The Daily - The Man Who Was Supposed to Save Crypto

Episode Date: November 18, 2022

Earlier this year, much of the crypto industry imploded, taking with it billions of dollars. From that crash, one company and its charismatic founder emerged as the industry’s savior.Last week, that company collapsed.Who is Sam Bankman-Fried, how did he become the face of crypto, and why did so many believe in him?Guest: David Yaffe-Bellany, a reporter covering cryptocurrencies and fintech for The New York Times.Background reading: Here’s what to know about the collapse of FTX.In an interview with The Times, Mr. Bankman-Fried said he had expanded too fast and failed to see warning signs. But he shared few details about his handling of FTX customers’ funds.For more information on today’s episode, visit nytimes.com/thedaily. Transcripts of each episode will be made available by the next workday. 

Hi, Daily listeners. It's Sabrina. We'll start our show in just a minute. But I wanted to mention that our colleagues at the show First Person recently launched their second season. If you missed the first season, First Person is hosted by Lulu Garcia Navarro. And it's a show devoted to something we do sometimes here on The Daily that I really love to do. And that's talking to regular people connected to the news about their beliefs, their lives, and what they make about what's happening in the world right now. The start of the second season is a pretty good example. So they start with a sheriff who's doing trainings for teachers who think they might want to carry guns to school. They're worried about school shootings and they think they can stop them. The second episode is about a teacher who

goes to a training class like that. And you might feel like, okay, I know what people like that might say. But what this sheriff and this teacher reveal on the show is so much more nuanced and emotional and human than what you might think. Anyway, first person. You can subscribe to them, listen to all their shows, wherever you listen to ours. Speaking of which, here's today's episode. From The New York Times, I'm Sabrina Tavernisi, and this is The Daily. Earlier this year, when much of the crypto world imploded and trillions of dollars disappeared,

one company and its charismatic founder emerged as the industry's savior. Last week, that company collapsed. Today, my colleague David Yaffe Bellamy on the story of Sam Bankman Freed and why so many believed him. It's Friday, November 18th. So David, the last time we had you on the show back in the spring, you told us about this big crypto crash. And it was supposed to be a real reckoning for the crypto market, you know, trillions of dollars evaporating. And then the world kind of went on and we all kind of forgot about it. But now you're back and you're going to talk with me today about crypto again and another crypto crash. Tell me what happened. So what happened in the spring

was unquestionably very bad. But what happened over the last week and a half was even worse. And there are two reasons for that. One is that this latest crash involves one of the biggest companies in the industry, a crypto exchange called FTX that was worth $32 billion, that was one of the most trusted companies in the industry, a place where customers would go to buy and sell cryptocurrencies like Bitcoin and Ether, and also where they'd go to store their cryptocurrencies and trust that they were safe there. The other reason that this is different and even worse is that this whole story involves a guy named Sam Bankman Freed. Sam Bankman Freed. Sam Bankman Freed.

Sam Bankman Freed. Sam Bankman Freed. Sam Bankman Freed. They call him the J.P. Morgan of crypto, right? Yeah, the Michael Jordan of crypto, if you will. He was a kind of crypto, right? Yeah, the Michael Jordan of crypto, if you will. He was a kind of crypto superhero, one of the most popular figures in the industry. So, you know, we started a few years ago.

We're one of the newest of the large crypto platforms. Somebody who is kind of styling himself as a crypto diplomat. And it's not a level playing field, and it's not an easy space to access. The person who would take this technology into the mainstream. So I think like getting regulatory clarity is huge, and I think it's good for everyone. I think it helps regulators come up with rules to keep it under control. At the very least, I want to be doing something net positive. And now it turns out that the business that he started was built on a house of cards.

Okay, so tell me about this guy, Sam Bankman Freed. How did he become this crypto superhero? So he's the son of Stanford law professors, grew up in the Bay Area, ends up going to MIT for undergrad, majoring in physics. And he was always regarded as super smart. I mean, you talk to his classmates from back then, and they say that he was the kind of guy who didn't really have to work that hard because he could just show up on the day of the exam and get a good score. And, you know, like a lot of college students, he's trying to figure out what to do

with his life. And the story that he's told over the years is that he wanted to do something good for the world and he was trying to figure out how to channel that energy. And he meets someone named Will McCaskill, a really kind of charismatic, smart philosopher who's an important figure in the world of effective altruism. And remind me what that is?

