The Breakdown - How Crypto Can Actually Move Past SBF

Episode Date: November 8, 2023

NLW wraps up coverage of the SBF trial with a recap of the conclusion and a discussion of community reactions. Today's Sponsor: Kraken Kraken: See what crypto can be - https://kraken.com/TheBreakdown Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

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. What's going on, guys? It is Tuesday, November 7th, and we are back with The Breakdown. 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. All right, friends, we are back from that anniversary trip that you knew about. Very rejuvenating. Excited to be back with you all. And today, although it is by now long old news to

all of you, for the sake of completeness, we are going to wrap up our coverage of the SBF trial. Now, I'm going to focus on some of the logistics, what happens from here, and of course spend most of my time on community reactions. So, on Thursday night, Sam Bangman Fried was found guilty on all seven counts of fraud and money laundering. Sam's defense attorney maintains his innocence and says they will continue to, quote, vigorously fight the charges. After the verdict was handed down, Damien Williams, the U.S. attorney for the Southern District of New York, delivered an ominous warning on the courthouse steps. He said that although the cryptocurrency industry is new, quote, this kind of fraud, this kind of corruption is as old as time, and we have no patience for it.

Williams noted that Sam's case moved at lightning speed, which he said was a choice, not a coincidence. He said that this case was a warning to, quote, every single fraudster out there who thinks they are untouchable, that their crimes are too complex for us to catch or that they're too powerful for us to prosecute. Williams warned that if the remaining fraudsters in the crypto industry don't cut it out, quote, I promise we'll have enough handcuffs for all of them. Now, Sam's sentencing will be carried out in a separate hearing tentatively scheduled for the 28th of March next year. Sam faces a statutory maximum sentence of 110 years in prison. However, of course, he will likely be sentenced to far less than that, as terms of imprisonment are often served concurrently across all charges rather than consecutively.

Katie Juan, a cryptovc who previously tackled high-profile crypto-criminal trials as a federal prosecutor, explain the way that federal sentencing guidelines work in this context. As Sam's crime surrounded one of the largest fraud schemes in history, the guidelines place him in the highest possible bracket when considering the size of losses and number of victims. His sentence will also be enhanced by his leadership role within the scheme and the sophisticated nature of the fraud. Sam maxed out the scale as a result of these factors, which means the guidelines would suggest life in prison as the appropriate sentence. Even if the judge reduces some of the factors to fit Sam into a slightly lower sentencing bracket, the guidelines would still indicate a sentence of 27 to 34 years in prison.

Katie wrote that Sam faces likely decades in prison. Now, aside from sentencing, the major question that remains in the legal process is whether additional prosecutions are still to come. Long before the trial, the Justice Department added charges related to campaign financing. These were not included in last month's trial due to objections from the Bahamas government that the charges were not agreed to when Sam was extradited. During her testimony, former Alameda Research CEO Carolyn Ellison discussed bribery of Chinese officials. That evidence would implicate Sam in breaches of the Foreign Corrupt Practices Act. With Sam now convicted of fraud, it's an open question whether the DOJ feels the need to pursue additional charges or is satisfied with the prosecution already carried out.

There is a second trial tentatively scheduled in March of next year to deal with the campaign finance charge and other allegations from the revised indictment. Over the coming months, the DOJ is expected to inform the court whether they intend to proceed with extra charges, which will be unlikely to result in additional prison time for Sam. The political sensitivity, however, of the campaign finance charge could complicate that decision. The other question is whether additional people involved in managing FTX will be charged. The three executives who testified against Sam will be sentenced alongside him in March after pleading guilty. And although he was mentioned several times during the trial and implicated in decision-making at Alameda Research,

we still have no real insight into why former Alameda CEO Sam Tribuco has not been charged. Similarly, significant testimony seemed to imply that the conduct of Sam's parents could rise to the level of criminal liability. Now, when it comes to reactions from the crypto community, one of the big themes was a sense of relief. Crypto researcher Noel Acheson said, the verdict came as a huge relief. While it looked increasingly likely as the trial wore on, there was always the outside chance that SBF would yet again embarrass the industry by showing that crypto frauds.

can be hard to prosecute. That didn't happen, and the swift and unanimous decision from the jury definitively shows that fraud is fraud, and crypto service providers can and should be held accountable. The closure of the SBF phase should help to show the next wave of investors that crypto markets can be grown up, and hopefully now we can get back to building the capital market infrastructure the ecosystem deserves. Paul Brody, the head of blockchain at EY, said, it's a wonderful moment for crypto. Accountability in the sense that bad actors will be punished is important, not just for deterring bad actors, but to give confidence to those who are operating with integrity. However, another reaction was that prosecutors are likely to be even more emboldened.

