The Breakdown - Sherrod Brown Tells SBF, ‘Show Up or Get Subpoenaed’

Episode Date: December 9, 2022

This episode is sponsored by Nexo.io, Circle and Kraken. Today on “The Breakdown,” NLW looks at the shift in tone around SBF following the FTX collapse. Both the House and the Senate are holding hearings on FTX next week, and have confirmed that if former FTX CEO Sam Bankman-Fried doesn’t testify voluntarily, he could be compelled via subpoena. The show also covers Sen. Elizabeth Warren’s fight against Silvergate and crypto-serving banks, as well as Rep. Ritchie Torres’ recommendation for an investigation into Gary Gensler and the Securities and Exchange Commission’s conduct and failure to look at FTX.  - Nexo is a security-first platform where you can buy, exchange and borrow against your crypto. The company ensures the safety of your funds and keeps innovating with products like the Nexo Wallet - a non-custodial smart wallet that allows you to create your Web3 identity. Get early access at nexo.io/wallet. - Circle, the sole issuer of the trusted and reliable stablecoin USDC, is our sponsor for today’s show. USDC is a fast, cost-effective solution for global payments at internet speeds. Learn how businesses are taking advantage of these opportunities at Circle’s USDC Hub for Businesses. - Kraken, the secure, trusted digital asset exchange, is our sponsor for today's show. Kraken makes it easy to instantly buy 185+ cryptocurrencies with fast, flexible funding options. Your account is covered by regular Proof of Reserves audits, industry-leading security and award-winning Client Engagement, available 24/7. Sign up and trade today at kraken.com/breakdown. - Cryptowatch Desktop levels up your trading game. Trade like a pro across all your favorite spot and futures exchanges over a single low-latency connection. Personalize your dashboard with fully-customizable layouts, ladder trade instantly, price watching and market insights. Visit Cryptowatch.com. - “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 "Back To The End" by Strength To Last. Image credit: Tom Williams-Pool/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

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 crack it and produced and distributed by CoinDesk. What's going on, guys? It is Thursday, December 8th, and today we are talking about how and why the noose is tightening. Before we get to 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. I'm also excited to share that today, CryptoWatch is an additional sponsor.

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for sponsoring today's show. All right, today we are back on the crypto side of the world where the fallout, particularly the regulatory fallout from FTX, continues to absolutely dominate the discourse. Where we left off, the main discussion point was whether or not Sam was going to testify before Congress. If you remember, on Friday, December 2nd, Congresswoman Maxine Waters, the chairwoman of the House Committee on Financial Services, tweeted to Sam, we appreciate that you've been candid in your discussions about what happened at FTX. Your willingness to talk to the public will help the company's customers, investors, and others. To that end, we would welcome your participation in our hearing on the 13th. Now, of course, over the following weekend, the entire crypto community was up in arms about the kid glove type of

tone. Rightly or wrongly, Maxine Waters has been perceived as an ally of Sam. She appeared in pictures with him and his father and even blew him a kiss at the end of a hearing earlier this year. Well, Sam himself didn't seem to think it was all that important to comply, and on Sunday he responded, Representative Waters and the House Committee on Financial Services. Once I have finished learning and reviewing what happened, I would feel like it was my duty to appear before the committee and explain. I'm not sure that will happen by the 13th, but when it does, I will testify. Now, this garnered another response from Maxine a day later, which basically said, okay, so you can do endless Twitter spaces but not testify where it matters? Waters tweets, based on your role as CEO and your media interviews over the past few weeks, 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 is also critical to the American people. It is imperative that you attend our hearing on the 13th, and we are willing to, to schedule continued hearings if there is more information to be shared later. Now, many in Crypto appreciated the slightly more forceful tone, but still more or less agreed that without compelling Sam to come, he simply wasn't going to, aka subpoena or bust. However, yesterday, CNBC released a bombshell piece saying that Waters wasn't planning on subpoenaing Sam. Quote, Waters informed committee members of her decision at a private meeting

Tuesday with Securities and Exchange Commission chair Gary Gensler on Capitol Hill. Those at the meeting, State Waters, said she wants committee staff to try to convince Bankman Free to voluntarily testify those with knowledge of the meeting said. Now, this absolutely set the internet on fire. Dave Portnoy, the head of Barstool, went off just as a for example. And SBF is just waltz around. Nah, I don't know. Biggest collapse ever.

