The Breakdown - Sam Bankman Fraud: Inside the Collapse of FTX’s Hollow Empire

Episode Date: November 15, 2022

As NLW said on each day’s show, “in addition to them being a sponsor of the show, I also work with FTX.” On today’s show, NLW gives an insider’s view of the timeline, from the beginnings of trouble as the crypto community turned on Sam Bankman-Fried for his role in shaping industry regulations to the chaotic week that saw FTX go from high flyer to bankrupt. Along the way, [NLW] shares how he and other FTX employees felt as they realized that they, along with the rest of the crypto industry, had been duped, lied to and defrauded.    “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsors today is “War” by Enoch Yang. Image credit: Danny Nelson/CoinDesk, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

What's going on, friends? It is Monday, November 14th, and today I am talking about the end of FTCS. On Tuesday, November 1st, FTCS was worth $40 billion, and its CEO, Sam Bankman-Fried, was worth about $16 billion. By Friday, November 11th, FTCS had declared bankruptcy, and the Bloomberg Billionaires Index was estimating SPF's net worth around a single dollar. As for me, I was town one job, and the breakdown was down one sponsor. Today's show is about the most head-spinning, mind-numbing heart-hollowing week in crypto history. So what are the goals of today's show? Well, for me, I think it's two parts.

First is, I want to give you a play-by-play of what happens, specifically from the lens of an average FTX employee's perspective. I haven't seen everything that happened last week put together in one place with that context, so this is an attempt to do that. The second thing I'm trying to do today is to start to lay out the questions that I think we'll all be discussing and debating in the weeks and months to come. I can't promise yet that I'll have any. particular insights or answers. I'm still very much in the middle of processing all of this, so it's

fairly raw. I intersected with FTX in two ways. As I said at the beginning of every edition of the breakdown, FTX is a sponsor, but I also work with them. Specifically, I've done brand marketing with FTX for a couple of years, with the most notable things being the TV ads. Larry David's Super Bowl commercial, that was me. Importantly, here are the things that I have never done with FTCS. Anything involving product, anything involving their investing, anything involving customer service, anything involving customer funds, anything involving their politics, anything involving anything other than helping tell our story to the public. I've always been remote, and in the two years I worked with FTX,

I spent one day in any office, which was the Chicago office, which is also the only time I met Sam. It was a working session on our main sports partnerships, including Tom Brady and Stefan Curry. At the time that everything started to go down, my biggest concern inside FTX was that Sam wasn't getting back to me with any feedback on the hundreds and hundreds of Super Bowl concepts that I in a group of agencies pitching had produced.

We were running perilously short of time. Of course, I now understand why he wasn't super focused on that particular issue. Now, there are going to be countless retellings of what happened last week, and I think many will choose to start with the seminal coin desk research piece by Ian Allison. That piece published Wednesday, November 2nd, shared balance sheet documents suggesting that there were problems at Alameda. This was, of course, the kindling that allowed CZ to light a match a few days later. But for the purposes of this show, I actually want to go back just a little bit farther.

I want to start with the regulatory dust-up around the DCCPA. The DCCPA is the Digital Commodities Consumer Protection Act. It was a proposed bill that would have created broad industry regulation with the CFTC at the head seat of the table. In the middle of August, a ton of discussion started to swirl around the DCCPA. FTX and Sam, who had been big supporters of the bill, were at the center of a lot of those discussions, and when it came to the perspective in the industry on the wrong side of them.

Now, that's all well and good. FTX had made a huge push on having a seat at the table for regulatory discourse, and when it comes to something as messy as regulating crypto, there are inevitably going to be disagreements. What was weird to me, though, was when on October 19th, Sam decided to write and publish a 4,000-word piece called Possible Digital Asset Industry Standards. It wasn't a support piece for the DCCPA,

and it wasn't really an official FTX position paper. In fact, the introduction stated, quote, this is written by Sam Bankman-Fried, but neither he nor FTCS feel confident that this structure is exactly correct. It's just a draft. The next line was, quote, ideally some industry group would mull over these topics, revise them, and publish what they feel to be an appropriate set of community norms. I'm not sure if that's truly what Sam thought was going to happen, but that was not what happened. Instead, people jumped all over him for a bunch of different positions in the essay. Most notably attacked were his comments around Defi and OFAC compliance.

For many in the crypto space, SBF's willingness to compromise around the idea that every UFI front end needed to comply with OFAC sanctions was tantam out to Sam saying, screw Defy, might as well just use a centralized service anyway. There was a particular tone deafness to the fact that Sam's position on this made no mention whatsoever of the OFAC tornado cash sanctions. Regular listeners to this show obviously know that the Department of the Treasury had seemingly way overstepped its bounds to sanction a smart contract. What's more it had had done so without ever actually explaining how it believed it had the statutory authority to do so.

This has led to lawsuits, notably from CoinCenter, around these exact issues. And Sam didn't say anywhere, including in follow-on comments. Anything like, you know, caveat seems pretty clear. OFAC has some shit to figure out. So maybe that's the important context for my saying that all Defy front-end should comply with them. But at this point, I'm actually digressing. For the purposes of what I'm trying to describe, the substance of the fight doesn't matter as much as the fact that there was a fight. a real protracted, extended fight where it was effectively Sam against the entire crypto industry.

Now, what was weird to me being on the inside of FTX and watching it was why he chose this fight when he did, and why he extended it with this super extensive regulatory proposal. He was already in all the conversations in Washington, why did he need to go pick the fight on Twitter as well? It felt very main character syndrome to me, as in I couldn't really think of a real comms objective that made any sort of sense so the only thing that did make sense was some sort of personal ego attachment to being in the center of the debate.

Now, of course, in retrospect, I think there was a more nefarious possibility, which was Sam trying to make himself look reasonable to DC politicians, while the rest of the industry came off as ideological and unreasonable. However, this certainly wasn't something I was thinking about then. Whatever the motivation or blunder was, it keyed up the industry to be angry at Sam. It also sapped a huge portion, if not all, of the goodwill that had been built up over the summer, with FTX's white knighting all across the industry. This is the context into which the CoinDesk Alameda research piece dropped at the beginning of November.

