On The Brink with Castle Island - Weekly Roundup 12/16/22 (SBF Arrest, Binance's 'Bank run', Gensler, FTX, and IEX) (EP.381)

Episode Date: December 16, 2022

Matt and Nic are back for another wild week of news and deals. In this episode:  Is SBF currently interned in a top 5 prison on earth? SBF is finally arrested We enumerate the charges from the SEC, CFTC, and DOJ What kind of sentence could Sam be looking at here? The CFTC's interesting argument for standing over FTX SBF is charged is campaign finance violations Confirming that Alameda did have latency and other advantages trading on FTX SBF's parents face growing scrutiny What's the deal with Gensler's calendar? Gensler comes under more scrunity for his FTX/IEX meetings Mr. John Ray is a new star of CT We have a new possible category for bad boys McCaffrey resigns from The Block after revealing loans from SBF Elizabeth Warren proposed a hostile anti-crypto bill Do Kwon is reportedly in Serbia The DOJ is reportedly split over charging Binance What's the deal with the Binance 'bank run'? 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 Concentuteeasing. You print a couple trillion dollars, and all of a sudden, people start to worry. So out of this worry, we have something called a Bitcoin. Bitcoin.

Welcome to On the Brink. I'm Matt Walsh. And I'm Nick Carter. This episode is brought to you by Coin Metrics. And here is the Metrics Minute. Today's Metrics Minute is brought to you by Coin Metrics. This week we're focusing on minor data. Bitcoin hash rate hit a high of 260 XHashes in November. It has since given up some of those gains as miners have struggled with.

profitability. Interestingly, post-Etherium merge, Bitcoin hash rate jumped from 220X to 250, implying that there were some data centers that repurposed their mining from ETHGPUs to Bitcoin 86. More recently, Bitcoin's mining difficulty decreased by 7%. The biggest single decrease since miners exited China in spring 2021. And lastly, Foundry is now the biggest mining pool, collectively Foundry and Pool and F2Pool account for 50% of Bitcoin pool share. That's your Metrics Minute. That was the Metrics Minute. 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 from TradFi to CryptoNative, the Talos platform enables the end-to-end lifecycle of a transaction. So you can trade on the GUI or you can trade on their API. and he can connect to all the liquidity in the crypto ecosystem, from prime brokers to lenders to investors to custodians, exchanges, OTC desks, and more. Everyone congregates on Talos. They have the best leadership team in the biz.

That's why you can head over to talos.com to learn more. That's t-A-L-O-S dot com to learn more. So we're back here in the coin metrics office. Doing this live, doing this live. It's always good to do it live. We're not in the studio, though. The studio is under construction right now. Well, I mean, I don't think it's fair to say the podcast is live.

Well, it's live when we record it. That's true. Well, we are in person right now. That's true. We are both alive. We are in person. We're not in the Fox Hill prison, which is good. Yeah, that might be the worst place on Earth.

We made a joke about sending Sam to Gitmo. He's actually in a worse place than Gitmo right now. It's horrible. It is horrible. I would much rather be at Guantanamo Bay than Fox Hill Prison. actually feel really bad for the guy. Yeah, I think the quote I saw in a news article was top five worst prisons on earth. What's going on?

Get it together, Bahamas. Well, a lot to talk about there. But yeah, honestly, like, it's hard to feel a lot of sympathy for Sam. Managed to squander away 8 to 10 billion in client capital. But I actually do feel sympathy for the guy. I do too. I would not want to be in Fox Hill prison. A lot of people aren't going to be happy that we express the sympathetic view.

I know. I said that on Twitter. and people were very upset. There's like a kind of vengeance streak going through the crypto space, which I understand. Well, what do you think Bali prisons look like pre-extradition stuff? Just asking for a friend?

Not good either, I bet. I mean, and this is the interesting thing people pointed out about Sam. Like, he deliberately set up his business offshore, take advantage of the lighter regulation. The flip side of that is when things go sour, the legal. infrastructure in that country is not good.

And so now this is unfortunately what he is to deal with as he waits for extradition. February 8th is the extradition hearing date. I would be. That is so long. Front running that and getting myself to the United States of America's fast as humanly possible. Yeah, I would, if possible, go ASAP. But you have to imagine, so the calculus here is that he just thinks that he can survive down there, survive a process, beat the extradition.