Preston Byrne, a partner at Brown Rudnick said, I would not read too much into the SBF trial result as a forward-looking matter. What's done is done. SBF is off the board as a major player in crypto, probably for the rest of his working life. What this is, is a significant and decisive victory for the U.S. Attorney's Office in the SDNY, convincing a jury that fraud is fraud, even in a context where complex novel technology is involved. I would expect that the USAO has a lot more confidence today than they did yesterday that they can win other big cases against bad actors in crypto. Now, at this point, it's worth noting to me that one of the things that I was watching is whether the idea that this was the crypto industry on trial would actually take root.

In other words, would this be characterized as the trial of SBF or as the trial of the crypto industry as a whole? In my estimation, it was much more, much more about SBF. Part of that was that the prosecutors were pretty clear about that. And indeed, that speech at the end of it all from Damien Williams really drove at home. Yes, he was warning others in the crypto industry that if they were rotten, he was coming after them. But his bigger point was that fraud was fraud, regardless of what context it was in, and whether or not it used novel technology like cryptocurrency. In other words, the prosecution made a specific decision, presumably rooted in actual belief that the Sam Bankman-Fried trial was a trial of Sam-Bankman-Fried. Now, one really interesting,

conversation that has generated a lot of discussion is what the appropriate sentence for Sam actually is. Unchained podcast host Laura Shin wrote, I see a lot of people debating how long a sentence SBF should get, curious to take the temperature. Also curious to hear if you think sentences are too short or long in general, and sentences for white-collar crime, financial crime, etc. Now, of the choices she gave, which were one to nine years, 10 to 19 years, 20 to 29 years, and 30-plus years, 30-plus years got 58.6% of the vote. Laura then noted, that she had misjudged how many people think this will be a long sentence and revised her post. For that new poll, her options were 1 to 14 years, 15 to 29 years, 30 to 44 years, and 45 years to life.

45 to life got the most votes at 44.1%. Now, if that shows the general mood of crypto is particularly vitriolic towards Sam, there were some who said that his sentence should not be that long. Tiffany Fong wrote, I bet this will be my most hated post, but I personally do not root for life sentences or equivalent for nonviolent. criminals. I lost my life savings to Celsius last year, and obviously punishment is necessary, but I care far more about every penny getting clawed back to creditors and that they're forever barred from financial institutions. I don't personally benefit from or take pleasure in the

prospect of SBF or Michinsky sitting in prison for life. I'm sure this post will enrage people and agree to disagree, but that's just how I feel. ProPublica senior editor, Jesse Isinger, said, SBF should not get 110 years. I'd say around 5 to 7. Reiterating my longstanding position that, One, we should put fewer people in prison generally. Two, but send more white-collar criminals to prison with far shorter sentences. Four, prison should be much, much more humane. Now, this one generated a lot of response. DC investor wrote, Understand that SBF caused serious financial harm and serious emotional harm. His fraud and his theft of user funds who believed they were being held as sacrosanct led to suicides.

Five to seven years isn't nearly enough. He deserves at least 30. Erie David Paul from Block Tower put it a different way. He said, if the punishment for stealing 10 billion plus by defrauding hundreds of thousands of laypeople was five years in prison, it would be rational for most people in the world to commit the crime. In the head of people like SBF, this is probability. They say X percent chance they get away with it, Y percent they don't. If they think 80 percent they walk away with 10 billion and 20 percent they go to jail for five years and keep nothing, it's a good trade.

David Z. Morris wrote, He won't get 110. That was never really on the table. And I understand the empathy. But based on the trial, he fully deserves 25 to 50. He has a callous manipulator who straightforwardly did not believe the law applied to him, and still doesn't. He lied under oath repeatedly. D.C. investor followed up in another thread, Give him only five years and O'Leary just funds his next startup. You either create consequences

and thus a disincentive for bad actors, or none of it even matters. Today's episode is brought to you by Cracken. For far too long, the whole financial system has been standing still, too slow, only on for certain. hours, overly designed for some types of people, but not for others. Crypto, at its best, represents progress. It asks the question, what if? It invites people in instead of leaving them out. It's on 24-7-365 and moves at the speed of real life. Not everyone believes it. We've got our fair share of detractors, but that's the way it always is when you're building something new. Cracken is a crypto company that has been through the highs and lows of