That's a kind of charitable movement that emphasizes logic and reason and encourages people to give in as efficient a way as possible and to also give as much as they can. And Will pitched Sam on something called Earn to Give. And the idea behind that is that if you're a really smart and accomplished person and you want to do good in the world, in the world. Instead of taking a low-paying job at a non-profit or doing community organizing, you should go off and just earn as much money as humanly possible so that you can give it all away. And in Sam's telling, he decides that he's going to try to dedicate his life to this idea. After graduating, he goes to work for Jane Street, the quantitative trading firm, and he's good at the

job. He's a talented trader, and he gives a big chunk of his salary every year. And that's sort of how he kind of starts out in the world of finance. And when does he get into crypto? So after spending a while at Jane Street, he wants to strike out on his own. And under this earn to give philosophy, he's looking for ways to make a lot of money really fast. And what he settles on is the emerging world of crypto. We're back in the kind of 2017 era, the first big cryptocurrency boom, tons of new tokens getting listed all the time. And Sam decides he's going to dedicate himself to that.

So he starts a trading firm called Alameda Research. And it has a kind of crazed startup vibe. They've got an office in Berkeley where people are sleeping, they're showering in the gym downstairs, you know, Amazon boxes are piled up to the ceiling. It has a really kind of like ragtag sort of thrown together rebel sort of feel to it. And they're trying to make big trades. And there's one trade in particular that eventually makes Sam kind of famous. And what trade was that? It hinged on a discrepancy between the price of Bitcoin in the U.S. and its price in Japan. In Japan, Bitcoin costs about 10% more. And that presented a pretty straightforward arbitrage opportunity. Buy low, sell high. You know presented a pretty straightforward arbitrage opportunity. Buy low, sell high. You know, get that Bitcoin in the U.S. and then sell it in Japan. But as simple as that sounds, the details of pulling it off were really complicated.

Banks were super distrustful of crypto. Sending wire transfers overseas took a long time. You had to constantly be switching money across different types of currencies, across crypto and non-crypto. It was an incredibly logistically complicated endeavor. And Sam's big triumph in the early days was that he figured out a way to execute this trade despite all those obstacles. And eventually, he's able to make a decent amount of money from this trade. And that's sort of the springboard for the rest of his career in the industry. And so that experience in the early world of crypto trading at Alameda Research gives Sam an idea. And the idea is to start a crypto exchange of his own. One of these platforms for trading cryptocurrencies, but one that's simpler, easier, better run than all the alternatives. So he decides to move to Hong Kong and start a new company, a crypto exchange called FTX. And the reason is pretty

straightforward. The regulatory climate in Hong Kong is much more favorable to crypto companies than it is in the US. You know, it can offer a greater range of different types of cryptocurrencies. And he can allow people to make kind of risky bets on the future prices of cryptocurrencies. This is called derivatives trading. And basically what it entails is that an individual investor can borrow money from the exchange so that they can just pile even more funds into the market, which brings greater returns when the market's doing well, but also much greater losses when the market dips. But in both those scenarios, the fees are really high, and the exchange collects that chunk of money on each transaction, and it's a super profitable way to run a business.

So the exchange is both a place to trade, but it's also a lender. The way it was set up by Sam Bankman-Fried, yes. It would, you know, lend money out to customers so that they could make even bigger bets. And in fact, he himself is participating in this kind of high leverage trading because his original company, Alameda Research, starts trading on this new FTX platform. And of course, that poses a bit of a conflict of interest because you've got a trading firm that's closely linked to the exchange that it's trading on

that's trying to make money, potentially at the expense of the exchange's other customers. But Sam waves off those concerns and says this whole operation is totally above board. So how does it go with this new exchange? What happens? It goes really well, and that's partly a matter of timing. He starts the exchange in 2019, and of course, in early 2020, we have the beginning of the pandemic, which ushers in a huge boom time for the crypto world. People are at home, they're online all the time, they're getting interested in these kind of weird investment vehicles that seem to be making a lot of money really fast. And so they're flocking to exchanges like FTX. And so they're flocking to exchanges like FTX. But it's not just a matter of timing.