The X factor here is that there's so much money that has been thrown across the Bahamas from FTCX. You had this hack that looks like it was an inside job. John Ray pretty much confirmed as much that the Bahamas government was involved in the hack. And then you had the hundreds of millions of dollars that were taken off the platform post filing for the bankruptcy. So there's a lot of capital down there. You know, you'd have to think there are a lot of people that don't want Sam to go back to the United States and to start talking. I don't think it's safe for him. I don't think it's safe for him in the Bahamas.

I think that there's a good chance that there's Bahamian officials that are incentivized to harm him. Honestly, I don't think the U.S. should allow such a high-profile judicial attorney to be... Criminal, I guess, yeah. Well, alleged, I guess, to be at the mercy of Bahamanian officials. Like, that doesn't seem right. We have a legal process in this country. This is clearly an American situation. far more than it is a Baham-A-Bahmanian one.

And I don't think it's right to leave it in the hands of the officials in the Bahamas. They've already massively mucked up this process with these illicit asset withdrawals. That's completely irregular. It is. In a bankruptcy situation. Apparently the demands to print a bunch of tokens out of thin air. Yes.

I don't know if that was going to be proven true or not, but that was alleged. So their stewardship of this process has not been good. So are we back to recommending an amphibious raid here? I don't know if it justifies full annexation, but I'm on, yeah, I think we should apply pressure. I think it would be really negative for sort of the rule of law if anything happened to Sam

as he was awaiting extradition. All right, so there's a lot to talk about on this FTCS front. Why don't we do the normal course, though, and hop into some deals of the week. And then we'll get into the FDX stories. First one up is 360 mining. This is a Bitcoin mining company. They raised $2.25 million from Luxor,

BT growth capital, and others. Bitcoin mining. That was the second week in a row that we had a Bitcoin mining deal here. And there's more. So Terowulf, Bitcoin miner, they've done this show before. They raised $10 million via direct offering of common stock

and notes to its existing shareholders. Next one up is an interesting one. Evertas. This is a crypto insurance. company, there is 14 million from Polychain, Morgan Creek, and Sino Global. Sino Global is a company that basically all their money comes from FTX. Turns out all of FTC's money comes from customer deposits. So interesting to see these deals announced now with firms that are clearly, you know, out of business, basically. Next up we have BitWave. Their crypto accounting and compliance platform,

they raise 14 million from Hack VC and blockchain capital. Next one up is Nileon. This is a Web3 infrastructure startup. They raised 20 million from distributed global, AU21, and others. Then we have a meta-good, a social impact NFT startup. They raised 5 million from Anamoka brands and Mark Yusco. Next one up is Bitcoin Group. They've agreed to a deal to purchase BVDH, which is a German bank for $15 million. Then we have suho.io. They're a DFI infrastructure provider. There is 4.5 million from Worry technology in about and others. Worry.

Next one is NF3. This is an NFT swaps and financing marketplace. There is $1.7 million from Infinity Ventures, crypto, and Spartan Group. All right. And then we've got Front Runner. They're a decentralized sports prediction market. There is $4.8 million from Suscoa Hallin and others.

The others are notable. All right. There are notable others here. That includes Toy Ventures. Toy Ventures. What's going on here? Toy Ventures, of course, which is operating. by FTX executive Romnik Aurora, who's the head of Corp Dev, head of venture capital,

head of product and head of IR at FTX, but I'm sure didn't know anything about what was going on. He took $30 million in Toy Ventures, customer deposits into Toy Ventures, and they just did a deal. Or obviously they did a deal months ago, but this company decided it would be a good idea to announce a deal with Toy Ventures as well as Ledger Prime. Ledger Prime is of course a fund that is owned by FTX. So why is it a good idea for a company? Obviously you did this deal before the collapse of FTX, but it shows remarkable lack of judgment to announce your deal

and to have Toy Ventures and Ledger Prime in your press release. Just remarkable lack of judgment here. So congratulations on raising the money from Susquehanna. That's a great firm. Not congratulations on raising it from Toy Ventures. that's a remarkably poor judgment to announce that round. You're fired up today. In other news, Toy Ventures actually, so I'm not all that fired up because I think

Romnik actually did some good deals here. You know, he did some, to be sure, he did some really bad ones. But SpaceX is doing a tender offer right now. Toy Ventures went into that SpaceX round at a $70 billion valuation. It looks like SpaceX is doing a tender at about 2x that amount. So, you know, cash on cash return here is looking pretty good. for FTX customer depositors here on the back of Toy Ventures. So good job.