It wasn't Sam and FTX's good guy, good faith actors. It was Sam and FTX seemingly pushing a self-interested regulatory agenda that could fundamentally undermine the core principles that had brought most people to this space. Is it any wonder, then, that the Coin desk piece on Alameda research hit like a bomb? It would have been big regardless, but coming into the context of an entire industry already ready to be mad at Sam. And more than mad, being more willing than ever to believe that his motivations may not be aligned even on a fundamental philosophical level with theirs. It had an immediate impact. So what was this piece? At 1044 a.m. Eastern Daylight Time on Wednesday, November

2nd, Ian Allison published a piece called Divisions in Sam Bangman-Fried's crypto empire blur on his trading Titan Alameda's balance sheet. The piece was based on a balance sheet obtained by Allison that, as he readily was potentially only a partial document. Now, there are a few major points that shook the market. First was the huge amount of FTT, which is the native token of the FTX International Exchange, that was on Alameda's books. Of Alameda's $14.6 billion of assets, its largest by far was $3.66 billion of unlocked FTT, and its third largest asset was $2.16 billion of FTT collateral. Keep in mind at the time of the reveal that combined, this FTT was worth more than the entire market cap of FTT. From the piece, quote, there are about 197 million FTT tokens worth 5.1 billion

in circulation, according to FTC's website. The second notable fact about this balance sheet reveal was how much else was concentrated in highly illiquid tokens. There were hundreds of millions in tokens like SRM, which was the native token of the decentralized exchange that SBF started in late 2020, plus tokens like maps, Oxy, Feta. There was also more than a billion dollars worth of various forms of locked and unlocked Solana. third notable fact was just an implication of the first two. Alameda was really, really, really illiquid. As anyone who has ever tried to sell either a zombie token like Maps or even just a relatively illiquid low-demand token like FTT, the market cap that you see on coin market cap or any other

site like it isn't really the market cap. Because there aren't really buyers. So even a tiny little bit of selling pressure can dramatically alter the price, which can itself cause its own cascading momentum, as what would happen next would demonstrate. That brings us to the weekend of November 5th and November 6th. Even before that Sunday, FTX was processing more withdrawals than normal, based on the reverberations of the Coin desk piece on Alameda. But it wasn't until Sunday that things got really gnarly. I had noticed for months that the tension between Binance and FTX was growing.

Binance had been one of the earliest investors in FTX, but in 2021, FTCS bought out Binance's stake, firmly separating the companies. Sam presented it at the time as a positive step for the company, and it was widely seen as a key part of removing regulatory liability as FTX tried to get licenses to operate around the world. However, over the last few months, privately, it felt to me like behind the scenes something must have gone down

that most that FTCS weren't privy to, given how much more contentious things seemed to be, even just on Twitter. Certainly tongues were getting looser. About a week before everything happened on October 30th, FtX Digital Markets co-CEO Ryan Salem, wrote an ironic tweet about what he perceived to be CZ spreading rumors about FTC.

He wrote, Been an absolute pleasure watching CZ have the extremely difficult for transformative debates on Twitter this past week to ensure the crypto industry moves forward in the best way possible. Sam responded to this. Excited to see him reppping the industry in D.C. going forward.

Uh, he is allowed to go to D.C., right? Now, in the pantheon of stupid actions that would transpire, writing an assholeish little tweet is a lot less bad than what we would find out Sam was up to, but still, talk about an unbelievably juvenile, stupid, and immature thing to send. You're the CEO of companies with $40 billion in value and you're making snarky jabs in the comments? Maybe this is just what CEOs do now on Twitter,

but I was very unimpressed. And it seems like Cici was, too, because a week later, he clapped back and in a huge way. On Sunday the 6th in the morning, already Alameda was the main character. CEO Carolyn Ellison tweeted a few notes on the balance sheet info that has been circulating recently. That specific balance sheet is for a subset of our corporate entities. we have over $10 billion of assets that aren't reflected there. The balance sheet breaks out a few of our biggest long positions. We obviously have hedges that aren't listed. Given the tightening in the crypto credit space this year,

we've returned most of our loans by now. However, that wasn't the big thing that happened that day. At 1047 Eastern Time, CZ tweeted, as part of Binance's exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash, BUSD and FTT. Due to recent revelations that have come to light, we have decided to liquidate any remaining FTT on our books.

We will try to do so in a way that minimizes market impact. Due to market conditions and limited liquidity, we expect this will take a few months to complete. Finance always encourages collaboration between industry players. Regarding any speculation as to whether this is a move against the competitor, it is not. Our industry is in its nascency, and every time a project publicly fails, it hurts every user in every platform.

We typically hold tokens for the long term, and we have held on to this token for a long time. We stayed transparent with our actions. A few hours later, CZ retweeted a whale alert that showed 22,999,000, 999 FTT transferred from an unknown wallet to finance, and quote tweeted it saying, yes, this is part of it. Now back to Caroline, just a few minutes after CZ's initial post at 11 a.m., she writes, CZ, if you're looking to minimize the market impact of your FTT sales, Alameda will happily buy it all from you today at $22. At the time of the tweet, FTT was just under $25. And obviously the gag here was that she was referencing Sam's famous,

I'll buy all the soul you want for $3, then go-f-off tweet. But instead of looking like a cute reference or a show of strength, this tweet basically single-handedly set a price target for the entire market to attack FTT, and very transparently so. Everyone had the same thought as soon as they saw it. As in, okay, Caroline, why is $22 the right price? We have to assume that's a key level for you guys for some reason, so let's try to break it.

At this point, folks in FTEX were starting to get uncomfortable. It sure looked like CZ was going after us and doing so pretty aggressively. Didn't really seem like a great strategy for Caroline to be alerting the market that 22 was a price level where things got messed up for Alameda. And Sam's communications were, shall we say, less than inspiring, which would be the beginning of a trend. Instead of engaging in any substantive or meaningful way, on Sunday he tweeted a thread about our new send feature, with these two cheeky little messages at the end. quote, Anyway, I was going to write a different thread,

but I took a deep breath and reminded myself of something we'd all do well to remember. They were all in this together, and I wish the best to everyone driving the industry forward, because I respect the hell out of what y'all have done to build the industry as we see it today, whether or not they reciprocate, and whether or not we use the same methods, including CZ.

Anyway, as always, it's time to build. Make love and blockchain, not war. Let me try to give you a sense of the emotions I felt at that time, and that I think we're fairly widely shared at FTA. although I can really only speak for myself. The two emotions I felt were, one, disbelief and two, anger. At the time, though, it was still mostly for CZ. The anger was that he would go at us so hard knowing what was likely to happen in this situation. It felt like as much as he hedged publicly, he knew he had the power to cause a major movement around FTT. It felt extraordinarily opportunistic

to use the moment of weakness coming off the back of a month of crypto-angry at Sam, and then these partial balance sheet docs at Alameda to try to cause a crash in FTT. What's more, keep in mind, we were still laboring under the delusions that there actually were more assets elsewhere and that Alameda wasn't lying. And in that context, it felt like CZ was inflaming

what was just a rumor. That anger was compounded when later that day, around 5 p.m., CZ tweeted again and made it clear that it wasn't just about whatever rumors about Alameda were circulating. His tweet said, liquidating our FTT is just post-exit risk management, learning from Luna.

