The Breakdown - The Vise Tightens on SBF as Former FTX Engineering Head Nishad Singh Pleads Guilty

Episode Date: March 2, 2023

The latest big news, in the wake of FTX's collapse: Nishad Singh, former head of engineering, has pleaded guilty to six charges as well as a “no contest” to civil charges from the Securities and Exchange Commission and Commodity Futures Trading Commission. In todays’ episode, NLW explores what we've learned from the charges, including new revelations about FTX's 2021 revenue. - “The Breakdown” is written, produced and narrated by Nathaniel Whittemore aka NLW, with editing by Michele Musso and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsor today is “Foothill Blvd” by Sam Barsh. Image credit: erhui1979/ Getty Images, modified by CoinDesk.  Join the discussion at discord.gg/VrKRrfKCz8.   Join the most important conversation in crypto and Web3 at Consensus 2023, happening April 26-28 in Austin, Texas. Come and immerse yourself in all that Web3, crypto, blockchain and the metaverse have to offer. Use code BREAKDOWN to get 15% off your pass. Visit consensus.coindesk.com.

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 produced and distributed by CoinDest. What's going on, guys? It is Wednesday, March 1st, and today we are talking about the latest SBF lieutenant to turn on him. Before we get into that, a quick note. There are two ways to listen to The Breakdown. You can hear us on the CoinDesk podcast network feed, which comes out every afternoon, and features other great CoinDesk shows, or you can get to do that.

you can listen on the breakdown only feed, which comes out a few hours later in the evening. Wherever you listen, if you were enjoying the show, I would so appreciate it if you would take the time to leave a rating or a review. It makes a huge difference. All right, friends, happy first of March. I joked today on Twitter that if you are in the northern hemisphere, particularly the northeast where I am, March always has this weird vibe where on the one hand, you think it's going to be spring, because, you know, spring solstice happens and all of that. But in fact, it is just second winter. And usually second winter is much less fun than first winter.

Well, when it comes to crypto, we got another reminder this week that we are still firmly in winter or at least winter cleanup. Yesterday, the news tightened around Sam Bankman freed even further as yet another of FTC's most senior execs turned against him. Former head of engineering at FTCS Nashad Singh pled guilty to criminal fraud charges and agreed to assist prosecutors in their case against SBF. As part of his agreement, Singh will plead guilty to one count of wire fraud, three counts of conspiracy to commit fraud, one count of conspiracy to commit money laundering, and one count of conspiracy to defraud the United States by violating campaign finance laws for a total of six counts. Now, in separate civil actions, Singh has agreed not to contest fraud complaints from the SEC and the CFTC.

The SEC will be asking for a ban on Singh asking as a corporate officer or director, which will be subject to court approval. This is in line with previous plea agreements from other FTCX co-conspirators Carolyn Ellison and Gary Wong. In a statement, Singh's lawyers said, quote, Nishad is deeply sorry for his role in this and is accepted responsibility for his actions. He wants to do everything he can to make things right for victims, including by assisting the government to the best of his ability in this case. Now, Nishad turning on Sam has seemed kind of like a foregone conclusion, ever since we got that conversation that Sam had with a Vox reporter

that he thought was off the record where he was, He said that Nishad felt really terrible, really genuinely terrible about all this, whereas Sam kind of made clear that he didn't. Now, Singh was released on a $250,000 bond to await sentencing, and his was so much lower than Sam's bond because, as prosecutor said, Singh had traveled back from the Bahamas voluntarily in November shortly after the collapse in part to assist with Justice Department investigations. Also, as we've learned, Sam's $250 million bond is total artifice just for headlines,

with the $250 million actually being backstopped just by Sam's parents' house and about $750,000 from two professor friends of theirs. As with previous plea deals, Singh's cooperation has filled in details and confirms speculation surrounding how the FTX fraud was committed. And on a personal level, it's always pretty weird to dig into these new revelations, as all of it was happening just around the corner from all of us seemingly doing our jobs, thinking that we were helping the good guys. And Ashad's case was no different.

The SEC complaint reiterated a number of claims against FTX, which now appear to be pretty firmed up by Singh's cooperation. These include secret automatically deleting messages, knowingly misleading statements to investors, large loans to executives, and most importantly, of course, the use of customer fronts to prop up the whole operation. Now, given that Nasad was involved in engineering, it might be no surprise that we got more details on the Alameda back door mechanism. The SEC complaint reads, quote, FDX diverted customer funds to Alameda in essentially two ways. One, by directing FTCS customers to deposit fiat currency, eG U.S. dollars, into bank accounts controlled by Alameda, and two, by enabling Alameda to draw down from a virtually limitless line of credit at FTCS,

