The Breakdown - Goldman’s Going on a Crypto Company Buying Spree, but Is That Good for Crypto?

Starting point is 00:00:00 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io, Circle, and Cracken, and produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, December 6th, and today we're talking about Goldman Sachs going on a crypto buying spree. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Today I'm also excited to share that this episode is brought to you by CryptoWatch.

Starting point is 00:00:48 CryptoWatch is the last crypto app you'll ever need. Track prices up to two times faster than other apps. Catch market movements as they happen with powerful charting tools and custom alerts. Sink your portfolio and trade across multiple exchanges and stay in the community conversation with leading influencers on CryptoWatch social. Say goodbye to your other crypto apps because you can get everything you need to gain a competitive edge with CryptoWatch. Visit Google Play or the Apple App Store to download CryptoWatch today, and thanks again for sponsoring the show. All right, folks, well listen, no matter how much we want to

Starting point is 00:01:20 move on, we are still living in an FTX Fallout world. So today we're going to do a couple updates on that front, and then we're going to talk about what I think is the beginning of a clear trend and whether it's good or bad for the industry. All right, so picking up where we left off yesterday, we had been discussing how SBF had turned down the invitation to speak before Congress at the hearing next week. He said that he didn't have all the proper information and then he wouldn't feel ready, but that when he did, he would certainly testify. Now, just after I finished recording, Congresswoman Maxine Waters, chairwoman of the House Financial Services Committee tweeted SBF, based on your role as CEO and your media interviews over the past few weeks,

Starting point is 00:02:01 it's clear to us that the information you have thus far is sufficient for testimony. As you know, the collapse of FTX has harmed over one million people. Your testimony would not only be meaningful to members of Congress, but it is also critical to the American people. It is imperative that you attend our hearing on the 13th, and we are willing to schedule continued hearings if there is more information to be shared later. Basically, this was a total BS call on Sam's statement that he couldn't speak yet. Another way to put it is that if you can go on YouTube channels that have basically no subscribers

Starting point is 00:02:33 and do a Twitter space every other day, you certainly can come get your scrawny little behind in front of the U.S. Congress. Mostly people were glad to see it. A lot of the comments are, okay, maybe I'd like you to go harder, but sure, this is better. Still a lot of people, though, probably agree with DC Investor when he wrote, getting better, Maxine, but you're going to need to subpoena him if you are actually serious. A lot of folks also pointed out that Maxine Waters' account was hiding hundreds of responses to the original tweet and complaining to Elon Musk about it. So far, there has been no response from Sam. Now, something else that people were non-plussed at this morning was a Financial Times

Starting point is 00:03:10 Exposé on the venture portfolio of Alameda. Now, first off, we have to give credit where credit is due. The lead line of this story is absolutely savage. It reads, as running a crypto exchange that didn't exchange crypto, and owning a hedge fund that didn't hedge, Sam Bankman-Fried had a venture capital fund that didn't venture its own capital. Now, all of this data comes from an Excel sheet from early November that was produced presumably during the frantic few days when Sam was trying to save FTX and Alameda by raising rescue funding. The spreadsheet lists nearly 500 investments, and I think there are a few things that stand out from this. First of all, FtX and Alameda were invested in everything. I mean, there is just such a

Starting point is 00:03:50 crazy array of things here. Obviously, a huge portion of crypto venture rounds had some form of FTCX or Alameda participation, but there were also more than 30 investments in venture funds and even numerous things outside of crypto as well. Second, the lines between FtX and Alameda were clearly blurred. This list identifies which entities had actually invested. Alameda itself has four or five different legal entities. FTX Ventures is one entity, FtX U.S., aka West Realm Shire Services is another entity and they're all presented together here, which gets us, I think, to a third point. Given that Sam prepared this in that frantic week at the beginning of November, it sort of undermines his claim that he didn't know much about what was going on at Alameda.

