I don't understand how we've gone back to that explanation. This is you lied to the people you were borrowing from. That is a criminal justice situation that will eventually be worked out. So, by the way, in terms of the proceedings here, so there's been nothing on criminal proceedings against these guys, although I'd say probably stay tuned. But a New York bankruptcy judge actually has agreed to issue subpoenas to allow the creditor estate to issue subpoenas against Suu and Kyle.

I don't know how you're going to subpoena to Bali. Yeah, but that's a sign of where we are. This guy is grousing on Twitter and on podcast about us. Meanwhile, like the actual courts are working their slow but steady grind to extract information they're duly o'clock. from them. Took Elizabeth Holmes a long time to go to jail, but usually justice is served. My DMs are open to you, Kyle, if you want to tell me where the money is, any of that.

I need a little bit of clarity on what you're doing to help people get their money back. I'm actually fairly optimistic that all of the various fraudsters and scammers, the major ones at least, will eventually be brought to justice. I do think there's political will for it to happen in the U.S. And that includes Sam. So, you know, I've been complaining about how long it takes. it's been taken. But I mean, it appears that some of the best prosecutors in the world are on the case, especially in Sam's case. So, you know, there were talks of subpoenas from Congress. Maxine Waters

said she's subpoenas on the table for Sam. So, you know, all things considered, I'm actually fairly optimistic about justice being done. Yeah, a bunch of letters went out too. Did you see this? Richie Torres, who's a rep out of New York, wrote a letter to the government accountability. office to investigate the SEC's basically inability to regulate FTX, I guess, for lack of a better phrasing. So that was interesting. Elizabeth Warren wrote an aggressive one around banking this week. She's back in the camp of writing things I disagree with. The one thing I did agree with her was the letter last week that basically said, got to get Sam. He's a fraud. I'm on board with that one. Yeah, we support that one. I liked Richie Torres's letter. So he's a Democrat, but he was pretty

critical of Gensler. Gensler is getting it from both sides now, says that basically Gensler is asserting authority, but he's avoiding accountability, right? So he wants the authority. He claims that he has authority under law to, you know, aggressively govern, you know, and manage or at least look into crypto platforms. And yet in the case of FTCs, he just really wasn't there. And so it is kind of a curious um juxtaposition i suppose and so richie torres rightfully points this out how about sam do you think that he'll actually get a subpoena here maybe he'll get one by the time this airs but it seems like maxine waters wants to send a subpoena to get him to testify

i think on what is it the 14th of december yeah that's very soon so i can't imagine he would do that no but if i don't want it to be one of these zoom things i've seen enough of sam on Zoom. I want him to appear in person. I think he'll actually dress himself properly this time. That would be my guess because he doesn't need to maintain the facade that he was a slovenly nerd or whatever that didn't know how to dress himself. So this time I actually think he wears like a sharp suit and actually ties his shoes. That's my prediction. I think so. Maybe he'll get a haircut. It's like Elizabeth Holmes. She probably lost the turtleneck when she was in the courtroom, right? Did she? I don't know. Maybe. I didn't really. I don't know. Do you think she lost the fake voice? She had a fake voice, you know. Yeah.

So I think Sam drops the act about being a, you know, distracted nerd or whatever and, uh, and sharpens up. Did you see that he was about to sign or he had been having conversations with Taylor Swift about a sponsorship deal? She's probably very happy she didn't do that. She did more diligence on them than their largest venture fund investors. I guess, but I don't know. That's hard. I mean, can you imagine being, I think it's tough for all these people that took like advertising from FTX. It's like you don't know that they're, it's like, hey, Sequoia invested.

They can't, you know, they're probably not a fraud. It's, it's a difficult, I don't really, even like a Kevin O'Leary. It's like, how can you find fault if they wanted to sponsor Kevin O'Leary? Of course he's going to take the money, right? I mean, you don't expect Kevin O'Leary or Taylor Swift to go say, like, let me see your cold wallets. Well, this is why Tate is so impressive. She actually kind of dug into this little bit. She interviewed the head of product probably, and she's like, this guy doesn't even know how the product works.