Yeah, we're a bright spot for the FDX creditors. So that is part one of FTX news. We've got parts two through 12 now. More things happened. Things keep happening. I don't even know where to start. Well, he got charged, I guess is the first thing, right? Arrested even.

Yeah, he got arrested and charged and charged with a lot. So do you want me to run down the DO date? DoJ charges here? Yeah, so there was charges from the SEC, the CFTC, and the DOJ. SEC and CFTC are civil. DOJ is criminal. Okay, so count one, conspiracy to commit wire fraud on customers. Count two, wire fraud on customers.

Count three, conspiracy to commit wire fraud on lenders. I have a feeling we're going to come back to that one at some point in the future with some friends that are in a different case. Count four, wire fraud on lenders, another very apropos one. Count five, conspiracy to commit commodities fraud. Count six, conspiracy to commit securities fraud. Count seven, conspiracy to commit money laundering. I think there's going to be a lot of those. Count eight, conspiracy to defraud the United States and violate campaign finance laws. So those are the eight from the Southern District of New York. That's a lot.

And I think you summarize as well on Twitter that he's toast. I mean, so the wire fraud, conspiracy, the wire fraud, the money laundering, those all carry a maximum sentence of 20 years. The others carry a maximum sentence of five years. Those alone could give him life. I mean, we're giving them a hard time for not arresting this guy, but they did their homework here at the DOJ. and the CFTC. SEC looks like, by the way, it was just they lobbed in and they did the press release at 231 a.m. to beat the DOJ.

It just seems a little bit shill-boating. It still seems like there's politics involved there. Yeah, I mean, I don't understand what was going on. Well, I actually understand very well what was going on there, but I don't like it. But the real charges here, the DOJ charges. The CFTC ones are really interesting, too. I think the CFTC complaint was probably the most thorough and researched. evolve them.

Agreed. Yeah. So one thing I find interesting is how the various agencies got standing in this case. So the SEC's premise is that he defrauded, he committed securities fraud against his basically venture investors. Yeah, that's a slam dunk. So that's easy. I mean, as Matt Levine says, everything is securities fraud.

In this case, he just lied to his investors. Right. You know, if you're raising capital, I guess, you know, that's under SEC's Aegis. And he lied to his investors because, you know, he didn't tell them that he was secretly operating a hedge fund with all the money that was meant to be owed to clients. So that's easy enough. The DOJ, I guess I didn't read the complaint that carefully, but, I mean, ultimately, there's U.S. individuals that have been defrauded here.

U.S. lending firms have been defrauded, campaign finance. transactions went through New York. You know, wires were going through New York. The campaign financing thing is crazy. So basically, I guess it'll come out that he made donations and other people's names. He was giving people money to make donations, it sounds like. So, yeah, don't do that. That's not allowed.

You're not allowed to do that. No. For sure, don't do that. And then the CFTC standing was most interesting because they don't have direct oversight over FTC international. FTX US, I guess, was a spot market exchange, and I don't think even in that case. Well, they were an MTL, but they would have over LedgerX, right? So LedgerX, yes, because they were actually CFTC regulated. Yes.

Although Ledger X is not even clear anything bad happened. No, I think Ledger X, it sounds like that was pretty well. Yeah. So, but so the CFTC didn't have direct regulatory oversight over FTX US or FTCS international. So what was the premise upon which the CFTC built their case? Well, basically, if you read the complaint, they say that FTC affected digital commodity futures markets, which are regulated by the CFTC, and they actually talk about the CME.

So the CME Bitcoin Futures, the CFTC says that FTC's behavior had an effect on the U.S. regulated futures exchanges. Yeah, it would. I mean, it's true. I mean, yes, the FGX thing affected the price of Bitcoin. Of course, that affects the price of Bitcoin derivatives on the CME. And so that apparently gives the CFTC standing, which I actually find really questionable. I mean, by that logic, you could say any action anywhere on earth that affects a global commodities market is.

under the CFTC's Aegis as long as there's a as long as the CFTC regulates a derivative version of that market in the U.S. I think that's a super aggressive interpretation in my mind. Now, well, what about the fact that a lot of U.S. persons were

transacting on this platform and it was an unlicensed commodity pool operator? I suppose that could also be yeah, so I think they did actually mention also that there were U.S. individuals that were able to transact on that FDXU XX international.