He's also really deliberate about marketing and trying to create viral moments for his new business. Early on, he helps run a crypto conference where he distributes crypto-themed condoms with the FTX logo on them and jokes on the wrappers like never breaks, even during large liquidations. Oh, God. And that marketing extends to himself as well. He tries to create a mystique for himself as a kind of nerd genius. He has this sort of disheveled appearance, wears t-shirts and shorts even into

big meetings. And it's all very calculated. You know, when investors would show up to meet with him at the office, he'd be sleeping on a beanbag next to his desk. And the investors would be kind of shown into a conference room where they had a view of him sleeping. So they could watch him slowly rouse himself and then walk into the meeting and kind of immediately turn on and deliver some, you know, cogent analysis of cryptocurrency markets. You know, once a colleague of his said, Sam, you should really cut your hair before you go on TV. And he said, no, it's in our interest for me to look super crazy and disheveled. Right. It sounds like he understood that his image and his kind of genius boy persona was really part of what was selling his company. Exactly. It was the brand.

And, you know, big name, respected venture capital firms get behind him. You know, he seems like a kind of less scammy, more respectable version of a crypto tycoon. And so the company gets bigger and bigger

and Sam gets richer and richer. At one point, he's worth as much as $24 billion. Wow. And what's he doing with all that money? I mean, is he doing what he said he would do, which is giving it away? Yeah, he's building a kind of idiosyncratic philanthropic empire. So he's funding research into artificial intelligence, for instance. He's interested in heading off potential existential threats to humanity.

He's also doing things that people could probably relate to more easily, like funding research into pandemic preparedness efforts. You know, how do we stop the next big COVID outbreak and prevent people from dying? But he's also getting into politics, donating a huge amount of money to major Democrats, $5 million to Joe Biden in the 2020 election effort, which made him one of the president's top donors. And why is he spending so much money on politics? So there are really a couple of reasons. One is because he does genuinely have these philanthropic priorities. You know,

he wants to put people in power who will support his AI research and his pandemic preparedness research and all of that. But of course, this is also about shaping the future of crypto regulation, creating a landscape where he can do the sort of risky stuff that he does overseas in the United States as well, and get even more powerful and make even more money. And the only way to get away with that is to show up in Washington and convince regulators, convince lawmakers that it's appropriate. And partly to that end, he moves his company in late 2021 from Hong Kong to the Bahamas. You know, like Hong Kong, the Bahamas offers a pretty friendly regulatory environment where you can do all this stuff. But it's also a great base if you want to be flying back and forth to the

United States to try to shape policy. And David, how does that go for him? Does Washington buy it? It goes pretty well. You know, all of a sudden, Sam Bankman Freed is like a constant presence in D.C. He's meeting with big regulators. He's meeting with lawmakers. He's contributing to crypto-friendly bills that are getting proposed. Thank you, Chair Stabnow, Ranking Member Bozeman, and members of the committee. I'm Sam Bang-Mutri, the CEO. And he's even called to testify in front of Congress about the future of crypto regulation. One of the big things that I want to point to in the digital asset industry is the equitable access that it

provides to users. And has some pretty friendly exchanges with the lawmakers. And so Mr. Bankman-Fried, I'm going to interrupt you because I've only got 30 seconds left and I'm offended that you have a much more glorious Afro than I once had. So it sounds like he's really become an ambassador for crypto. once had. So it sounds like he's really become an ambassador for crypto. Yeah, absolutely. And, you know, both in and outside Washington, he also becomes this kind of crypto celebrity. And his goal is to make sure that everybody knows and trusts FTX. All right, it's official. The home of the Miami Heat is now FTX Arena. Man, it's gonna be hard to get used to saying that, though, isn't it? He buys the naming rights to the Miami Heat's basketball arena.

I had to look it up because I didn't know what FTX was. He's got an FTX patch on the uniforms of the umpires in Major League Baseball. Wow. Patch meaning FTX is the umpire? Exactly. We're the trusted person in the middle. He's hanging out with celebrities and athletes. Larry David's commercial for FTX generating a lot of buzz. How about Tom Brady and his supermodel wife Giselle joining the cryptocurrency craze? And then what's up, guys? I'm here with my boy Sam from FTX. We're at Crypto Bahamas conference. We're going to start in April. He throws this huge party in the Bahamas.