Starting point is 00:04:30 Now, of course, Sam could just say that he learned about all of this later after he realized that there was a huge hole in the balance sheet. But again, I'm going to call BS. Sam was exhaustive in knowing at least on a high-level everything going on in that company. He did not delegate. and when it came to venture decisions, he was very involved in all of it. Fourth, this information reveals that there could be more pain here to be had in the bankruptcy process. One of the highlight investments that many have been looking at is $300 million into K5 Global. K5 is a venture firm that is deep in the Hollywood Hole. Its founder Michael Kviz is a former agent at CAA, who has also served as an aide for the Clintons and is close with Elon Musk.

Starting point is 00:05:07 The size of the FTX investment in K5, 300 million, has many speculating that it will be a primary target for Clark drawbacks during the bankruptcy. Right now, it's not clear whether any of that $300 million has actually been deployed into K5's investment portfolio yet. Overall, number five, this does help explain where all the customer's money went. Remember, there remains a $10 billion or so whole. This helps explain a little bit where some of it went, and this is yet another infuriating thing. This funding came from customer funds. As has been coming clear, Alameda wasn't doing nearly as well as it seemed like from the outside. And what's more, if you look at what FTX made during the last year when everything was booming, which was in the high hundreds of millions, and the money it raised,

Starting point is 00:05:48 which was another couple billion, all of that together doesn't make up even close to the $5.4 billion represented in this portfolio, which means there was other money coming from somewhere, and we know where that somewhere was. CMS Holdings tweeted this morning, around $5.5 billion in venture, $2 billion buying out CZ, $1 billion in real estate and marketing, lose $2 billion in trading, I can piece together how you lose $10 billion now, but you kind of need it to still be all of the things. In an ecosystem where innovation is the norm, it's the basics that are in the spotlight.

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Starting point is 00:08:10 Silvergate has been under heavy scrutiny this year, as one of the few banks to actually take on banking for the crypto sector. Its ties to FTX had been most recently in focus. Last month, Silvergate was under the microscope as a solvency risk. They reported that FTX only deposited with them and that FTX represented less than 10% of the $12 billion the bank held for crypto clients at the end of September. Since then, the focus has shifted to the dubious relationship between FTX and Alameda. Basically, the issue is that Sam, during his extensive PR tour,

Starting point is 00:08:40 has been saying that before FTX was able to get its own banking relationship, it would have exchange clients send money to Alameda instead. In a regulatory filing on Monday, Silvergate acknowledged that it had processed wire transfers for Alameda. Silvergate's CEO, Alan Lane, is basically pushing back saying that whatever the intent was from Sam and Co, Alameda had bank accounts with them, so when they got payments to Alameda, they processed them and credited to those accounts at Alameda. In other words, to the extent that these were FTX clients that should have gone to FTX accounts, that's FTC's job, not Silvergate's job. At least that's the claim that Alan Lane seems to be making.

Starting point is 00:09:13 Still, some aren't content with Silvergate's answers to questions around due diligence. Count markets among those, as Silvergate's stock price is down 84% this year, and around 50% since all the FTX revelations came about, compared to 23% in general for banks. Politicians are also getting up in this right now. Yesterday, Senators Elizabeth Warren and John Kennedy, as well as Congressman Roger Marshall, wrote Silvergate a letter demanding some answers. The letter cuts straight to the quick of the $10 billion of customer funds transferred to Alameda and what Silvergate's potential role was.

Starting point is 00:09:45 From the letter, quote, Mr. Bankman-Fried has himself admitted that FTC's customer funds were improperly transferred to Alameda's bank accounts. When asked how FTCS customer deposits ended up in Alameda's accounts, Mr. Bankman-Fried told Vox that the company did not originally have a bank account, and so it directed customers to wire money to Alameda's account with Silvergate in exchange for assets on FTCS. According to Mr. Bankman-Fried,

Starting point is 00:10:06 executives at the company, quote, forgot about this scheme until the company imploded, telling a reporter, quote, it looks like people wired $8 billion to Alameda, and oh God, we basically forgot about the stub account that corresponded to that, and so it was never delivered to FTX. Silvergate provided banking services to both Alameda and FTX, raising questions about the bank's role in facilitating the improper transfer of FTX customer funds to Alameda. Apparently, quote, some FTX customers continue to send wire transfers to Alameda's Silvergate account as recently as this year. It appears that Silvergate did nothing to halt these activities.