People lost their lives, their jobs, their livelihoods, all their money, life savings, gone. And he's not being called to testify? What are we talking about? Sorry. I don't remember it is, somebody has their hands so deep in this and so much money and protecting his ass. It's disgusting. Now, one other note from that Portnoy rant, he mentioned that one of the reasons that he was disbelieving of all of Sam's claims to not be involved in key parts of the business

was that when FTX did an advertising deal with Barrstool in early 2021, Sam wouldn't finalize that deal until he had talked to Portnoy directly. This is more or less the same source of my skepticism that I've shared before. The part of the biz that I saw, limited though it was to just brand marketing, didn't just have Sam have visibility. He was the final call always. Anyway, there was enough of this sort of fierce intensity that Waters was compelled again to respond. She tweeted, lies are circulating on CNBC that I am not willing to subpoena SBF. He has been requested to testify at the December 13th hearing. A subpoena is definitely on the table. Stay tuned.

Meanwhile, over on the Senate side of the table, the Senate Finance Committee also set a date for an FTCS-related hearing, December 14th the day after the House hearing. Perhaps taking a lesson from the communication between Waters and Sam, their letter to him was a little bit more direct. Chairman Sherrod Brown wrote, I'm writing to request your appearance before the Committee on Banking, housing, and Urban Affairs to testify in-person at a hearing entitled Crypto Crash, why the FTC's bubble burst and the harm to consumers. Has the founder and CEO of FTCS trading limited at the time of its collapse, and the founder, principal owner and former CEO of Alameda Research, you must answer for the failure of both entities that was caused, at least in part, by the clear misuse of

client funds and wiped out billions of dollars owed to over a million creditors. There are still significant unanswered questions about how client funds were misappropriated, how clients were blocked from withdrawing their own money, and how you orchestrated a cover-up. Please respond to my staff by 5 p.m. on Thursday, December 8th, to discuss your participation at the hearing. If you choose not to appear, I am prepared, along with ranking member Pat Toomey, to issue a subpoena to compel your testimony. Now, at the time of this recording, Sam had not publicly responded to that. And perhaps that was because he was finally listening to counsel, which is another interesting wrinkle in the story. As I've discussed previously, Sam hired

Martin Flumannbaum of Paul Weiss, Rifkin, Wharton, and Garrison, but last month that firm dropped him, saying they couldn't represent him due to conflicts. Well, as of Tuesday, according to Reuters, Sam has now hired Mark Cohen to represent him. Mark Cohen is a former federal prosecutor, but that's not what he's best known for. Nope, what he's best known for is representing Jeffrey Epstein compatriot Galane Maxwell at her recent sex trafficking trial.

You truly cannot make this shit up. By the way, Carolyn Ellison has also lawyered up. In that same piece, Reuters confirmed the rumor reported by Autism Capital First that she had hired Wilmer Hale. Now, this is all part and parcel of a clear shift that's happening right now. I think the skepticism of the initial mainstream media coverage of Sam was warranted.

The first pieces too often failed to hone in on the key questions. There are major gaps in interviews. And even as of yesterday, there were pieces like the one that appeared in the Boston Globe that suggested that Ellison was just a bright normal girl, her star going places, until she came into league with crypto. But holding that aside, as the story has progressed, the tone has shifted as well. I don't think it's necessarily because the media has had some big change of heart. I think it's that the longer this goes on, and the more Sam talks, the more the inconsistencies rise to the surface.

What's more, while media cycles quickly, regulators and law enforcement take a little more time. The farther away we get from the initial collapse, the more the story is about the investigations. In an ecosystem where innovation is the norm, it's the basics that are in the spotlight. Nexo is a company that has never put the safety of clients' funds in question. With over 50 global licenses, $775 million in insurance, and a real-time audit of custodial assets. Nexo sets an example for security standards in the industry. Apart from keeping their 5 million clients safe,

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And award-winning client engagement teams are available for support 24-7. Buy crypto instantly with fast, flexible funding options on Cracken. Download the Cracken app on Google Play or the Apple App Store. Or visit crackin.com slash breakdown to join. The New York Times reported yesterday that federal prosecutors are now looking into whether FTX and Alameda manipulated the market for Terra, U.S.D, and Luna in a way that led to their demise. From the New York Times, quote, U.S. prosecutors in Manhattan are examining the possibility that Mr. Bankman-Fried steered the prices of two

interlinked currencies, Tara-USD, and Luna, to benefit the entities he controlled, including FTX and Alameda research, a hedge fund he co-founded and owned. The investigation is at its early stages, and it is not clear whether prosecutors have determined any wrongdoing by Mr. Bankman-Fries. or when they began looking at the Terra-USD and Luna trades. The matter is part of a broadening inquiry into the collapse of Mr. Bankman-Fried's Bahamas-based cryptocurrency empire and the potential misappropriation of billions of dollars in customer funds.