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Obviously, this is more personal for me than it is for some. Although, luckily for me, it is less personal than it is, given how many people have their entire livelihoods on that site, and have had them trapped there for the entire year. So as to my take, one, sometimes the obvious thing is the true thing. The jury took no time to decide this because it was incredibly obvious. There was no secret explanation from Sam forthcoming that would make sense to them, because there wasn't a reasonable explanation for his actions. It didn't ring true that he just didn't know what was going on, and in fact, the idea that he wasn't leading every single decision in this company just didn't resonate with what everyone

else was saying. Sam's defense basically rested on the jury trusting him over the other three witnesses and co-conspirators who had testified against him, and it just wasn't happening. The reason it wasn't happening is that Sam was lying. He was lying when he said he didn't know what was going on. He was lying when he said he wasn't in charge of these decisions. I've remained fairly quiet on this, but I will only add that in my experience at FTX, there wasn't a single f-ficking decision of consequence that Sam didn't ultimately decide. The entire premise of the organization is somehow theoretically flat, was a joke from the get-go. Everything of significance required Sam's sign-off, at least everything that I touched, which, as the marketing stuff, was significantly

less important than major financial decisions, so I can't really imagine how it would have been any otherwise with the most significant questions in the company. The point, again, is that Sam was lying, the jury saw that he was lying, the witnesses testified that he was lying, and ultimately he was convicted for lying. Second reaction that I have to this. Sam was someone who fundamentally did not believe that the rules applied to him. And even more than that, my sense now in retrospect and in everything that we've learned subsequent to the collapse of the company is that not only did he not think that the rules applied to him, this is a guy who had convinced himself that the people who believed in rules at all were on a very deep level,

simply weak. Unlike him, who was willing to make bets that other people found crazy, all the rest of us were just sheep, doing what society and convention and yes, the law, told us to do. I think even to this day, Sam likely doesn't believe that there's actually a right or a wrong. There's just what you can get away with. Now, of course, what the prosecution showed beyond a shadow of a doubt was that this mentality, when applied to business, meant that for Sam, there was never any distinction between any assets in any enterprise company, holding company, shell company, shoebox closet, bedroom, bathroom, office closet, refrigerator drawer. Basically, if Sam was attached to it, it was all just one big pool of stuff that he could do whatever he wanted with.

This perspective was so deeply ingrained in him that even when he was testifying in his own defense, the explanations he gave were, I think, damning. There was a part where he testified that he basically didn't think that the hole was as big as it was because it didn't include the fact that he could just move some assets from some other shell company onto the Alameda balance sheet. even though that's not how balance sheets work. Now, Sam, of course, was sitting there thinking that the jury would understand where he was coming from, thinking that there were a lot more assets than there were,

because he could just move this other pool of assets over. But what he failed to understand is that what I imagine the jury was thinking about was the inverse of all of this. If Sam was willing to just move assets from some holding company that he had put them in onto the Alameda balance sheet in order to make it look better for investors, wouldn't it track that he would also be comfortable, just moving FTCS user balances over from FDX onto the Alameda balance sheet to do whatever he needed to do with them? Basically, this idea that it was all just one big slush fund and one big playground or sandbox for Sam was reinforced not only by the prosecution but by Sam's own testimony.

Now, when it comes to how I actually feel about this, I am relieved, but I am not gleeful. Justice has been served, and yes, the industry is moving on. But the sheer tonnage of damage done by SBF is very, very hard to overestimate. We are talking about huge amounts of money lost. And even if it's entirely recovered, the fact that it's been locked up for a year and will be locked up for longer is hugely damaging. It means that that money is not going for any meaningful purpose, be it personal or professional or business. We're talking about untold amounts of money that didn't come into the industry that might otherwise have or will never come in because of this. We're talking about years,

years of setback on policy, and by extension, based on what we've seen this year, years of set back on actual critical infrastructure. It is harder today than it was a year ago for crypto companies to get bank accounts, to get audits. It is harder today than it was a year ago for crypto companies to be in the business of being a crypto company. We're talking about untold amounts of energy that have dissipated and gone elsewhere because they're just disgusted with the whole thing, and frankly, reasonably so. No amount of Sam rotting in prison changes those facts. And so like I said, I'm relieved because, as others have pointed out, the circumstance where he walked would have been so damaging in so many ways,

but it's very hard to be anything other than just relieved. Now, when it comes to sentencing, I think one of these short five-to-seven-year sentences would be absolutely insane. I am completely with DC Investor. If SBF is out in five, he's getting his next startup funded before he's even out the door. Sam needs to be locked up long enough for the world to pass him by. And that's not just because of the message that it sends to others, although that's important. It's because I genuinely believe that he is going to be plotting his next company, basically from the moment the trial ended. So put me firmly in the 30-plus years camp, thank you very much. Now, last thought. Ultimately, I believe that the real redemption is completely in our hands. The justice system has done its part, or I guess

will once we've got the final sentencing. But the real question is whether this industry allows another Sam to emerge. This is around the part of the cycle, that we start to see the next wave of influencers and entrepreneurs pop up, some of dubious origin and others of dubious ethics. They always get traction. They always find oxygen. Will they again, this time around? Is it just the native part of the industry? The real question to me is not about Sam and his sentencing. It's about the next Sam and whether that person is allowed to flourish. If the next cycle passes without a new Sam, that's how we'll know that we've actually healed. So keep building and keep calling out bullshit wherever you see it, because that's the only chance we have. Until next time, guys,

be safe and take care of each other. Peace.