We gave support before, but we won't pretend to make love after divorce. We're not against anyone, but we won't support people who lobby against other industry players behind their backs. Onwards. So here you have one, CZ explicitly and intentionally connecting FTX to Luna, which was sure to cause panic. And two, making clear that it was about some action that happened in D.C. behind the scenes, lobbying against other industry players behind their backs. This wasn't just risk management. It was retaliatory. Now, I said I had another emotion, disbelief. And that disbelief came from the fact that even then, on Sunday, before I knew about the redemptions going on or anything like that, it was clear that this was more than just a petty

ego squabble between CEOs, although it clearly was that too. The brinksmanship of actually trying to cause the failure of an exchange of the size of FTX, given its relative position in the industry, just seems so insane to me. But ultimately, what I felt didn't matter. What mattered is that as CZ moved in for the kill, and Sam tweeted platitudes about coming together and working to the industry was frantically asking for real answers from FTX. Answers that we would not give. It's important to note that crypto is not like other industries. People were watching assets vacate FTX live on chain.

By 8 p.m. Sunday night, people were pointing out that FTC's stablecoin reserve had dropped by 93% over two weeks and was down to just $50 million. From a communications perspective, saying nothing was not an option. We had to say something, or at least we had to say that we were going to say something. But not only did the public not get that, no one inside the company did either, at least not through any of the major Slack channels. Even more significant by late Sunday night, all of our biggest clients were frantically asking for answers as well. I was never on the VIP or client-facing teams, but those who were reported in through Slack that all of the partners who trade with FTX were getting extremely nervous. And what they were asking for wasn't extraordinary.

They just wanted to hear from the company or from Sam. And they just wanted really simple, should be easy to answer questions answered. They wanted to know we were solvent, and they wanted to know that we don't lend out our customer assets. The intensity continued to ratchet up overnight into Monday. All the commentary which investors might have written off as FUD was becoming more and more concerning for the very reason that we hadn't tried to deny any of it. Again, it was so easy to say the two things that the market needed to hear. Of course, FTCS is solvent, and of course FTCS is solvent because, of course, we don't break our own rules and lend out customer funds. that is what I expected from Sam.

That is what the rest of the people at FTX expected from Sam. But it's not what we got. Instead, we got silence. Adding even more weirdness and frustration to this, Sam had been clear throughout the summer that we were extremely solvent, that our balance sheet was strong, that we were keeping more money on reserves because of all the regulatory work we were doing.

So you can imagine how weird it was that as the market was frantically asking about our solvency, again, a solvency that had we actually been keeping, customer funds segregated and in reserve, as we promised, literally could not have been an issue. Our usually overtalking CEO had gone dead silent, both outside and inside the company. In fact, when employees suggested a PR or comm's war room to help get our messaging straight, they were told currently that Sam and a handful executives were already all set with that, thanks. Monday morning, FTXers woke up to a short, highly unsatisfying message that Sam had sent around

4 a.m. Eastern the night before. Withdrawal volume was way up. There were some delays in making our way through it, the PR had been rough, and yes, finance was coming for us. This, of course, didn't address any of the real questions at all. The unsatisfactory nature of that communique was matched only by the wildly unsatisfactory official tweets early Monday morning, saying that FTX's matching engine was running smoothly, that Bitcoin withdrawals were being churned through, but that the node was throughput limited, and that banks being closed for the weekend was hampering stable coin processing. Throughout Monday morning, the internal discussion was getting more and more frantic. I really want to put a fine point on the fact that we were

now 24-ficking hours into this crisis, and we still hadn't given the team responsible for interfacing with our largest and most important customers any information. To their great credit, that team was the loudest internally begging for assurances of solvency and assurances that FTX wasn't lending out customer assets. They never got those assurances. Instead, that afternoon, Sam tweeted, one, a competitor is trying to go after us with false rumors. FTCS is fine. Assets are fine. Two, FTX has enough to cover all client holdings. We don't invest client assets, even in treasuries. It would be less than 48 hours before we all learned that this message was a bald-faced lie. On Monday afternoon, CZ wrote a thread where he seemed to try to calm things down

a bit. I was out with friends yesterday he wrote when the topic of whale alerts came up. Following our principles, I decided to be transparent, so I wrote a thread in five minutes and posted it. Little did I know it was going to be the straw that broke the camel's back. Everyone wants more transparency in our industry, right? My tweets were simple. There were questions about a large 580 million FTT deposit to Binance, and we were transparent about the fact that we are closing our FTT position. The fact that it sparked such levels of discussions was surprising. There were also conspiracy theories that I somehow orchestrated this whole thing. If you read this thread, you would appreciate that no one can orchestrate this. CZ at this point links to a thread by Miles Dutcher that starts off

Sam Bankman-Fried was once admired as the king of crypto. Now Alameda and FTCS are rumored to be on the brink of insolvency. Here's how it all went wrong for SBF and FTCS. Back to CZ. Quote, funny memes, media, and some people tried to color this as a fight. Sorry to disappoint, but I spend my energy building, not fighting. Today I spent my day on our business and our community. I suggest others do the same. Back to building. Despite that sort of spiky d'a-taunt, nerves were still on edge inside FTX.

That evening, no one was getting any more information from Sam or any other senior leader. I remember thinking to myself, if he's not talking to us and he's not talking to big clients, who the hell is he talking to? Now, I had heard from two other people outside the company that Sam was trying to raise in emergency round, which was the phrase both sources used emergency round. And that was far from reassuring, because again, unless we were lending out customer funds, why would we need another round when we were as per assurances from Sam, so cash flush? Team members were all frantically messaging each other, and one statement that I'll remember forever came from someone who said, the only way we would go

insolvent is if we were running a fractional reserve, in which case, we deserve to go insolvent. By Tuesday morning the situation was dire. We were officially in a bank run. And what's more, withdrawals seemed to be slowing down and taking longer and longer to complete. It had been nearly a day since Sam had said everything was fine publicly. No one waiting on Slack had heard anything new, and the customer and client teams were still in the dark. We got another early morning message from Sam that was 21 words,

apologizing for the chaos, and asking us to hang in there. And yet, by the beginning of the East Coast Business Day, the press noticed that FTX had stopped processing on-chain withdrawals from a Ethereum, Salana, and Tron entirely. Now, for me, by this point, it was clear that the game was over. The scramble in my guts of anger and disbelief turned into a squelching realization. There was no universe, no communication strategy so bad or so stupid, that it would say nothing for this long, unless something truly catastrophic had happened.