This guy's out here running his own venture fund On the side of his desk called Toy Ventures This guy doesn't even know where the cold wallets are How can I take $100 million from these people? That's the level of diligence that Taylor Swift does Good on her for walking away from that I mean Kevin O'Leary could also not be doubling down He seems to be doubling down

Instead of recanting his I mean, you know, he could also give the money back That's an option This is the best thing that ever happened to Kevin O'Leary Because what Kevin O'Leary likes is people talking about Kevin O'Leary. And that's what's happening right now. There's a lot of people talking about Kevin O'Leary.

There's not only many people I wouldn't take $15 million from to extol their virtues. So that's a great deal if you're Kevin O'Leary. It's like all you have to do is occasionally go on CNBC and say, I'm working with FTC. They're great. That is an incredible deal. It appears to have really embedded itself in his brain forever. And he's stuck on pro-Sam mode indefinitely. He's going to investigate.

He's going to hire some work. to investigate. Oh, okay. Oh, that's good. Maybe he'll get to the bottom of this thing. He might. Did you see Alex Partners was hired as a forensic investigator? They're one of the restructuring shops.

So now I think you have Alvarez and Marselle and Alex who are competitors working on this. This is the fees coming off of this bankruptcy are going to be huge. So Alex partner is going to have to go through. And, you know, my guess is that you hire like a TRM labs and you, or channelysis, and you get them under there and they do all the real work. And then you get to say Alex Partners did a report. So the other thing I think was the current leadership of FTCS, which are the liquidators. They also met with prosecutors, I believe, yesterday. So they saw something in there they didn't like.

Doesn't surprise me. I missed this. So what happened? FTX CEO, John Ray, met federal prosecutors in New York. Bloomberg reported that today. I mean, doesn't at all surprise me. I mean, John Ray has been calling the prior FTCS leadership compromised. I've been going

I've been on a little bit of a reading kick lately so I read the LTCM book last night LTCM man they blew up in spectacular fashion but those guys went down with the ship there was there was none of this like

I'm going to Bali type of situation with those guys they were there working with the people and you know calling the New York Fed and saying we're in trouble so that's an interesting data point Enron guys, not so much. Enron guys were, those were some bad operas.

Yeah, I mean, with LTCIM, I think they just really did actually believe in the strategy and earnestly thought, I mean, they were, they noble laureates among them. I mean, they were genuinely accomplished, at least academically speaking. I think they believe in what they were doing. Yeah, their theory was, you know, convergence, arbitrage type of strategy. It wasn't like super cycle. They weren't delusional. Yeah, it's remarkable that the GPDC thing, which has brought down half the industry now,

premium at minus 47%. Kind of similar in some senses trade, which was now the widow maker trade. I mean, how many funds have blown up trying to make that trade, in some sense similar to the LTCM trade in that there are two assets which have the same intrinsic value, but different and widening market value. please. I, what's the discount right now? It's like 47% on GDPTC. It's an all-time discount. I mean, we know they have the Bitcoin at Coinbase. Yeah. And so this, what this reflects to me, I think, I'm speculating entirely. I don't know firsthand, but I think that probably Alameda still has

some and that maybe there's some liquidations going on and, you know, there's some force sellers still of that asset. I mean, it's just a structural failure of market oversight. Like an asset like this that's toxic, that does come to the referees. That is their responsibility to make sure it's crazy wrecking ball. It's as simple as a proofing an ETF. So it's ultimately a political weapon, which has been wielded against the crypto space, in my opinion. I want to give a shout out. Have you been reading David Morris at CoinDesk, that guy has been on fire with his articles lately. Yeah, I thought he wrote the best article maybe about FTX. I mean, the most sort of intellectually honest article, no sugar coding whatsoever. So he wrote an article maybe a week ago that just gave

the rundown of all the fraudulent things that they did, which was excellent. And that's, I think was the number one most watch or most viewed article in the history. CoinDesk maybe. They were talking about it on all sorts of mainstream podcasts that I listened to as well. And then he wrote another one this week, which I thought was great. Not the least of why, because of the title. It was be patient. Sam Bank-Bin-Fried could go to prison for a very, very long time. It kind of goes through the rationale of how long this is going to take. So I recommend people checking that out on Coin Desk. So speaking of CoinDesk, there's been a very entertaining subplot on CryptoTwera this week over the Coin Desk most influential list.