Starting point is 00:10:38 End quote. Simply put, they write later, Alameda's depository account with your bank appears to be at the center of the improper transmission of FTX customer funds. Now, where this led the congressman and senators to was a set of questions. Were you aware that FTX was directing its customers to wire money to Alameda's account with your bank? Dild Silvergate flag is suspicious the movement of funds to Alameda accounts or between Alameda accounts and FTX or FTX affiliate accounts. Before November 11, 2022, were you aware that Alameda Research LLC was a distinct company from FTC's and its subsidiaries? has Silvergate ever undergone an independent audit of its BSA anti-money laundering compliance program?

Starting point is 00:11:15 Did Silvergate have any communication with representatives from Alameda, FTX, or FTX-affiliated entities regarding concerns about the transfer of funds into Silvergate, etc., etc.? Now, I'm certainly not jumping on some screw Silvergate bandwagon. There are plenty of people there already, including short-seller Mark Kohotas, who was one of the loudest voices calling out SBF for months. Still, Silvergate has been one of the only banks actually willing to take the risk of banking crypto companies, and I'm going to be pretty pissed if they didn't behave improperly and get caught up in Sam's fallout. However, to the extent that they helped perpetrate the fraud, this really does

Starting point is 00:11:49 need to be investigated, no matter how unpalatable or unfunded, it seems. All of this continues to leave crypto in a very liminal in-between moment. The industry is waiting to see justice serve to Sam, but it's also waiting to see whether other institutions will fall. DCG and Genesis are high on that list of WTF is going on. But in that vacuum, there is emerging a clear category. of winner, and I'm not talking about Binance, although clearly they're the last exchange standing when it comes to inside the industry itself. No, that likely winner is Tradfai. That was reinforced today when Reuters reported that Goldman Sachs is planning to spend tens of millions of dollars to invest in or buy outright crypto companies that are newly repriced,

Starting point is 00:12:27 let's say, in the wake of FTX's collapse. Matthew McDermott, who's Goldman's head of digital assets told Reuters that FDX's implosion has heightened the need for more trustworthy, the regulated cryptocurrency players, and big banks are seeing an opportunity to pick up business. In an interview, McDermott said, quote, we do see some really interesting opportunities priced much more sensibly. On FTX, he said, it's definitely set the market back in terms of sentiment. There's absolutely no doubt of that. FtX was a poster child in many parts of the ecosystem. But to reiterate, the underlying technology continues to perform. Now, as of this recording, apparently the firm is doing due diligence on a number of different crypto firms, although they

Starting point is 00:13:02 didn't specify which. So I think there are a few ways to look at this. The first is obviously as a vote of confidence, and Reuters itself sort of nails this angle, saying, while the amount Goldman may potentially invest is not large for the Wall Street giant, which earned $21.6 billion last year, its willingness to keep investing amid the sector shakeout shows its sense is a long-term opportunity. Second, I think that this does show a trend, but not a ubiquitous one. On the trend side, Fidelity recently opened retail crypto trading for both Bitcoin and Ethereum. Fidelity is one of the largest asset managers in the world, and this is a huge vote of confidence. Of course, plenty of skepticism still.

Starting point is 00:13:36 remains. Morgan Stanley's CEO James Gorman said at the Reuters' next conference on December 1st, quote, I don't think it's a fatter going away, but I can't put an intrinsic value on it. The HSBC CEO told a banking conference in London that they have no plans to extend into crypto trading, and Jamie Diamond was on CNBC today telling them that crypto was just pet rocks and that they spend way too much time on it. Still, it certainly seems like Tradfai is likely to become one of the winners. Again from Reuters, quote, the ripple effects from FTX collapse have boosted Goldman's trading volumes McDermott said, as investors sought to trade with regulated and well-capitalized counterparties. He said, what's increased is the number of financial institutions wanting to trade with us.