Yes. I think that's also in the complaint. I think that's pretty rock solid in terms of standing, actually. Yeah. But so, yeah, fair enough. The additional thing they said about the CME, I found somewhat questionable. But yeah, I did think the CFTC complaint was actually the most detailed. So the CFTC complaint reads as if they had a lot of help.

And so I think there were, it's quite, I'm speculating here, but I think Caroline Ellison has turned to state's witness. It looks like Ryan's. Salami has as well, although unclear to who. It looks like there's a report that he revealed some information two days before the bankruptcy to Bahamian authorities. I wonder about Trubuco. I mean, there's a lot of very detailed information in the CFTC complaint. There's a lot of questionable things, right? The SPF directed company executives to reallocate funds to a Korean account that he referred to as our Korean friends account or, quote, the weird Korean account.

Who the heck is that? That was their negative $8 billion hidden internal account, right? So, but why are they calling it a Korean friend's account? I mean, I don't know what that's about. There's also just concrete, I guess, evidence there. There's confirmation that the API was rejiggered such that Alameda, I guess it was always jiggered this way, that Alameda was faster on exchange. So they had the speed advantage.

They had the no liquidation advantage. They had all the advantages. And they still lost $10 billion. Well, I mean, some of that is accounted for in the terms of the private equity investments and things like that. But they had every advantage. And apparently we're still losing money. And they still blew up as a hedge fund, which is incredible. And, you know, it's funny because I remember looking on Twitter and seeing a bunch of traders

quenching about the API and saying like, yeah, there's. And then I think FTCS was like, oh, this is just a browser issue. Hasaka. Hasaka. Yeah, that's right. Probably the first Hasaka mention on this podcast. Yeah, I think it was. So Hasaka had basically a thread with Sam where Sam was saying it was just a browser issue and he did the homework and he said, no, it's not.

But this is confirmation that he was right. Yeah. So they're trading, they're able to front run their customers. They're able to go negative equity balance. It's just shocking. No liquidation. No liquidation. Every advantage.

Every possible advantage. So I don't know how you work. work at Alameda and don't know this stuff, you have to, right? Well, right, because the constraints that normally apply don't. So, of course you knew this. So I guess everyone turns state witness here because what else you're going to do? Because it's clear that if you were in a leadership position at Alameda, you would have had to known a lot of this stuff.

Yeah, but is that exculpatory? Like, if you do crime for years and then on day 600, you know, you spill the beans. Does that mean that your crimes are invalidated? I think you're still going to get convictions here for the accomplices. I don't think it should be amnesty. No. I mean, it'll be lesser. It won't be Fox Hill penitentiary, though.

Yeah. And as I said before, like, this Fox Hill place is terrible. I mean, there's no sanitation. I don't think the proper medical care. And Sam apparently is on like all sorts of medications. Yeah. Which is, I don't know why you need Adderall in prison as a side note. No, if you're not doing...

What are you focusing on? If you're not doing these podcast interviews and, you know, scamming people out of money, there's less things to need... You don't need... Why do you need a stimulant? But yeah, the place looks hellish. I think it's just a horrible shame, frankly, that he's there. I know people are saying, well, U.S. prisons aren't much better. To be clear, they're better than this.

This is a top five worst prison in the entire world. I don't know if I wouldn't make it two months in this prison. No, you definitely wouldn't make it two months. I would not. No. Neither will he. I hope he makes his way over to Manhattan or something. I think you just got to put a hand up after a week and say, actually, about that extradition, I'm ready to come back.

So there's also scrutiny for his parents, Mrs. Freed and Mr. Bankman. Mr. Bankman was very involved in FDX. He was. He's on these emails. He brought Tom of Bravo in to FDX. Oh, really? I didn't see that. He did the intro to Tom O'Bravow, wrote a huge check. I didn't see that. He was active in congressional meetings. He was. So you're in Congress, you're meeting with an entrepreneur. He brings his dad for some reason. I mean, he had his dad cede on

these correspondences with the Bahamian securities regulator as this thing was falling apart. The dad helped him structure the legal, you know, the labyrinth and legal structure. The dad was an expert in taxation. So, I mean, clearly that there's, you know, element of expertise there. He was a paid employee. He lived in a house, paid for. His name was on the deed. He was doing podcasts. He did Tristan's podcast, the FDX podcast months ago. So the dad is totally culpable in my mind. Allegedly. I mean, clearly he was one of Sam's closest confidants. Yeah, it appears so. So how is the dad? I mean, come on. Like the mom, okay, she ran, you know, she's not really that involved. Like, her main thing was just,