which was funded by FTCS customer assets. As a result, there was no meaningful distinction between FTX customer funds and Alameda's own funds. Alameda therefore effectively had carte blanche to use FDX customer assets for Alameda's trading operations, end quote. Importantly, the complaint against the shot also describes actual knowledge and intention behind this mechanism. quote, from the inception of FTX, Singh knew that Alameda had a special role and received special treatment on the platform. Specifically, he was aware that Alameda used Ft's customer fiat currency for its own trading purposes. According to the SEC complaint by mid-2020, FtX began to attempt to untangle the co-mingling of customer funds at Alameda, which had by then

ballooned to more than $8 billion worth. Singh had a key role in this project in overseeing the team of software engineers that were working on it. Work was ultimately abandoned as exposing Alameda, to the same terms as other users of the exchange would mean charging the fund interest. Instead, the multi-billion dollar balance sheet hole was hidden in the account of a fictitious individual to ensure that it was not attributed to Alameda. Complaint also reiterates the other special privileges Alameda had on FtX, including the ability to access infinite borrowing capacity with no risk of liquidation. It explains that Singh and Gary Wong initially coded these abilities in May 2020

to allow Alameda to carry a negative balance on the exchange in order to reflect debt owed to FTX. Later, at the direction of SBF, the limit of this negative balance was increased to $65 billion, becoming functionally limitless. Although the complaint says this code was not initially intended to be used for trading accounts, quote, Over time, Singh became aware how these privileges were being applied to Alameda's trading accounts, and that Alameda was taking advantage of these privileges at Bangman-Fried's direction to draw on FTX customer assets to a virtually unlimited extent for its own uses. Singh then became complicit in the fraud, annotating the code that he wrote for the secret Alameda account with, quote, be extra careful not to liquidate. Now, regarding recent revelations about more overt bank fraud,

the SEC complaint alleges that Singh was the one who created the website for quote-unquote North Dimension. North Dimension was a subsidiary of Alameda research, which was specifically created to apply for bank accounts on behalf of Alameda, which had previously been refused service. The North Dimension website made it seem like it was a company that was entirely unrelated to crypto or FDX or Alameda in any way. The SEC complaint also adds a pretty big revelation about the degree, to which Sam was lying to us about everything. And certainly among all of this, given that we've

had so many revelations already, this is the part that really hit me and I know a number of other FTXers in the guts. Quote, in late 2021, when Bankman Fried realized that FtX was 50 million short of his goal of earning $1 billion in annual revenue, he instructed Singh to transfer funds from another entity that he controlled, and to falsely characterize the 50 million as revenue that FtX earned throughout 2021. Singh then backdated a series of fraudulent transfers and later lied to auditors about the transfers and created false documentation to support those lies. He did so knowing that this information would later be presented to investors and potential investors. So this, I think, is such an encapsulation of the way that it was clear ultimately that these guys did business.

For some reason, perhaps because it was something that he had already promised to some number of investors that he was counting on to keep the train going, Sam was willing to pull. Sam was willing to perpetrate fraud to make it look like FTX made a billion dollars instead of $950 million. There are only two possibilities of why you would do such a stupid thing. The first, like I mentioned before, is that you had somehow promised or were somehow seriously committed to this lie of hitting a billion dollars. The other is that you had just such a casual relationship with the truth and such a desire for optics over ethics, that you were willing to commit fraud for a real.

a reason that had nothing to do with actual business need and just a slightly better narrative story. In either case, these types of revenue numbers were something that Sam touted left and right, not only outside, but also inside the company. They were a key part of his argument to us when he invited FTXers to invest in the company in 2022 as well. It's really reinforced that there's basically nothing that these guys weren't willing to lie about. Anyway, the other new details that came about as part of this were around the campaign finance side. The criminal charges from the Justice Department, address Singh's role as a key straw donor to political causes on behalf of SPF. All told, Singh contributed $8 million to campaigns across the 2022 election cycle,

according to Open Secrets, and the DOJ has alleged that these donations were routed through Singh in a deliberate attempt to circumvent contribution limits. The SEC complaint outlines how Singh took out massive personal loans in the summer of 2022 for personal use, including purchasing a multimillion-dollar house and making charitable donations. These loans were generally poorly documented, however, one loan was, quote, collateralized by digital assets that Singh knew or should have known would plummet in value once the misappropriation of FTC's customer assets became public. According to filings in the FDX bankruptcy, Singh took a total of $543 million in loans. While the SEC goes to great lengths to describe how Singh and the small handful of folks

around Sam were aware that he, Sam, was making extremely misleading statements to investors and customers and employees about the safety of the exchange and how the relationship with Alameda was handled. Grubier-Gruwal, the director of the SEC's Division of Enforcement, said, this was fraud, pure and simple. While on the one hand, FTX touted its supposed effective risk mitigation measures to investors, on the other, Mr. Singh and his co-defendants were stealing customer funds using software code Mr. Singh helped create. Anyways, there's a lot in here to be disgusted by, and I spent all of yesterday doing that.