Starting point is 00:14:14 I suspect a number of them traded with FTX, but I can't say that with cast iron certainty. Goldman also sees recruitment opportunities as crypto and tech companies shed staff, although the bank is happy with the size of its team for now. End quote. Now, that same piece also suggests that some Tradfai institutions that hadn't gotten into crypto yet are now looking at it because their customers are just over doing business with crypto-native institutions. The Britannia Financial Group said that it's now building out cryptocurrency-related services. CEO Mark Bruce told Reuters, quote, we have seen more client interest since the demise of FTX.

Starting point is 00:14:46 Customers have lost trust in some of the younger businesses in the sector that purely do crypto and are looking for more trusted counterparties. So the question that I want to posit to you is, is this a problem? Or is it just unreservedly good? I think the answer is, of course, it depends. On the one hand, it's hard not to be gratified that in a world where many antagonistic voices are calling for the end of this whole experiment, there are still big firms taking a big picture view in investing for the long term. Relatedly, I think there's a fairly good argument that for citizens of countries with sophisticated banking and investing infrastructure, tradfied brokerages and platforms were always going to capture the mainstream, so this might have just accelerated the inevitable. On the other hand, there are challenges with having this category of actor take the pole position in the industry. They are clearly more focused on compliance and integrating with the existing system than in challenging that system. This could lead to very different priorities. For example, Fidelity launched their retail trading product without the ability for customers to withdraw and self-custody assets. There's also the question of how synthetic products around Bitcoin undermine its supply limitations. If everyone can just play financial

Starting point is 00:15:49 games without ever actually having exposure to the underlying Bitcoin, does that diminish the value of its 21 million supply cap? This is something that folks like Caitlin Long have warned about in the past. And the fact that when all was said and done, FTCS had zero Bitcoin on its balance sheet suggests it's already a problem. Now, I do believe that this was sort of a problem that was always going to happen and has just been accelerated, but that doesn't mean it's not a problem. This is something that Ben Hunt from Epsilon theory has discussed quite a bit. He wrote multiple pieces on this and yesterday said, if you don't see that the crypto quote-unquote industry has become just as blindingly corrupt as the traditional financial services industry it was supposed

Starting point is 00:16:24 to replace, well, you're just not paying attention. What may be the crypto, quote-unquote industry has become Bitcoin's special is nearly lost, and what remains is a false and constructed narrative that exists in service to Wall Street in Washington rather than in resistance. The Bitcoin narrative must be renewed, and that will change everything. Now, interestingly, on December 16, 2020, as the last bull market was just getting up and running, I had Human Rights Foundations Alex Gladstein and Ben Hunt on the show to debate will Wall Street ruin Bitcoin. Ben argued many of the same things he has argued around Sam over the last six months, even back then, although obviously in general at that time. He argued that Bitcoin was going to become just another

Starting point is 00:17:00 financialized plaything for the already rich to extract value from. Gladstein's counterpoint was that even if that happened, it didn't change the value of Bitcoin as a transportable, censorship-resistant, hard-to-sease asset for people living under autocratic rule or in turmoil, conflict, etc. It's a really good conversation, and I suggest you go back and listen. Like I said, December 16th, 2020, Will Wall Street ruined Bitcoin with Ben Hunt and Alex Gladstein. I was reminded of it today thinking about all this, but especially when I saw a tweet from Troy Cross. He wrote, Do I want to live in a world where Krugman, Wall Street, are laughing off Bitcoin? The EU and U.S. governments are trying to curb mining and mute demand through regulation, while we see

Starting point is 00:17:38 grassroots adoption throughout Africa, Latin America, Southeast Asia? Yes. Yes, I too, actually. And I think that that speaks to the redemptive side of all of this, the question of whether, even Bitcoin getting caught up in these financial games in markets like the U.S. can, on a fundamental level undermine what it's valuable for in the places that need it most. There's a lot that we could discuss around that, but we are so short right now on optimistic thoughts that that's one that I am going to hold on to. For now, I want to say thanks again to my sponsors, nexus.io, Circle and Cracken. And again, today, CryptoWatch, for supporting the show. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Goldman’s Going on a Crypto Company Buying Spree, but Is That Good for Crypto?

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