you know, political action committees and stuff like that and helping move some some of Sam's funds through those. But the dad was instrumental. Doesn't look good. And so you're starting to get these articles about the father's role here. Yeah, people are saying, oh, the parents are now pariahs at Stanford. It's going to get a lot worse than that. They're not going to just not get invited to the nice dinner parties. The other angle here, of course, and you heard this in the House committee meeting this week is Gensler's role. And so he's coming under a lot of scrutiny. His calendar still is not updated past July of 2022 on these Freedom of Information Act requests. Emmer asked about this during the, and John Ray did not know anything, but he asked about the IEX transaction and whether or not we still don't know if FTX owns IEX.

Yeah, so what is, according to the FT, they have a controlling stake in IEX. IEX met with Gensler a number of times. With FTSA. With FTX. Gensler is getting heat elsewhere, even not in. crypto for hiding key meetings from his publicly disclosed calendar. What's on the calendar? What are we going to find out about the calendar? What's the hiding? So the calculus here for Gensler gets pretty interesting because the next two years are going to be pretty difficult. I think

McKenry and Emmer are going to call him in to testify a lot. McHenry's comments at the hearing, he said he intends to hear from Gensler. He did. And Emmer was pretty forceful, I thought, as well. So if you're Gensler... And it's not just on the right. It's on the left, too. It's Richie Torres wrote the article, really calling out Gensler as well. So above all else, you have to remember, Gensler's a politician, right? He's not fashioning himself a regulator. He wants to be a politician.

He wants to be a statesman. So, you know, I think the calculus is either, you just throw in the towel here and you're just going to go off into the night. I don't see him doing that. I think he's going to dig his heels in and try to fight and make this a Democrat versus Republican issue to the best he can in the hopes that he gets treasury at some point in the future. That's what he really wants, his treasury. And the fact that Torres is coming from the left here with the critical eye towards this as well, makes us a less tenable

path, I think, for Gensler in a lot of ways. Yeah, it's inconvenient for him. And Gensler's tactic so far has been to basically use favorable press outlets to try and pose it like he was trying to regulate and get his hands around FTX, and Congress was obstructing. He specifically points out this March letter that Emma wrote, which was not about FTX. It was about other organizations in crypto that had reached out to him saying, hey, Gensler is coming after us with these burdensome requests that he doesn't appear to have statutory authority to even make. And so Gensler is now saying, well, Congress stopped me from doing my job investigating FTCS.

Meanwhile, Gensler is having all of these meetings with FTX, with IEX, and FTX, and of course, they're doing absolutely nothing about it. It just doesn't smell right. And meanwhile, he's going after Kim Kardashian. Yeah, exactly. So, you know, Gensler missed every major scandal that happened in crypto. Meanwhile, was aggressively policing onshore organizations, causing them to not be able to have a diversity of product lineups. causing their clients to go offshore to these other exchanges and where they lost money in the end. So there's just no way to whitewash his track record here. It's just not good. We're going to have a lot more about that in the coming weeks.

All right. So we mentioned Caroline. I think she's turned state's witness here. She's hired Stephanie Avakian from Wilmer Hill. Avocyan was formerly at the SEC. So she was the lead on a number of crypto cases over there, including the Ripple one, I think. So, you know, good hire by Caroline and it looks like she's cooperating. I mean, Caroline can't be, I mean, she can't get off Scott Free though, right?

No, I don't think so. I think that, you know, Tribuko and Caroline are going to have a lot of, they'll be charged, I would imagine. I think it'll be probably a better deal, assuming they both cooperate. Yeah. So how good was John Ray's testimony, by the way? I was very impressed by him. Do you think John Ray is interested in doing the startup because I would back that guy? He's pretty much the only guy in Crypter that I trust right now.

John Ray just has command of the situation. I mean, this is a guy that went through the Enron case, and he got more than 100 cents on the dollar for Enron. That will be more challenging here, because the portfolio is full of nonsense. There's a lot of just rubbish in that portfolio, and I will venture to say that we're going to find a lot of money laundering in that portfolio. But I liked his demeanor.