And for something truly catastrophic to have happened, based on what we had been led to believe up to that point, there had to be a big lie somewhere. a big lie that was about to be exposed. At 11 a.m. Eastern Time or 1 p.m. where I was in Uruguay, myself and the rest of the FTX team found out at the same time as all of you that Sam had in fact not been out raising an emergency round, but instead selling FTX to the very person whose tweets seem to have kicked this whole thing off.

Hey all, he wrote, I have a few announcements to make. Things have come full circle, and FtX.com's first and last investors are the same. We've come to an agreement on a strategic transaction, with Binance for FTX.com, pending due diligence, etc. Our teams are working on clearing out the withdrawal backlog as is. This will clear out liquidity crunches. All assets will be covered one to one. This is one of the main reasons we've asked Binance to come in. It may take a bit to settle, etc. We apologize for that. But the important thing is that customers are protected. A huge thank you to

CZ, Binance, and all of our supporters. This is a user-centric development that benefits the entire industry. CZ has done and will continue to do an incredible job of building out the global crypto ecosystem and creating a freer economic world. I know there have been rumors and media of conflict between our two exchanges. However, Binance has shown time and again that they are committed to a more decentralized global economy while working to improve industry relations with regulators. We are in the best of hands. Note that FTXUS and Binance.us, two separate companies, are not currently impacted by this. FtXUS's withdrawals are and have been live, is fully backed one-to-one and operating normally.

two things that are important to note about this mind-boggling statement. The first is that fourth and fifth tweet, where Sam just totally sucks up to CZ. I have no doubt that those words were demanded and maybe even written by the Binance team. It was a medieval Game of Thrones style accession to power and having been beaten. But even beyond that, the statement in that second tweet, all assets will be covered one-to-one. people immediately noticed the use of will, not R. It was tantamount to an admission that FTX had been playing loose with customer deposits.

After posting that to Twitter, Sam added a now leaked note to our Slack. He apologized for being non-communicative. He shared that we had had $6 billion of net withdrawals. And he said that he was real proud of the team, which I'm sure made us all feel much better. Now, almost as soon as the deal was announced, the crypto community nearly universally bet that it was never, ever going to happen. If there was really a big hole on the balance sheet because FTX had been lying about lending out customer assets, why would Binance want to take that on? To acquire customers? Candidly,

it didn't really need them, and they were likely to flow in some large portion of finance anyway. Tech assets? Maybe, but Binance isn't really hurting for resources to build. Licenses? Maybe the most compelling reason, but remember, any deal would have needed to actually be approved by the U.S., which seemed like a pretty steep hill to climb, given that the combined entity would have had a roughly 80% share of the exchange market. But what about FTX's Sterling brand? Honestly, after this colossal disaster with everything that was to be revealed, what brand would even be left?

For about a day, the charade that the deal would close was kept up. FTXers begged over and over for any update that would let them know it was going on, which we didn't get, by the way. But by Wednesday afternoon, the deal was dead, and Sam got to experience a bit of what employees had been experiencing all week when he found out that the deal was off through Twitter and the media rather than through Binance telling him directly. After Binance walked away, the vibe inside the company got very, very frenetic. Sam and a couple others were outworking on next steps.

FTXers were reminded that we were all in this together and let's keep fighting. But by that time, not many people really wanted to keep fighting. You have to understand just how devastated the average FTX employee was at this point. Many of these people, especially our global staff, use FTX as a bank, being more efficient than banks their part of the world. Not only then did it seem like they might be out of the job, but they were also potentially facing the total loss of their savings. For me, all I could feel was rage and white-hot anger as Sam and those around him wouldn't even give these people the fucking courtesy of a message on Slack to give them any explanation for what they could expect.

This, I think, is something that will stand with me even when I'm years away from this. It wasn't just, as we will learn shortly, that Sam and a small group around him perpetrated fraud, which they did. From the moment the fraud was called out and the market started to react, every single ounce of their effort went into self-preservation. They continued to ask their team to lie for them publicly, even knowing it could expose those people to legal ramifications. It was callous, cruel, and utterly devoid of any genuine human consideration. Over the next couple days, there would be all sorts of stupid assinine attempts to salvage something. His excellency, Justin's son, for example, showing up and helping people get Tron's assets out of FTX. But by that time, no one was

focused on Sam scurring to save face. Instead, we were watching in horror as lie after lie, betrayal after betrayal, deception after deception, and actual fraud after fraud was revealed. First, while the public perception of Sam and FTX over the summer as a white knight and savior of the crypto industry, a new J.P. Morgan propping up industry after the panic of 1907, a new Warren Buffett saving the financial world post-global financial crisis, the real story was apparently very, very different behind the scenes. Reuters published a piece on Thursday that suggested that Alameda was rocked by the crashes in May and June, alongside many of their other hedge fund compatriots.

According to Reuters' sources, at that time, SPF transferred at least $4 billion in FTX funds to Alameda, secured by assets including FTT and shares in Robin Hood, which SBF had bought a 7.6% share of in May. Importantly, according to these sources, a portion of these funds were, in fact, FTX customer deposits. Reuters was unable to determine what percentage was from customer funds, but I think we can all agree that the specific percentage is much less relevant than the fact that it happened at all. The one thing that had been promised over and over that Sam had promised himself that Sam had enlisted his team to repeat up to the very last minute was that FTX didn't touch customer funds. And it was a lie.

Over the next couple days, the reported numbers of the transfers from FTX to Alameda kept growing. By Friday night, Reuters again reported that it was $10 billion of customer funds, and that what's more, a huge portion of that was now made. missing. One source put it at exactly 1.7 billion in missing funds, and one put it at between $1 billion and $2 billion. How did Reuters find this out? Well, apparently last Sunday, as the massive withdrawals was happening, and we were allowed to be mad at CZ as though somehow this was his fault, a handful of senior executives were briefed about the gap. The goal of the meeting was to calculate how much they needed to raise. Now, Reuters did admit that in text messages to them,