Crypto Twitter could basically taste the delicious irony here. Gabriel Shapiro writes, how funny would it be if SBF Alameda crashed UST, ultimately dooming SBF's entire empire? I believe in karma. Zero hedge writes, too many ironies. One, FTC sparked the collapse of Terra UST and Luna eventually leading to FTC's own demise. Two, CoinDesk first reported on FTX's fraud, sparking a cascade of events that has led to the near demise of parent digital currency group. Now, by the way, on that front,

the lack of progress out of Genesis's financial trouble continues. With the crypto lender writing to clients yesterday, quote, at this point, we anticipate that it will take additional weeks rather than days for us to arrive at a path forward. As we progress, you will hear from us on meaningful developments, including any updates on timing. Frank Chaparro of the block summed up the situation well, tweeting Genesis basically like, let's all reconnect in the new year. Gemini, one of the major creditors of Genesis, have committed to additional communication with customers as the negotiation process continues. Cameron Winklevoss, the co-CEO at Gemini, tweeted, Today, Gemini is launching a new page that aims to bring as much transparency as possible

to the process of finding a resolution for all earn users to redeem their funds. At a minimum, we will update this page on Tuesday and Friday of each week until a resolution has been reached. Gemini, acting as an agent on behalf of earned users, has been in ongoing conversations with Genesis Global Capital, DCGCo, the parent company of Genesis, and Barry Silber. at the CEO of DCG in an effort to find a resolution ASAP. Anyway, to put a nice little bow around these SAM updates, where we stand is that there are two hearings next week, a House hearing on Tuesday and a Senate hearing on Wednesday. They both want Sam, they want Sam in person, and now they're using the subpoena word

in terms of what they're willing to do to get him there. Sam, meanwhile, after hiring Galane's lawyer, has finally gone quiet. But lest you think regulators are only focused on Sam, that is not the case. On Tuesday, we discussed distressed crypto-serving bank Silvergate. Senator Elizabeth Warren has gone after them in a significant way. On Wednesday, she and Senator Tina Smith sent a letter to Jerome Powell about banking and crypto. We write to express concern regarding recent revelations of ties between the banking industry

and cryptocurrency firms and to inquire about how your agency, the Federal Reserve, assesses the risks to banks in the banking system associated with those relationships. Thankfully, the banking system has been spared of the FTX-induced turmoil. Despite the industry's efforts to gain access to the banking system and the benefits that come with federal recognition from bank regulators, crypto is, so far, not deeply integrated with the traditional banking system. Nevertheless, it appears that crypto firms may have closer ties to the banking system than previously understood. According to a New York Times report, Alameda, which siphon $10 billion off the FTC's exchange and into its coffers under a scheme coordinated by Sam Bankman-Fried and other FTCS and Alameda executives, made an $11.5 million investment into Moonstone Bank,

more than double the bank's worth at the time. According to a former president of the independent community bankers of America, quote, the fact that an offshore hedge fund that was basically a crypto firm was buying a stake in a tiny bank for multiples of its stated book value should have raised massive red flags for the FDIC, state regulators, and the Federal Reserve. It's just astonishing that all of this got approved. A little editor's note here that was the same quote I used when I was talking about this Moonstone connection. Now, ultimately what Warren and Smith are asking Powell for is a set of questions, to be returned by December 21st. Those questions include things like, do your agencies plan to conduct a review of crypto firms' relationship with banks?

Describe the process by which your agencies evaluate banks' relationship with crypto firms. Questions around which banks provide crypto custody services, hold dollar deposits for crypto-related firms, act as nodes to verify customer payments, etc. Now, on the surface, none of this is totally unreasonable. The Moonstone investment is really weird. And to the extent that the Fed or a branch of it approved the transaction, these are reasonable questions to ask. However, many in the crypto community simply do not believe that Warren's arguments are in good faith. Masari's Ryan Selkis went in saying Senator Warren doesn't want to investigate a single bank for its relationship to a fraudulent crypto exchange. No, she wants to shut down all banking access to honest crypto companies, too.