He had it in a vuncular. I thought attitude friendly. He saw some of the humor in the situation. I thought he did well to press back when some of the members of the house were asking him weird questions to kind of score political points. He didn't really play the games.

Yeah. He looked very tired. He looked like he hadn't slept in weeks. Well, I would be tired too. I mean, you're going through this. There's no records. We need to get him some stimulant patches or something. Yeah, some of those patches.

Some of them, Sam. He did look. I think he, this is probably more exhausting than Enron was. I would have to believe so. I mean, and there's so many vectors on this, too. So he has the Bahamian authorities to deal with. And he was pretty powerful in his statements that there's a lot of bad things happening in the Bahamas.

He's wrangling with them. I mean, there's a little feud happening. And to be clear, I'm on Mr. Ray's side. I think there's some bad boys in the Bahamas. Yeah, I agree. I agree. I don't like what's going on there. I don't like that $100 million were siphoned out of FTC's corpse at the 11th.

hour to Bahamian residents. I don't know. I think a lot of those people were random traders that bought KYC. Yeah, there's definitely some of that. And I think we're going to, Mr. Ray said we're going to get to the bottom of it. So if you did that, they're coming for you. If you, yeah, you don't want to have been doing that. You also probably don't want to be one of these firms that has the types of accounts that can't be liquidated. I think that's going to be pretty ugly here. There's going to be a bunch of stuff. All right. So the next one, we, we thought about doing bad. boys for this. I don't know if I'm quite willing to do the bad boys for McCaffrey yet. So I think we should have an intermediate category, which is naughty boys.

He might be a naughty boy. It's not a naughty. It's not a it's noty. It's noty. It's not a full on bad. It might be. Yeah, more could more to come on this. So the story is the block, which is of course, you know, one of the more preeminent crypto media outlets out there. They revealed on Friday that their CEO, Mike McCaffrey, he's stepping down after taking $27 million worth of loans from FTX and Alameda for the company. And it looks like another $16 million to finance an apartment in the Bahamas. And so it was not known how Mike McCaffrey led this management buyout from the original shareholders of the block. And it looks like the way he did it was secretly with money from Sam Bank bin freed, including $16 million.

to finance an apartment in the Bahamas. So this media outlet was just owned by the largest fraud in the whole industry. Effectively. Yeah, this one came out of the left field. I was honestly shocked when I saw this. I was flabbergasted. We both had plenty of contact with Mike McAfrey. I thought he was a credible, super sharp guy who ran a great organization.

The block is a great organization. I mean, in my view, number one are, you know, joint first with CoinDesk in terms of the most credible crypto news organization. Yeah, I mean, I've talked to McAfri a lot over the years. I was, my jaw was on the floor when I saw this news. No, I don't know that it's illegal. It's highly unethical. Yeah, well, you're a media organization.

You are secretly compromised by this. It's worse because all of the staff at the block didn't know. It seems like none of them had any idea if you take them at their word. At least that's what they're saying. And frankly, I believe them. And all the work they've done over the years has now just kind of been undone because the neutrality of every story is not calling the question. It's not like, I wouldn't say the block was particularly partisan or like bias in favor of FDX.

But now every story is now being looked at with a critical eye. Now, what's the angle here from both sides? I think it was just Sam's normal MO. financing media organizations, which he was super keen on, although in other cases it was more transparently disclosed. McAfrey, I don't understand this. I mean, I asked him this year how he financed the buyout and he gave me a super vague idea, answer. And I never understood that because I didn't think he'd had some like big prior exit or anything like that. He's a young guy. He's younger than me. I didn't understand it at all. And,

And I never understood the management buyout either, for that matter. And they grew super fast, tons of employees. I don't really get why he felt compelled to do this. I don't, in the $16 million for personal use makes no sense to me. How were you ever going to repay that? And how is he, how do you expect that it wouldn't be found out eventually? Also, if he was living in a lavish apartment in the Bahamas, did he think his colleagues wouldn't notice?

And I still don't even understand Sam's MO because I get, you know, wanting to have influence over media, but it doesn't seem like they were, I don't think that they actually did have any influence over there. Yeah, so did Sam get value for money? I don't know. Clearly not. It's not like the block was super partisan pro FTCs. There was no evidence of that. Yeah. And so was this a longer play where at some point in the future McCaffrey was going to default on this and he was going to step in and take it over or something? Who knows? Well, right, because it's not like the block was spitting off enough cash flow. for McCaffrey is I guess the major or dominant shareholder to actually pay back the loan.