SBF said that he, quote, disagreed with the characterization of the $10 billion transfer. We didn't secretly transfer, he said. We had confusing internal labeling and misread it. Crypto-Twitter has been rightly ragging on the confused internal labeling argument ever since. But it goes on. If you're saying to yourself, how is this possible? This exchange is heavily regulated in jurisdictions around the world and has to do audits and et cetera, et cetera. Well, let me tell you, you're not the only one feeling that way. As it turns out, there is another deception that explains this as well. on that same Sunday meeting where Sam was briefing execs to figure out how much to raise and telling them how much he had transferred to Alameda,

apparently it came to light that SBF had implemented Bespoke Software to build a backdoor into the FTX bookkeeping system. I'm just going to read Reuters directly here. In a subsequent examination, FTX's legal and finance teams also learned that Bankman-Fried implemented what the two people describe as a backdoor in FTX's bookkeeping system, which was built using bespoke software. They said the backdoor allowed Bankman-Fried to execute commands that could alter the company's financial records without alerting other people,

including external auditors. They said it meant that the movement of the $10 billion in funds to Alameda did not trigger internal compliance or accounting red flags at FTX. Now, if this were the only thing that Sam had done, a one-time error in judgment caused by desperation, fear, and just genuinely being in over his head, it wouldn't change the fact that this was fraud. It wouldn't change the fact that this was a betrayal of customer trust,

of employees' trust, of investors' trust, of the entire industry's trust. Wasi lawyer, who's been covering the situation on Twitter, wrote, unlike Voyager, Celsius, et cetera, where their terms of service allowed them to on-lend or re-hypothecate your assets for yield, FTCS specifically states that title to assets remains with the customer, which means FTCS was literally stealing customer funds. Clearest criminality so far. End quote. Unfortunately, I don't believe now that this will be the last of massive abuse of trust we found.

one doesn't on a whim build bespoke backdoor software into bookkeeping tools so you can transfer funds without auditors noticing. That's something you plan and execute far in advance. My base case is that most shi things people are now accusing FTX and Alameda of, pump and dumb schemes, counter-trading customers, and even more nefarious things, all probably have some truth to them. I'm sure it will be dressed up in niceties and have obfuscating creative explanations from the people who knew, but I think it will amount to the same. The image of FTCS as a good-faith actor and driver of a more main,

mainstream, save crypto, was a charade to prop up a massive immoral fraud. I'm appalled by it, and ashamed that the work I contributed thinking I was helping drive the space forward, unwittingly ended up supporting it. Anyway, as late as Thursday night, there were still extreme battles within the organization about whether there could be some way to salvage something or whether the whole thing needed to be put into bankruptcy. I expect the details of who the heroes in that fight were will come out in some combination of future media and potentially criminal depositions. By Friday, the forces of rationality had prevailed and FTX was put into bankruptcy. To be clear, something like 130 or more corporations tied to FTX were put into bankruptcy,

which is just insane. Sam was deposed as CEO and John Jay III was put into place. You may recognize that name as the same person who was appointed to lead Enron through bankruptcy and settlement proceedings in the early 2000s. At this point, I just felt hollow, somewhere between depressed, betrayed, and livid. Now, an important note, my anger for ZZ had largely gone by this point. While there was, of course, the lingering frustration that his tweets had been the thing to set this ball rolling, the reality, of course, was that there was only one person who had decided to break trust, and likely the law, by shipping billions of dollars of customer deposits to a hedge fund

to gamble wildly in a frantic attempt to unfaq all the other fraud and deception in the relationship. That person wasn't CZ. While it's good that there is no more farce and artifice that FtX can somehow go find external money to fill this gap, the whole process has left thousands and thousands of people with their assets stuck on the exchange. There are likely many projects and funds that are completely screwed because they custody their assets with FTX. Galois Capital, for example, revealed that close to half their assets are trapped on FTX,

around $100 million. In short, we've only barely begun to see the bodies float to the surface. There will be direct contagion in the form of projects and funds that collapse because their resources are trapped, to say nothing of the huge number of individuals who will now be stuck as subjects to what will inevitably be an incredibly lengthy bankruptcy process, through which they'll be lucky to come away with pennies on the dollar. There will also be indirect contagion, as every other exchange is stress-tested to see if they, too, are fudging the numbers and revealing dubious practices. It is, in short, a mess, and likely a mess

that is just beginning. Putting a fine point on that, on Friday night, the FTCS accounts that remained started being drained in a quote-unquote hack that most assume is far more likely to have been an inside job. Let's talk now about the big questions that people have. First of all, who knew about this? I'll answer this in a few ways. First, myself. I knew nothing. I knew nothing. about FTCS breaking its word on customer funds. This is a deception I never would have been willing to be any part of. My job never touched anything, having to do with any parts of our trading or financial systems,

and I'm completely grossed out by all of this. I also believe that the vast majority of FTCSers knew nothing about this. First of all, like me, most of them did jobs that had nothing to do with the parts of the system having to do with customer funds. Second of all, it's become clear that SBF was keeping things extremely close to the vest. When Reuters first reported the Sunday meeting

where Sam led a handful of executives, know about the billion-plus hole in customer funds, they wrote, quote, Bankman Free did not tell other FTCS executives about the move to prop up Alameda that people said, adding he was afraid that it could leak. Also on Saturday, the Wall Street Journal published a story that gave a little bit more clarity to who did know. Quote, apparently in a video meeting with other Alameda employees on Wednesday, CEO Carolyn Ellison said that it had been herself, SBF, and two other FTXs, co-founders Nasad Singh and Gary Wang, who had been aware of the decision to send customer

funds to Alameda, end quote. In later reporting, the New York Times pointed out that these were also the four directors of the FTX Foundation. So it seems pretty clear that the group who actually knew about these deceptions and these frauds was extremely small. However, if you're not satisfied with these answers, I will say only that the truth of it one way or another will likely come out in future court proceedings, as it's hard for me to imagine that this stays out of the legal realm for long. Next question. How deep did the fraud go? Short answer is, I don't know, but I think that we're going to learn a lot more in the coming weeks and months. As I stated before, my base case is that this wasn't some isolated incident, because the specific infrastructure of the fraud seemed to be in place.

Another question, why was there no due diligence from investors? FtX raised billions of dollars. It is quite reasonable then to ask why none of these investors uncovered signs of malfeasance. First, I will say it's not quite true that no investors saw red flags. Chimoth Palahapatia of Social Capital said that when he reviewed the deal, his team recommended FTCS get an actual board of directors as well as a couple other things. He claims that when his team sent these suggestions, they got a call from someone on FTX who literally said, go fuck off. Now, an even more reliable source in my opinion is Jason Choi, who has said that he had reservations about FTX very early and always wondered until recently if he had just been stupid

in letting such an iconic deal go. Second, there were clearly some conflicts of interest. The information reported last week that SBF had quietly invested more than a half billion dollars in Sequoia, Paradigm, venture firms who also invested in FTX. This sort of circular investing seems likely to be something that is going to get a lot more scrutiny in whatever is to follow. Third, there is the simplest factor. The guy was on the cover of magazines. He was on TV constantly. He was what the better side of crypto was supposed to look like. And hell, everyone else had invested, right? Next question. Why, why, why didn't they just let Alameda die when it had already died alongside Luna and Three euro's capital. This has been one of the most common questions on crypto-twitter. FTC was worth a combined

$40 billion. Why not just take the hit and let Alameda fail rather than risk everything? To me, there are two possible answers. The first is arrogance of kids who thought they could save everything and were willing to play fast and lose to do so. The second, and more concerning, was that they knew that the death of Alameda was an existential threat to FTX because of yet-to-be-revealed tie-ups. I think both of these are plausible and even likely. Another set of questions has to do with SPF's political relationships. How much was Sam trying to use regulatory capture as a business strategy? The answer that's coming to light is that there certainly seems to be much more of that than he was letting on.