That is her goal. He also made an accusation that there was a significant lobbying campaign going on behind the scenes, tweeting, the Warren's Silvergate letter is allegedly in response to a push from a well-known short-seller who has been aggressively hitting DC-Wing. with this pitch. Senator Warren, are you doing the bidding of shortsellers in an attempt to spark a bank run on an entity you disagree with politically? Now, I don't know for sure, but I can only assume Selkis is referring to Mark Cohodes, who has been super vocal about Silvergate in the wake of FTC's collapse. As an aside, shortsellers and media and lobbying is one of the weirder parts of the market and regulatory system to me. We're just discussing whether Alameda manipulated the market, presumably those

investigating mean the way that they traded around USD and Luna. But why then isn't leveraging media relationships to try to take down a company, which necessarily would mean tanking their stock price in the case of Silvergate, its own form of manipulation. By the way, this is a general thought that I've had many times in the past, not necessarily specific to here. And Mark Cahodes was right on Sam, so if for no other reason than recency bias probably deserve some consideration. Anyway, back to Ryan, he writes, I feel bad for Silvergate. This should have been a banner year for them as a pillar of the crypto community, as rates finally rose above zero for the first time in years. instead, their collateral damage to a massive financial fraud and now part of a Senator Warren witch hunt.

There is a chance this blows up in my face, but I'm willing to risk it and say I'd be surprised and very disappointed if Silvergate was anything but on the up and up. There's a lot of short-seller political witch-hunt fud right now, but it's a good bank with good people. Now, Silvergate isn't the only one outside FTC that is getting FTX-related heat. New York Democrat Richie Torres sent a letter on Tuesday to the government accountability office asking them to investigate the SEC's, quote, failure to protect the investing public from the egregious mismanagement and malfeasance of FTX. The Torah's note is pretty good, so I'm going to read a big excerpt from it. I'm writing to respectfully request that the Government Accountability Office conduct an independent review of the SEC's failure to protect the investing public from the egregious mismanagement

and malfeasance of FTX, which has brought billions of dollars in losses to about a million creditors and customers. Chair Gary Gensler, by the logic of his own public pronouncements, is singularly responsible for the regulatory failures surrounding the collapse of FTC and its affiliate FTXUS. Chair Gensler has said on countless occasions that there is no need for authorizing legislation from Congress, the SEC presently possesses the authority it needs to regulate crypto exchanges. If the SEC has the authority, Mr. Gensler claims, why did he fail to uncover the largest Cryptoponzi scheme in U.S. history? One cannot have it both ways, asserting authority while avoiding accountability. It is on Congress to pass laws, but once the necessary laws have been enacted, it is on the

regulators to apply those laws to conduct investigations and protect the public. When it comes to FTX, Chair Gensler fundamentally failed as a regulator, and he has no one but himself to blame. The SEC chose to dedicate scarce time and resources to investigating Kim Kardashian, rather than opaque crypto exchanges, leaving many to question whether the commission is operating efficiently and apolitically, and whether it has its priorities in the right place. The operating principle of the SEC must be protection for the investing public, rather than publicity for the political appointee in charge. If the SEC had done the due diligence of thoroughly investigating the financials of FTX, there would have been a greater likelihood of exposing the crypto exchange for what it truly is, a house of cards

built on monopoly money printed out of thin air. Mr. Gensler's leadership has left the career staff at the SEC fundamentally demoralized to an extent rarely seen, with the SEC Inspector General reporting the highest attrition rate in a decade. To what extent has Mr. Gensler's demoralization of his own workforce crippled the commission in the performance of its duty to protect investors. The public deserves an answer. Given the magnitude of the regulatory failure surrounding the FTX saga, an independent review is both needed and warranted. Now, of course, this letter echoes many of the things that people in the crypto industry have felt, notably that Gensler has often been much more focused on raising his own political visibility,

as opposed to actually living up to the stated mission of protecting investors. Whether or not this investigation happens, the fact that there's these sort of public letters coming from Congress around it show just how massive the fallout from FTX is. In short, it is getting real out there, folks, and I think that we are turning a corner into a very new phase. of the post-FTX world. For now, I want to say thanks again to my sponsors, nexo.io, circle, Cracken, and Crypto watch for supporting the show. And thanks to you guys for listening.

Until tomorrow, be safe and take care of each other. Peace.