It's just puzzling. It's a really, really weird story. I really feel for the employees that have put their whole careers into the block over the last few years. And, you know, done exemplary reporting. I thought Frank did a really good Twitter space. By the way, these Twitter spaces are brutal. Some of the people that are asking questions on some of these crypto. It's just some of the.

mouth breathers of the world. Yeah, so I feel for Larry Sermak, for Frank, for the other block employees. I love the blocks reporting. I consume it all the time. I think their data product is exceptional. I hope they find a way to move on.

The weird thing is that, as far as I know, McCaffrey didn't do anything illegal here. Yeah, I don't think that, I don't know. I guess maybe, though, you have to pay the back of money, right? Since it's all customer money.

But that's kind of a problem for like three to five years from now. So I don't even see any way for him to relinquish control here if he doesn't want to. I think the only way that, well, I mean, I guess the key staff could just say we're leaving unless you sell it. Yeah. They could say we're going to start, you know, we're going to fork this media. Yeah. Yeah.

So far no signs that the senior leadership is planning to walk out. But I would feel very hard done by if I were them if I stayed and the fruits of my life. labor, we're now accruiting to this guy who is still the major shareholder and kind of torched the reputation of the outlet. I would agree. I would agree with that. So that's the block. Let's talk about this Elizabeth Warren bill. I don't think we have much to worry about in terms of this passing because usually Elizabeth Warren can only pass bills that's like recognizing people that did heroic deeds. There's actually not a lot of legislation that she's ever passed, but she's partnering up with Roger Marshall, who's a Republican U.S. Senator from Kansas,

and they've introduced a bill called the Digital Asset Anti-Money Laundering Act. And this bill would be a disaster. So basically there would be a K.YC requirement on basically everything in crypto, wallet providers, validators, miners, basically computers that are operating on open-source blockchains would be classified as money transmitters. I don't know how you get a computer to go in and get an MTL in 50 states. Even searchers, MEV searchers. MEV searchers.

Everything under the sun. It's basically, it's completely technically impossible to do what she's advocating. So you'd literally have a blockchain node would have to go register. A node that is an open source piece of software would technically be a money transmission business. It just doesn't make any sense. Well, I think the objective is just to regulate out of existence, you know, the majority of all crypto activity. So that's the objective. It's not that she thinks lightning nodes would register as MSBs or whatever.

It's so perplexing with Warren. It's always been perplexing that she ought to be the biggest proponent of things that give people the ability to hold assets outside of the banking system. But not so much. No, her position on crypto is very clear at this point. So anyways, that was introduced. I don't think it really has any shot of passing anything. it's out there. Yeah, speaking of, you know, proposed legislation, we have a guest on, actually tomorrow we're doing an interview with a high profile congressional guest. And we'll be

learning about some of the legislation that could be introduced in the 2023 session. And that actually does have a chance of being passed. So we're very excited about that one. Stay tuned. Good team. What else do we have? So I took note of this B. Riley proposal to Core Scientific. So B. Riley is an investment bank. They have $42 million loan out to Core Scientific. Core Scientific is struggling. They want to do another loan.

So the loan would be for $72 million. Be Riley would do 40 of it. And it would be contingent on all of the other lenders who have done equipment loans to Core Scientific, halting principal and interest payments if the price of Bitcoin is below 18,500. hundred dollars. So basically if the price of bitcoin's below that threshold, no debt payments. If it's above, you start to pay again. Kind of clever. I don't know if that's viable or not.

Doquan is in Serbia, apparently. I hear so many conflicting things about where this guy is. Is he illegally in, he's an illegal immigrant in Serbia? What are, what's the theory on what he would be charged with if he was in South Korea right now? I think there's like 50 crimes that you could charge him with, to be honest. I mean, you know, just look at the litany of crimes that SBF was charged with. There's so many things he did wrong. Yeah, there's, it's... I don't think you'd be that creative to find actual parts of the criminal code that he violated.

So I've never been to Serbia. I'd imagine it's better than Fox Hill prison. Serbia's lovely. I would say it's a nice country. I don't know why that was his choice, though. Do they not have an extradition treaty with Korea? I have no idea. What are Serbia-Korean relations like?