You know, think beachside music, hand-rolled cigars, major political figures showing up to kind of laud him. I'm convinced that we've got a lot of money, energy, and talent behind crypto. He does a talk with Bill Clinton and Tony Blair. Wow. And when you have something that's obviously serious, you want to do right by it in the regulatory space. Who basically say, this crypto stuff, it's really exciting. And they're up on stage with Sam Bankman-Fried, who's in shorts and a t-shirt.

Wow. Wow. So that's a real height. Yeah, not long after that conference in the Bahamas, actually. Wow. Wow. So that's a real height. FTX appears, at least outwardly, to be doing relatively well amid all of this volatility in crypto markets. Sam still seems to be really rich. He's actually spending money to bail out failing crypto companies. And he's sort of hailed as a savior, actually. You know, somebody who's the kind of last support between the crypto industry and like total collapse, basically. But of course, this was a massive crash that hurt everybody in the industry, and nobody fully escaped the fallout,

not even Sam Bankman-Fried. We'll be right back. So David, you said that the contagion in the crypto market eventually caught up with Sam Bankman-Fried. What happened? So it's been a pretty wild week and a half. One of the busiest of my reporting career. And basically the sequence of events begins in early November. Fast-moving developments with crypto and FTX last week.

Boggles the mind. If you blinked, you missed it. When a crypto publication called Coindesk obtains a balance sheet associated with Alameda Research, Sam's trading firm. But Coindesk published an article saying that Alameda Research, which is another company owned by Sam Bankman-Fried, had essentially more than $5 or $6 billion of FTT tokens on its balance sheet. And the balance sheet basically shows that Alameda is kind of on shaky foundations. You know, a lot of its assets are sort of tied up in sort of fake-sounding cryptocurrencies, and it might not have as much real money as it thinks.

So you've just seen the same fears we saw with crypto markets in the spring now coming to roost with Sam Beckman-Fried. And then the big picture here is— And this sort of stuff comes up in crypto all the time, and oftentimes big crypto advocates will just dismiss it. They'll say this is people spreading misinformation, trying to discourage growth in the industry. But what makes this different is that someone really influential weighs in on the debate, a guy named Chengpeng Zhao, who runs Binance, which is another crypto exchange and one of FTX's biggest rivals. And what does he say?

and one of FTX's biggest rivals. And what does he say? About two weeks ago on a Sunday, Changpeng Zhao takes to Twitter and says, essentially, these rumors that FTX is in trouble, I believe them. And you shouldn't trust this company. And that almost immediately sets off what amounts to a crypto version of a bank run.

Customers who've got their funds locked up in FTX are rushing to get the stuff out. You know, billions of dollars in crypto are leaving FTX's platform practically overnight. Wow. This is continuing on Monday, and Sam's trying to calm everybody down. He goes on Twitter and says, FTX is fine. Assets are fine. I really respect my rival, but he's wrong on this. And we need to work together for the future of the industry.

Okay. That's Monday. The next day, Tuesday, Sam tweets the exact opposite. We're going to dive into this, but I think we can safely say that this is a hinge event in the crypto economy. Our company is in total crisis. It's imploding. And I'm going to be selling it to Changping Zhao at Binance. His rival. His rival. Binance and FTX are two of the biggest exchanges out there. So if you combine Binance and FTX, it makes for a big player in this market. And so everybody thought, okay, things will be roughly fine. We'll get this big super exchange, you know, Binance slash FTX, and everybody's money will be fine.