Did you see this? Yeah, so our intern didn't even put this in the newsletter, the most influential. What the heck? Right. So, I mean, to be clear. So congratulations. You're one of the 50 most influential people in the blockchain space. So I was in position 40, but to be clear, it's not a ranking.

They've been very clear that it's not a ranking. So anywhere between one and 50, it's the most influential. I'm not one for accolades, right? I don't necessarily seek those out or anything. But the funny thing was, so they put me on there because I, you know, came out very publicly against Bitcoin maximalism this year. And they thought that was an important trend. So thank you, by the way. The Bitcoin maximalists lost their minds about this because they alleged that there weren't any Bitcoiners on the list, which of course there were.

Ballagis, Sera-Avassan was on there, Arthur Hayes. Of course, myself, I'm still a bitcorner, I promise. And so now they're making their own. lists of most influential bitcoinsers. I've never seen anyone take as seriously one of these, you know, media rankings than the Bitcoiners. They have totally lost it over the list. They, yeah, they don't like you anymore, those Bitcoin maxi people. Yeah, they haven't covered themselves in glory recently. And the funny thing is they're taking a victory lap over, you know, like centralized exchanges going down. It's not like Bitcoiners protected anyone from anything.

No one listens to them. If you call everything as a scam, yes, some things in the set of everything will be scams. But you also have a huge amount of false positives by definition. Although a lot of Bitcoin people were happy about the Cynthia Lummis assertion this week. So she said that she thought that Ethereum now is going to be a security. Did you see that? That is questionable in the extreme. Yeah, I don't know.

I don't think she has the ability to say whether it is or isn't, really. But the logic was around proof of stake, I suppose, which I don't know. You could have an intellectually honest argument on that, I guess. Yeah, look, I'm not a proof of stake enthusiast by any means. I would say one of the louder proof of state critics. And I get that having these tightly managed upgrades with a small group of people running them creepsie closer to Howie, for sure. But I don't, I think the horse is out of the barn at this point. I mean, when was Ethereum launch like six years ago?

I did want to cover, I've got some inbound on Paul Krogman of all people. So I don't read anything he writes, but apparently he wrote this article last week in the New York Times about some of these failures of things like the ASX private blockchain project. And he points to the fact that this is indicative of the fact that blockchains just don't make any sense and that they're useless. And I was asked by someone to give my thoughts, and my thoughts are everything he's talking about is a private blockchain. And no one has really thought that those were going anywhere for a very long time. They're basically just reintermediation plays by companies like IBM that never got commercially relevant. So that's that. Yeah, I think Paul Krugman might be the most noxious defender of like establishment thinking that exists on the planet.

well we did get some some interesting op-eds they're they're kind of a little bit in the private blockchainy type of space but um so david solomon who's the CEO of Goldman Sachs he wrote an op-ed that said blockchain is more than crypto I'll give him that it is what year is it my goodness yeah so he got dunked on and you know we have a we have a t-shirt uh on what is it on the brinkdot shop that says just in it for the underlying technology he's he's like a just in it for the underlying technology. I guess it is more than just crypto though because right like you know stable coins and blockchain gaming and whatever. So I'll give them that t-shirt is not on our shop by the way. I think it. No it is. It's like on the apparel tab. Oh, hang on. Yeah, just send it for the underlying

technology. That's true. That's on the apparel tab. That's on the shop. Yeah. It's, yeah. Is our merch guy still active? Yeah, I'm actually curious. Have any of you ordered merch lately and did it arrive? Like, does the plumbing behind our merch store actually work? I don't know. I mean, and what happens to the money? I don't think we've talked to this guy in like a year.

Does it just go to like an FTX account? I think we're going to find out that somehow it was being stored in, you know, UST or something like that. I've never seen a dime of our merch money. I don't know what's going on here. So our friend Dan at CMS, I saw him. other day and he was wearing one of our t-shirts and he also had one of our mugs and i was like oh did i give that to you he was like no i got it on your merch site well so we know for a fact that there are

some inflows wow this we have the same amount of oversight of our merch store as sam had over ft x yeah i mean if i was under oath right now i'd say i don't i don't we had no knowledge there was a guy they'd be like well don't you own it i'm like yeah i guess it's this affiliated you know entity yeah there was another different CEO so carol was her name her name was carol she ran the merch she seemed to know a lot about it she was very smart we didn't know anything about the merch financials just had no idea about it