Maybe there's some history we're not aware of there. Yeah, I don't know. There's another story this week that the U.S. Department of Justice is evaluating whether or not to charge Binance. Pretty open-ended. So this was reported by Reuters. and it just says DOJ officials have discussed plea deal. So it sounds like maybe there's some ongoing talks.

And the way I read this is that someone in the DOJ is talking to Reuters and saying, hey, there's a path forward here on a plea deal, but they ought to take the plea deal with sort of the read between the lines. So on finance, people think that there's a bank run happening there. Have you seen this? Yeah, but it doesn't look like there really is. No. So it's not that hard just to look.

at the blockchain and see that they have a ton of coins. They have cold wallets. This was something that was not a feature of the FTX market. Yeah. So recall what happened with FTX. Coin desk article comes out. People start to wonder about the quality of Alameda's reserves. People look on chain and realize that funds from FTCS appear to just be going directly to

Alameda. People look on chain, they realize that FTCS doesn't actually have, they don't appear to have cold wallets. Okay, what's the Binance situation? Look, people are justifiably spooked about these markets. Binance discloses their cold wallet addresses. They've actually started doing proofs of reserve. Was there Bitcoin proof of reserve completely airtight? Arguably no. Okay, could it have been better? Certainly. Certainly. But are they actually doing these proofs of liabilities plus assets? Yes. They only did it for Bitcoin so far, so hopefully they get to other assets soon. But, yeah, they publish their cold wallets.

They have something like $50, $60 billion in assets sitting there. It's a mixture of, you know, BUSD, USDC, USDT, Bitcoin, Ether, BNB. And so that's all kind of visible on chain. You can see the withdrawals. I would say peak to trough you've seen around 20 to 30 percent withdrawals on a per asset basis. So they're material. but if you're fully reserved with one-to-one liquid assets, it's not really a bankrun situation if those reserves start to be withdrawn

because there's no liquidity mismatch. So, you know, you just process the withdrawals. The one thing that people were panicking about was the stable coins. And the reason that they weren't able to process timely stable coin withdrawals was the U.S. banking system. Yeah, maybe. My speculation here is actually that the way this, was set up is that when Binance put BUSD as the default asset, you would effectively go on

with your USDC, it would get converted into BUSD, but you could still withdraw USDC. So they're effectively short, Binance is short USDC. What if, I'm totally speculating here, what if Circle cut off Binance from the ability to create and redeem USDC and they had to do like an OTC transaction to get the USDC, then you'd have a delay, right? So it would be more than just the U.S. banking system. It would be the ability for Binance to actually directly tap into USC. So I don't know. Maybe there's some other reason for the delay, but people start, the problem is Twitter is just a cesspool right now. And everyone thinks that they're going to make a reputation for themselves by calling out the next big

fraud. And everyone is just jumping on, hey, Binance is a fraud. But there's no second order thinking on these things. Yeah. So one thing Ciz did say about. this is and actually it's funny how many problems come from this mismatch between 24-7 crypto markets and nine to five very much not seven days a week legacy markets is to convert between us DC and BUSD or Paxo stable coins requires using dollars in the banking system if you don't have enough buffer ready so now they've actually replenished finances replenished their USC reserves, so they sort of should be okay. So if you see BUSD drawing down at the expense of USC, you know why. But yeah, if their reserves get low on a weekend, they just kind of have to wait.

Yeah, the long weekends are the most precarious here. Yeah. So if you ever want to, you know, do something weird in crypto, do it on a Sunday on a three-day weekend. Or yeah, or Saturday. Or, yeah, anyway, just do it during a bank holiday weekend at a 3 a.m. Eastern time on a Sunday. Yeah, that's when a lot of weird stuff happens. That's when a lot of hacks actually happened. Yeah. So I think that's it for the week. Busy week.

I mean, I guess you can't underplay it. He was charged, he was arrested, and he's in prison. That's a big week. Yeah. I mean, a lot of people thought that wouldn't happen. They thought the political donations would work. but actually if you compare it to other large-scale financial frauds, I would say Sam was arrested much faster than a lot of those historical.

Yeah, I mean, you have to hand it. They did a good job here. They were thorough. You read these complaints and we have them in our newsletter. It's, I don't know how he wins this. There's just no shot in my way. Yeah, no, it's damning. Sam got the book thrown at him.

So we will be back on Monday with a new episode. We will see you then. Have a safe and healthy weekend.