But there's also just this big, blaring question of how Sam possibly, thinks that he's going to be able to defend himself when everyone around him. Everyone who is complicit in this has admitted it. Anyways, that's the update. We'll leave that one there. Join CoinDesk's Consensus 20203, the most important conversation in crypto and Web3, happening April 26 through 28th in Austin, Texas. Consensus is the industry's only event bringing together all sides of crypto, Web3, and the Metaverse. Immers yourself in all that blockchain technology has to offer creators, builders, founders, founders, brand leaders, entrepreneurs, and more.

Use code breakdown to get 15% off your paths. Visit consensus.coindesk.com or check the link in the show notes. And I wanted to close out today talking about another issue that we've been covering quite closely. We've been talking a lot about a U.S. CBDC, in particular because GOP majority whip Tom Emmer has been recently vocal about his opposition to one. He recently introduced legislation contra a U.S. CBDC and has been tweeting up a storm about it. Now, if we're trying to understand why now, why Emmer is so concerned about this at this moment,

interestingly, yesterday we got some evidence from a former Biden economic advisor that there have in fact been pretty big efforts from the White House to push for a CBDC. So yesterday there was a Senate banking committee hearing called advancing national security and foreign policy through sanctions, export controls, and other economic tools. One of the witnesses was Deleap Singh, and I swear I didn't notice until literally this moment that the subject of our other story on this show also had the same last name as Nasad. Anyways, this Singh had previously served as the deputy director of the National Economic Council and Deputy National Security Advisor at the National Security Council.

Some of his things common suggested that the Biden administration had tried to push the government to issue a digital dollar. Now, while the hearing was brought in its scope, Senator Elizabeth Warren asked a question addressing the use of crypto in ransomware attacks and its theoretical use in sanctions evasion. You'll remember, she keeps asking this question to anyone she can. She asked it to the founder of Chainalysis, only to be very flustered by his response that Crypta just wasn't actually used in those sort of criminal activities very much. But still in this case, Deleip Singh reflected on the timing of last year's crypto executive order shortly following the first U.S. sanctions against Russia.

He said, quote, one of the efforts we made in parallel was to launch the executive order and also trying to push our government to launch a digital dollar, which I think is the single best step that we could take because it would crowd out the ecosystem of crypto that allows national security adversaries like Russia to exploit our deficiencies, our weaknesses, in terms of our critical infrastructure. Senator Warren, Trudeiform, used a big chunk of her time

to opine on the evils of crypto. She said it's being used to evade American sanctions, it's being used to enrich America's adversaries. We've got to stop helping these guys by letting crypto go unchecked. However, despite this strong rhetoric that crypto is the great tool of sanctions evaders, there just hasn't been evidence that surfaced to support that narrative. At the hearing, Singh even admitted that, quote, I don't believe that it's allowing for the evasion of sanctions at scale, but even a dollar of evasion is not something we ought to

tolerate. Now, what's really interesting about this to me is that this is a very different sort of narrative for and justification for a CBDC than we've seen the Biden administration and supporters of a CBDC talk about openly. This is much more reminiscent of the rhetoric coming out of places like the Reserve Bank of India, who are trying to build a digital rupee, specifically to have the benefits of digital currency while actually stamping out the need and demand for cryptocurrencies as well. This is an argument effectively that crypto is at worst a national security risk, and at best a force that makes U.S. economic power in the form of sanctions more toothless because of the way that it allows sanctions evaders to use crypto get around those restrictions.

Therefore, so the argument goes, the U.S. should have a CBDC. That would allow us to ensure that the digital currency that wins the day would not be able to do that sort of undermining of U.S. economic policy. Now, we haven't gotten to the point where official arguments are being made that brazenly yet, but perhaps this is what's happening behind closed doors. Perhaps these sort of arguments have more force behind them, more momentum behind them than we actually know. And perhaps that's why people like Tom Emmer are being so aggressive right now when it comes to trying to use legislation to actually limit what they're going to. the government can and can't do vis-a-vis CBDC. Now, while it's unlikely to be a major political issue in the upcoming election cycle, there is at least one candidate, the upstart anti-woke activist Vivek Ramoswami,

who is making opposition to his CBDC a central part of his campaign. He gets enough traction. It's not impossible that major candidates will have to actually address this. Anyways, guys, interesting times for sure. And as weird as it seems, given how much is happening, we might actually be in the quiet period, as relates, a digital dollar and a USCBDC debate. Anyways, for now, I appreciate you listening as always, and until tomorrow, be safe and take care of each other. Peace.