but genuinely I don't know if we've ever made a dollar from our merch maybe maybe it's secretly really popular we have a nice little nest egg there it's probably do we ship to Indonesia I'll send something to Indonesia as a token gesture. Yeah. You know what? Yeah. Maybe our Bollyan fan group will purchase some of our merch. They are number one fans. The other one besides David Solomon was Robin Vince, who's the CEO of Bank of New York Mellon, who's launched a custody product. People aren't talking about that enough. And he had a positive message in the Financial Times, time for a reset

on the crypto opportunity. These guys will make a lot of money, these regulated custodians in the US. B&Y Mellon are like the best thing that's happened to crypto in the last few

months. I mean, they're literally the largest custodium financial assets in the world. Yeah.

These guys are firing on all cylinders it would appear. Same with Fidelity, by the way. I got the,

um, a lot of people asking how I got off that wait list and I don't know. Hmm. I think maybe someone did do me a favor

when I talked about a podcast. Yikes. But no, People are getting off the wait list in droves. In droves. Okay. Well, Fidelity.com retail trading for crypto assets.

It's very sleek. It shows you the execution price, too. These are some tight spreads. So you tell me that we're not sponsored by Fidelity. This podcast is not sponsored by Fidelity. No, it's not. This is a, and we're just talking about it for free. Incredible.

No, we're sponsored by NXO. No, actually, we're not. Oh. We're not. We're not sponsored by NXO. I'm a little bit triggered by these. They're sponsoring a lot of stuff. Yeah, what's going on?

Do we, it's like being sponsored by FTX. It's like, all right. Of all the lenders, of all the lenders I thought would go down in last year, they would have been top of my list. I'll caveat this with I've never met a single person at NXO. I have no idea if they're good or not, but it just feels not good. I have met NXO executives. They seemed charming.

You shouldn't evaluate a lending business just based on whether the principles are smart or nice. Yes, agreed. But I am just shocked. Like, everybody else went down. What's going on? One other thing, the U.S. Federal Trade Commission is reportedly probing several crypto firms about their advertising, so deceptive advertising. Hopefully this is actually the people that are bad and not like going after a coin base or something.

Can we get Bit Boy? Can we somehow stop Bit Boy? That's what I want to know. Can he be stopped? How did I just find out about this guy like two weeks ago? I wish that I didn't know about him. So you know that movie Eternal Sunshine of the Spotless Mind where you know you can go to these people and they selectively cut memories on your brain? I wish I could do that for Bit Boy. Like there is no utility for me knowing about the existence of Bit Boy. Yeah. Yeah, he's not doing much for me. How is he claiming to have brought down FDX? What is that all about? I don't know, but this Zach XPT guy is just relentless on him. It's really funny to watch. We need more, we need to clone Zach XPT.

Yeah, he's awesome, that guy. And there's only one of them. And there's just so many shillers of ICOs and tokens out there. He just works for himself, right? He's like, he's literally in it for the community. The nouns Dow gave him a grant though So shout out to the nouns Dow One of the otter NFT communities, I will say Oh do we were supposed to do an episode with nouns style We never did it

We're friends with one of the nouns I don't remember which noun Several several several Some more than one noun I think we promised said noun Said nouns an episode Okay Yeah let's do it

We'll do an episode on nounsdow a strange Dow. A very strange vibe over there. Speaking of people that are into Dow's, the bankless guys made an acquisition. Do you see that? They acquired a company that does air drops. Our sister yet much more successful podcast

bankless. Good for them. Wow. That's a real business now. I think it would be, it's kind of generous to us to call them on our level. I think they're much bigger than we are. But yeah, they bought Earnify, which is like crypto, crypto air drops. They, we cross.

Pollenate the podcast. They got the weekly roll-up from the weekly round-up. That's true. We're friends. This round-up, this round-up, I think we started it. There's a few of them now. Yeah, we might have been, well, I don't know. Where did we get the idea for the round-up?

Axios Pro Rata, really. The newsletter that I started back when we were at Fidelity. So we're not even original. Traces its way back to that guy, Dan Primack. It's a good newsletter. There is a good newsletter. I was reading that when it was called P.E.hub.com. Well, this has been a very long roundup.

Well, we had a lot to say. I think that's it for the week. Have a safe and healthy weekend, and we will see you on Monday.