Specifically, the relationship with Gary Gensler and the SEC seemed to be proceeding in a direction that very few people knew about. Going on, how much of Sam's campaign donations were about giving him political cloud cover if things were to go badly. On that front, I do think they were about to see whether that was an effective strategy. whether it was an intentional strategy or not. Next question, speaking of effective, where does this leave effective altruism? Sam was effective altruism's first homegrown billionaire. He was a business philosopher king

who was meant not only to apply the ideas of impact utilitarianism at scale, but to do so in a way that actively proselytize the idea behind the movement at the same time. That community is absolutely reeling as it grapples with whether the particulars of its philosophical outlook gave Sam an ends justifies the means mentality,

an ethical cover for his first, fraud and deception. Facebook and Asana co-founder Duskin Moskowitz tweeted, many people have been saying that EA's culturally are likely to follow naive utilitarianism into dark corners. I thought this was too cynical, but feel incredibly humbled by this event. Either EA encouraged Sam's unethical behavior or provided a convenient rationalization for such actions. Either is bad. Next question, where do regulations go from here? One thing that is abundantly clear is that the Digital Commodities Consumer Protection Act or DCCPA is dead for this year. More broadly, I think many people are expecting a political

drag net in the wake of FTX's collapse. Stack Hodler wrote, all I can say is prepare for the Patriot Act of Crypto, and I don't think he's insane. People are particularly worried because already defy was on shaky ground regulatorally, and it seems fairly clear from the initial response that defy and all of the rest of crypto is getting swept up in what ultimately is an institutional failure based on fraud. Unfortunately, getting politicians to recognize nuance when the event is so cataclysmic is going to be an uphill battle. This, I think, brings us to one of the most salient and important questions. Where really was the rot here? There are a fairly large set of possible answers to this one. One possible answer is the very idea of tokens as a construct. As is becoming

clearer and clearer, tokens like FTT and SRM were used as little more than a shell game to balance out a seemingly endless back and forth of value-on-paper games between Alameda and FTX. He's the problem that from thin-air tokens can be used this way in the first place, that it's too easy to obfuscate the reality of illiquidity that characterizes the absolute vast majority of tokens. Another possibility is that the rot has to do with the type of business relationship that simply shouldn't be allowed to exist. In other words, should it be the case that crypto exchanges or the people that own and operate them should not simultaneously be able to own and operate prop trading firms? Is a source of rot the lack of

regulations that let the above two conditions persist. The SEC has been taken to task for spending time on Kim Kardashian settlements instead of this actually horrible, damaging stuff. Is the source of rod an industry that wasn't willing to do diligence, and that overly relied on media as an instrument of legitimacy that was so desperate for a mainstream success that it was willing to overlook red flags? You can probably tell from my tone that I think the answer to all of these questions is yes. None of them can explain it alone, and none of them are as clear-cut and fixable as I've just laid them out, but they all played a role. However, there is another source of rot here,

one which in our necessary self-reflection we cannot forget. And that's a power drunk kid or kids with too much fake money and too much willingness to lie, deceive, and defraud his customers, employees, and investors to achieve whatever ends he had decided justified the means. And that brings us to, I think, what is the biggest question for many?

Why Sam did this? Why couldn't he just stop? Why couldn't he be content with the legitimate business that FTCS is built? Even if at some point he had used shady techniques. By 2022, he had $40 billion in equity and businesses that were making a ton of above-board money. Why risk that for the rush of some trades? It feels to me that there are only a few possible answers. The first one is greed.

Now, Sam wasn't an ascetic, hello, $35 million penthouse with a grotto apartment. But he also wasn't a person who really focused on enjoying his wealth. in the traditional ways. So the idea that he couldn't stop because he needed more things and stuff and the normal trappings of greed feels incomplete. A second possible answer to why is power. This seems to me more plausible, power or influence. Sam's stated objectives were basically power and influence to shape the causes that he cared about. Getting money and then channeling it in a way that he thought was uniquely correct, especially relative to how others were spending money, whether it was in charity or in politics, was a distinct and key motivator. It is entirely possible

that the gaping maw of his ambition for this sort of power and influence, even if in his head a righteous justified power and influence, led him to never consider slowing down, no matter what techniques were required to stay speeding up. Which of course, I think, brings us to a third possible answer, hubris. I think it is impossible to view this situation as it is, whatever the other whys are,

and not see a huge, hearty dose of hubris. Simply put, Sam thought he could get away with it. The brazenness of lecturing Congress in the Senate on FTCS's transparent practices while lying to everyone in the industry, including his own team, is so gallingly hubristic it would make ancient Greek poets blush. There is, of course, though, a fourth possible answer, which is desperation. There is a growing speculation and investigation of, to what extent, the supposed fortunes of FTCS and Alameda as companies,

and Sam as an individual, were built on a foundation of fraud and lies from the very beginning. It is entirely possible that the open door between Alameda and FTX, and specifically those $10 billion in customer fund transfers, were in fact a prerequisite of the whole setup. That if they couldn't pull off this fraud and deception, the whole thing was going to crumble in on itself anyway. For now, we don't exactly know. We can only speculate. But I suspect we'll know a lot more soon. Now let's talk about who got it right. There's a lot of hindsight bias flooding the industry right now, and that's honestly very understandable.

It is incredibly natural when some massive fraud like this comes to light, to look back at every red flag that was either unnoticed or ignored and ask, why the hell didn't we put a stop to that then, or at least, at least ask more questions. There are also a lot of folks who are using this situation to reinforce their own narratives, claiming knowledge of it the whole time and that it was so obvious to see who SBF truly was. And this is, of course, to say nothing of other fraudsters who are looking to use this as a pivot point in their own reclamation arc, which, by the way, we should not let them do. The reality, though, is that for even people who didn't particularly like Sam,

who thought that FTCS was a shit coin casino, or that his political machinations were worrisome, there was virtually no one who would have even whispered the idea as of two weeks ago that Sam was perpetrating massive financial fraud on the scale that has started to come to light. That is, in fact, the most worrisome thing, and it is why so many people feel so betrayed and hollowed out by the last week. Sam was supposed to be a good guy. FTX was supposed to be a source of strength for the industry. Instead, he and it became one of our greatest catastrophes.