But then the next day, Wednesday, Binance pulls out of the deal almost as fast as it had come together. The deal's off. the deal almost as fast as it had come together. The deal's off. I think they took a look at it and just decided this was a hole too big to fill. So suddenly, Sam is starting to run out of options. Wow. He's scrambling for new financing. And that lasts for about a day. You know, he's doing that on Thursday. And then Friday morning, there's a big announcement. Sam Bankman-Fried stepping down as CEO of FTX as his crypto exchange files for bankruptcy. FTX is bankrupt. Sam's resigning as CEO. And the future of everybody's money will be settled in

court. So in the span of just a week, Sam goes from this shining star of the industry to bankrupt. But what happened to the money people were trying to get out of FTX? So this goes back to Sam's original business, Alameda Research. Alameda never went anywhere. It was still trading and trading heavily on the FTX platform. And this was always something that bothered people. It seemed unfair that a company that's trying to make money trading was run by kind of roughly the same people in charge of the marketplace where the company is doing the trading. But what we've learned over the last few days from conversations with ex-employees, conversations with other people who are close to FTX,

was that around the time of that crash in May, Alameda got itself into big trouble. It had been taking out loans over the months and using that borrowed money to invest in other crypto companies, to do all sorts of risky trading. But when the crypto market crashed, those lenders suddenly wanted their money back.

They called up Alameda and they said, you've got to pay us back right away. But those funds were tied up in all those kinds of risky ventures that Alameda had poured them into. Alameda couldn't get the money back. They couldn't get the money back fast enough to deal with their creditors.

And it's at that moment we've now learned that Sam and several of his top executives at FTX did something that ended up destroying the company. What they did is that they dipped into the customer funds stored on FTX, those deposits of Bitcoin and Ether that regular traders had put onto the platform. They took that money and they lent it out to Alameda. And Alameda used that money to pay back the loans. So basically, Sam Bankman Freed decided to take money from his exchange to pay the debts of the other company. But I don't really get it, David. Like, if the whole problem was Alameda, like all the risky investments it had made, why not just let it fail? Like at this point, you know, Sam Bankman Freed is worth billions of dollars. Why risk that to keep your first business alive? These companies are so closely entangled. If Alameda had failed, that would

have been a huge reputational hit for FTX. You know, it would have reduced customer confidence in the platform. And so the two institutions were basically inseparable. And there's another potential reason, though this one's more speculative. Alameda was run by a woman named Caroline Ellison, who was one of Sam's original hires when he started the company. And at times over the years, Sam and Caroline had been romantically involved. In the Bahamas, they even lived together in this massive sort of palatial suite with a bunch of other roommates who worked at FTX. And so both personally and professionally, you know, Sam was incredibly entangled with the world of Alameda. Thinking broadly about this, I mean, how should I understand what happened?

Was he knowingly doing something that was illegal or was he just bumbling and sloppy? There was nothing illegal about those unwise investments. As lots of people in crypto have learned, it is perfectly legal to throw your money at something that's worthless and then, you know, have trouble paying back loans. It was what happened subsequently that is getting Sam into a lot of trouble and which may well have been a the problems that came up with the bank run. You know, customer deposits weren't safe. They'd been recklessly transferred over to another company. And, you know, that's what has made so many people in the crypto industry so angry. It feels like this incredible betrayal that this guy who cast himself as a trustworthy, responsible figure, was essentially gambling with his customers' money. And how much money was that? So we know that when customers rushed to withdraw funds

and FTX had to freeze withdrawals because they just didn't have the money available, that the hole that FTX was facing was about $8 billion. Wow. That's a lot of money. And David, has he been talking? Like, has he said anything about all of this? So surprisingly for somebody who's in the middle of a legal and corporate firestorm, he's been reasonably chatty with reporters, you know, responding to text messages throughout the week and that sort of thing. I, like many of my

colleagues, texted him while this was starting to heat up and said, Sam, you want to get on the phone? I have some questions for you. And he kind of expressed some vague willingness to talk. And then late on Sunday night, so yeah, I guess the first thing I'm wondering about. I got a phone call from him. Like, at what point did you realize that this was going to be a big issue? I asked him. Can you explain on the record how big the margin position that Alameda held on FTX was?

Do you think that was a problem that you were in a romantic relationship with Caroline? Are you afraid about the possibility of jail time? Did that constitute lending out customer funds, essentially, and putting customer funds at risk? How on the record versus off-record important is this? Frustratingly, it was difficult to get him to say much on the record. You know, what he did say was not super satisfying. It didn't really answer any of the questions

kind of hanging over this whole situation. In retrospect, I wish that... I wish we, um, I, I wish we'd bitten off a lot less, and I think that... His basic story

was that he'd built this huge crypto empire and kind of lost control of it. I realized during this episode that, um, Alameda's

margin position on FTX was quite a bit larger than it had gone. And, you know, when I asked him about the billions of dollars that FTX was missing, the customer deposits that they couldn't return, he basically said, oh, you know, I knew that we had lent some money to Alameda, but I wasn't totally sure how much, and my estimate was off

by billions. Off by billions as in off by eight billion? Off by as much as eight billion. So he had no idea what was going on, he claims. That's his claim. Now, of course, it's a convenient explanation in some ways. It relieves him of some level of responsibility, and I think it's probably a preview of the sort of legal argument that he might try to make as he defends himself. And so you've got to take it with a big grain of salt. But even since my conversation with him, a huge amount of damaging information has come out about FTX, that it didn't really have accounting procedures, that its human resources department was a complete mess. In fact, in bankruptcy court recently, the new chief executive of FTX,

a kind of restructuring expert who oversaw the Enron bankruptcy, came to court and said that he'd never seen a mess like this in his career. Wow, that's saying something. Exactly. That's the Enron guy saying that he's never seen anything like this. So if his business turned out to be just as shaky and, of course, potentially even fraudulent, why did so many reputable people in Washington and finance believe him? A lot of it had to do with privilege. You know, Sam came from this fancy academic background.

He spoke the same language as the people who were giving him money. And so he managed to avoid some of the questions that might have been asked of people with a different set of characteristics and different stuff on their resume. But that wasn't the only thing. I think a lot of this also comes down to greed. The investors who gave him money, the politicians who accepted his money, they all saw, you know, dollar signs around Sam Bankman Freed. And that was really the foundational sin of crypto in 2021. Everything was going so well. The markets were spiking.

There were all these kind of opportunities to profit and people were willing to look the other way while the money kept flowing. Like he gave them permission to do it. Exactly. He gave them permission and do it. Exactly. He gave them permission, and he was aware of that. He was so conscious of how he was packaging himself, he knew exactly what strings to pull to get people to give him money. And as he said a little bit more publicly over the last few days, he's expressed a pretty explicit level of cynicism about this whole project, about the effect of altruism, about his involvement in politics.

And now everybody's left wondering, did he ever believe any of it to begin with? David, thank you. Thanks for having me on. In Washington this week, the Financial Services Committee of the U.S. House of Representatives said it plans to hold a hearing to investigate the collapse of the FDX exchange. The committee said that the hearing is scheduled for December and that it expects to hear from Sam Bankman-Fried and from Alameda Research. We'll be right back. Here's what else you should know today.

Scripture teaches us that for everything, there is a season. On Thursday, House Speaker Nancy Pelosi said she would not pursue a leadership post in the next Congress. For me, the hours come for a new generation to lead the Democratic caucus that I so deeply respect. Pelosi, who is 82, received a standing ovation in the chamber as she gaveled in the session. The House will be in order. Pelosi is the first woman to serve in the post and has been the leader of the House Democrats for over two decades. She advocated for key legislation, such as the Affordable Care Act, the COVID relief bill, and the Inflation Reduction Act. President Biden said in a statement that Pelosi would be remembered as,

quote, the most consequential speaker of the House of Representatives in our history. And a Dutch court convicted three men with ties to the Russian security services of murder and sentenced them to life in prison for their role in the shooting down of a passenger jet over the separatist region of eastern Ukraine in 2014. Flight MH17 was downed by a Russian-made surface-to-air missile in an attack that foreshadowed today's war in Ukraine. All 298 people on board, many of them Dutch citizens, were killed. The men, Igor Girkin, Sergei Dubinsky, and Ukrainian citizen Leonid Harchenko, are believed to be in Russia and were tried in absentia.

But the verdict still offered the families a slim measure of justice. Today's episode was produced by Will Reed and Stella Tan, with help from Mary Wilson, Jessica Chung, Rob Zipko, and Asa Chaturvedi. It was edited by Michael Benoit with help from Anita Botticeau. Contains original music by Marion Lozano, Dan Powell, and Rowan Nemesto. And was engineered by Chris Wood. Our theme music is by Jim Brunberg and Ben Landsberg of Wonderly.

That's it for The Daily. I'm Sabrina Tavernisi. See you on Monday.