Now, in terms of the scorecard, Bitcoiners certainly, on average, got SBF more right than others. It is an affirmation of the base-level skepticism and adversarial thinking that is such a core part of the Bitcoiner mentality. I would add that many Ethereum were also in this category, who felt like they got to see Sam's true colors around his support of Solana last year, a position that many dismissed as just a new type of maximalism taking form. However, for those, whether it's in Bitcoin or Ethereum, claiming a victory lap for toxicity, I would humbly suggest that it was not toxicity, but instead a bedrock ethos of don't trust verify that should be lauded. Second, there were a handful of critics like Mark Cohodes who smelled bullshit and never let it go.

To me, this is a reminder that even if you don't particularly like a criticism being lobbied at the space, our industry has officially not earned the benefit of the debt. doubt. Or maybe we had, but now we've lost it again. I already tried to do this, but I'm definitely going to try to create more mental space for critiques I don't like from people I don't particularly care for, because engaging with them honestly and sincerely seems only prudent given this whole affair. And I guess that brings it all the way back around to me, how I feel and what I think about my role in all of this. There are some of you out there, including long-time loyal listeners, who throughout my duration with FTX have asked me why, even before the fraud, why they're

lend this thing, this casino, credibility? Why contribute to it? First of all, while I know many of you want me to be Bitcoin only, the reality is that I'm just not. I've never really truly wavered in this. I've always, always argued that the reason that I hold Bitcoin in the highest esteem compared to everything else is that Bitcoin has matured into something that is actually a big picture power shift in the world right now. The example I give every time I'm interviewed of what made Bitcoin click for me was thinking back to when I was working with Sudanese refugees in Cairo in 2004, and imagining if they had had Bitcoin to be able to bring some part of their wealth with them as they fled famine and war.

How different that might have made their lives. That use case is possible and real and happening today. And that makes Bitcoin for me an unimpeachable force in the world. But I do not believe that that unimpeachable force is nearly as threatened by the existence of other types of things as other Bitcoiners seem to. I might care less about the other types of use cases for cryptographic tokens, but I don't think that they need to not exist for Bitcoin to thrive. I also don't think that people are immoral or stupid

for wanting to work on things relating to them. Now, that's said, I do think that this episode is going to make us take a much harder look at where tokens are used and why. I think that even outside Bitcoin circles, there will be much more common sense of which tokens are genuine scams and which aren't. I also think that legislation is going to once and for all create either legal pathways for tokens to become, not securities, or determine that they all are. When it comes to individuals, I think many are going to decide that Bitcoin is the only

right answer, and I am completely supportive of that if that's the path that makes sense to you. Bitcoin is a big picture power shift. These other things are contenders at various stages of their journey to that potential. But speaking of power, in a world where if you're not Bitcoin only, if you live and operate in the broader crypto context, there is no category of institution that has more power than exchanges. I didn't seek out working with FTX. In fact, when the opportunity came, I had previously determined that I never wanted to work for any single company again. Blockfolio was one of my clients, and when COVID hit, their CEO Ed, wanted to do right by his team, and that meant trying to get acquired. When FTX was the right fit, the Blockfolio squad pushed me hard

to join in a full-time capacity. I did so, A, under the condition that I would never have to give up my podcast, which was built into the contract, and B, because the sheer number of people who seemed convinced that Sam was a generational entrepreneur, and FTX was a generational company. I didn't know about that when I started, but there was a lot that I did like about FTCX. I liked that FTX wanted to mainstream crypto and shift the story from one that was all rah-rah revolution fortune favors the brave to one that was simple, invitational,

and for anyone from any background who wanted to explore it. I liked that Sam wanted to have an impact in the world and had a theory of how to do so, even if EA has never been my cup of tea for its unwillingness to deal with messy non-mathy impact issues like human rights. I was like Fox Mulder with his I want-to-believe poster behind him, except instead of wanting to believe in aliens,

I wanted to believe in non-sociopathic billionaires. And even more than wanting to believe, I like that I could potentially nudge them to be a better version of themselves. Even before all this deception came to light, and it was clear how close Sam kept things to the vest, I was never arrogant enough to think that I could really impact how Sam thought about things much. But what you guys didn't see was behind the scenes

my being able to be a person inside FTX debating how we talk, think, and act about Bitcoin's energy consumption, and why we shouldn't just cast it to the wind for political favor. What you didn't see was me being able to use the little influence I had to get us to sponsor Bitcoin CoreDevs through Brink, where we were the biggest exchange donor, although at an embarrassingly small amount. These were things I liked about where I was, even if it was behind the scenes and it wasn't much. When it came to being sponsored by FTX publicly, what mattered to me was being clear about the relationship each and every day. I've never, ever positioned myself as a journalist, but I still think it's important that you as the listener get to know my conflicts of interest,

so that you can decide just how big those conflicts are, and how it might make you contextualize whatever I happen to be saying about any given topic. I know who I am. I know what I stand for. And I respect every single one of your rights to know who I'm working with, to make your own decisions about how that might influence me, and to be able to take or leave what I have to say because of that. So, do I regret ever working for FTX? Clearly, in retrospect, I wish that the exchange that Blockfolio ended up in

and recruited me to hadn't been one led by someone who had abused his power, and secretly perpetrate fraud. But I know why I felt compelled to dig in when I did. What I thought I was trying to help do to push the industry forward in a way that expanded who could be part of it while respecting its core values is still something I believe strongly in. And just so there's no revisionist history,

working with Sam and FTX wasn't something where I ignored some gut feeling about Sam being bad for the sake of some greater good. I genuinely took him at his word around his motivations. I thought we were the good guys, or at least aspiring to be as good as you can in a complicated industry. I was absolutely blindsided last week,

and the betrayal I feel is still raw. Now, do I regret the fact that because the leader of FTCS ended up being a fraud, who duped our entire industry, both my work and the credibility of the podcast sponsorship ended up perpetuating that lie? Absa-ficking lootly. Media in all its forms is power, and when it's wielded to nefarious ends,

even by those who don't realize they're part of serving those nefarious ends, they need to own it. To those whose money and lives got tangled up in Sam's massive fraud, I am endlessly, endlessly sorry for any credibility I lent it. I apologize in unreserved terms. Now, to be honest and candid, I don't know what the right answer is in terms of changes and how to think about sponsorship.

What makes the situation so damnable is that even if I impose some new criteria or diligence to figure out who is a good actor in the space versus a bad actor, by every metric I can think of, FTCS would have soared through. I'm thinking about whether there is a different type of disclosure or discourse to do around the sponsors. Think the warning label on cigarettes, so we're at least reminding people of the fundamentals

to do their own research, to remember that nothing is as safe as self-custody, to remember that not your keys, not your coins, but ultimately I'm still in the middle of those reflections. Now, another question that some have asked is why did it take until Monday to do this show when the shi-storm started a week ago? The first answer is boring but true. We were in South America, trying to focus on family matters, birthdays, anniversaries, and helping my in-laws move. At the end of the week, we were traveling for 30 hours between Thursday and Friday with two small kids. Throughout all of this, episodes were pre-recorded with the exception of a couple that I recorded on Wednesday. When it came to Wednesday and why I said things were

too unclear to comment yet, some have said, yeah, but you always discuss things that aren't quite clear, just using the best information we have. It is one thing when I'm giving you the best information we have about, about some situation I'm not a part of. But I was inherently a part of this. I was watching everything I've told you about on Slack. I was wondering what it meant for my job. our health insurance, the money and equity we had tied up in FTX. There were huge implications for my family. And that's the other piece of this. We are, to be clear, about the luckiest and safest of the folks that are getting screwed

by this situation. My heart especially goes out to the FTX team around the globe, who are using FTX as a bank and lost not only a job, but in many cases their savings. But let's be very clear, this still ripped my family's life apart as well. We lost a life-changing amount of money. And more than that, a huge amount of how we thought about and designed our next few years went out the window in a flash. We weren't just watching the car crash.

We were in it. I needed time to figure out what the exit was. When the irredeemable extent of the fraud became clear and when it became clear that I couldn't do anything to help the customers and employees stuck in the situation, I resigned. It's taken me all friggin' weekend to write this damn thing, and I've barely scratched the surface.

And on that front, one thing that became clear during this reflection is that there is a bigger story that needs to be told, and I think I want to tell it. I want to talk about the rise as well as the fall of FTX. I want to put it in the context of the larger changes in the crypto industry, as well as the secular shift from loose-to-tight monetary policy. I want to give the huge number of people who woke up ruined because of a con man the chance to have their voice shared,

and I want to keep covering the muck that gets turned up so that we can learn from it. I want to do it because I want to do it, but also because I think this situation is going to be used as Exhibit A as a reason that the whole enterprise of Bitcoin and Crypto are moribun fraudulent garbage and should be banned off the face of the earth. Someone needs to tell the story unflinchingly and in all its detail without coming in assuming that it's vindication of priors that everything about this space was bullshit to begin with. So right now, I'm planning on at some point releasing a standalone series on the rise and fall of

FTX, tentatively called No SmartMoney. If you want to stay up to date on that, go to nosmartmoney.com and sign up for updates. And for those of you who don't care about any of that, but just want me to give you the unvarnished coverage day to day from this train wreck. I'm completely unencumbered now, so get ready. So where does the industry go from here? First of all, one thing I want to say is that beyond this rottenness at its core, FTCS is full of some of the best people I've ever worked with,

in terms of them as people and in terms of their skills and capacity to deliver. Like me, all of those people are absolutely reeling from the betrayal of Sam and trying to figure out what next. There's a telegram chat where XFTXers are sharing opportunities, so if anyone is hiring DM me and I can drop it there. More broadly speaking, we will see, I believe, a massive return to fundamental. I'm talking real no bullshit basics. Not your keys, not your coins. Why decentralization, true decentralization matters. Don't trust, verify. I'm already thinking a lot about how that

might manifest in the show and you're not going to have to wait long to see that. Second, there is going to be a huge amount of reflection around everything I discussed above. The nature of tokens, rules and regulations around exchanges, considerations of diligence and the power we give media to shape our opinions. We need to own our part and fight. for something like this not to happen again. But I do believe that as we do that incredibly important reflection, we need to remember that this was not a failure of a technology. It was egregious, deplorable, arrogant fraud. And the actions of one lying, fraudulent con do not define us all. Ryan Adams, a bankless tweeted yesterday,

Sad thing is, Sam may kill Defi in the U.S. on his way out. The wrath of regulators is coming. I expect they'll make no distinction between C-Fi and D-Fi. Our defy educators in D.C. need our help more than ever. He ced Jake Chravinsky from the Blockchain Association and said, What do we do? And Jake's response nearly perfectly summed up a lot of what I've been feeling. Jake tweeted, we tell the truth. We explained that this wasn't a U.S. regulatory failure or a flaw in the underlying technology. It was a historic fraud perpetrated by a con man in the Bahamas.

We uncover in detail exactly what happened, honestly and ruthlessly. delay bear the crime in full. We take responsibility for not calling out the red flags, for not pushing back harder while the criminal crowned himself the king of this industry. We help with the investigations. We show how open-source public blockchains offer an unprecedented ability to root out bad actors. We take it upon ourselves to use this technology for what it does best, to increase transparency, to mitigate risk, to eliminate untrustworthy third parties. We make proof of reserves a top priority for every custodial market participant. We put decentralization above all else. We restore the principles

that brought us here. Don't trust, verify. Not your keys, not your coins. We focus on education for newcomers. The first thing we teach is self-custody, not which coin will make them rich quick. We teach them only to invest what they can afford to lose. Once we've done that work, we show, not tell. We do hundreds of briefings and demos in D.C. We go to every office and every building in the city and show them how D.F.I. works. What a trust-minized financial system looks like. We show how Defi is the solution, not the problem. We bring the real DeFi builders to those meetings. We show them the intellect, the honor, the passion that truly characterizes this industry.

We show them that a Bahamian bucket shop chief doesn't represent us, not one bit. We show why rules for CFI don't work for Defi, why they'd kill this promising new technology in the crib, and why that would be a tragedy for the U.S. and the world. We show that our industry is ready to mature to get serious about rules that make sense for this new paradigm. We can do it, and we will do it, because the truth is, is, despite how bad this moment feels, we know it only reinforces that what we're trying to build is absolutely necessary, a financial system free from crooks like Sam Bankman freed.

I'm confident that the truth will win out. On the other side of this, will people stick around? Some won't, and that's okay. I've seen more people say that they're just done with this. The betrayal is too much, the rod is too much, and I understand. Ultimately, everyone who sticks around will have to ask themselves two questions. Did something that we were doing here actually matter, in spite of it being so egregiously taken advantage of?

And second, am I still willing to work to make that thing real? I respect anyone who answers no after all of this. But I know my answers to both questions. Until tomorrow, be safe and take care of each other. Peace.