The Decibel - FTX and Canadian crypto FOMO

Episode Date: December 15, 2022

Sam Bankman-Fried, the former CEO of cryptocurrency exchange FTX, was arrested in the Bahamas on Monday. U.S. prosecutors charged Bankman-Fried with eight counts of fraud and conspiracy. He’s now in a Bahamian prison and could be extradited to the U.S. The company was founded in 2019 and went from being worth US$32-billion to bankrupt in mid-November.Along the way, FTX built up a lot of hype and attracted a lot of investments worldwide. That included support from both Kevin O’Leary and the Ontario Teachers Pension Plan, which invested US$95-million in the company. The Globe’s technology reporter, Temur Durrani, explains what he learned about how the fear of missing out got so many to buy in.Questions? Comments? Ideas? Email us at [e-mail]

Sam Bankman-Fried was arrested in the Bahamas on Monday. He's the former CEO of the now-bankrupt FTX. It's a crypto exchange which, at one point, was worth a whopping $32 billion. A lot of investors bought into the hype, and now we're learning more about the Canadians who got involved and how the fear of missing out, or FOMO, may have played into some of these decisions. Today, Timur Durrani is on the show. He's the Globe's technology reporter, and he's been talking to some of those Canadian players, including Kevin O'Leary and the Ontario Teachers' Pension Plan. I'm Anika Raman-Wilms, and this is The Decibel from The Globe and Mail.

Tamur, it's great to have you back in studio. Thanks so much for being here. Thank you. Thanks for having me. So we did an episode about the collapse of the cryptocurrency exchange FTX a little over a month ago, and a lot has happened in the span of a few weeks now. So I think it's just worth starting with this week's news. Tamar, can you just tell us what is going on with Sam Bankman-Fried? Definitely a lot is happening with Sam Bankman-Fried. So this week, he actually was arrested in his apartment complex in Albany, in the Bahamas by Bahamas police. He is facing U.S. charges of criminal fraud and conspiracy. And he's now facing a maximum sentence of 115 years in prison if convicted on eight

counts. And he said in court that he will be fighting an extradition to the U.S. And so this is essentially the idea is that he defrauded investors here and there's money missing. So like, what are the dollar amounts that we're talking about here? So we're talking billions, we're talking at least around 5 billion that he has confirmed, actually, in interviews that he has been doing. And he has confirmed that 5 billion were taken from FTX to go into Alameda Research, which is a company also founded and was run by Sam Bankman-Fried up until recently. The CEO that's taken over FTX, John Ray, has also talked in bankruptcy court very candidly about what he has quickly been able to see behind the scenes with the finances and the books

of FTX. And some of those details that he's talked about, you know, in his own words, he's described it, it was an absolute concentration of control in the hands of a small group of grossly inexperienced, non-sophisticated individuals. Okay, so what have we learned from the charges against him? Like, what are federal prosecutors alleging that he did? One thing we've learned is actually that it was maybe happening from the start, since FTX was actually founded, all of this was a big brazen scheme. So they've actually called it a brazen multi-year scheme that started since at least May 2019. This is the SEC actually from the U.S. that has alleged this, that $1.8 billion from equity investors were taken by Sam Bankman-Fried in which FTX was concealing that it was diverting

customer funds to Alameda Research. In the indictment unsealed on Tuesday morning, U.S. prosecutors said Sam Bankman-Fried engaged in a scheme to defraud FTX's customers by misappropriating their deposits to pay for their expenses and debts and to make investments on behalf of Alameda. Wow. So this is a real fall from grace then for Sam Bankman-F, facing the maximum sentence of 115 years in prison. So let's kind of break this down a little bit more. One of the things he managed to do was to get a lot of big names on board, including Canadian entrepreneur Kevin O'Leary. He's a venture capitalist that people probably know from, of course, like Dragon's Den and Shark Tank.

Why did Kevin O'Leary get involved with FTX? So I interviewed Kevin O'Leary recently. He's someone who I've talked to over this past year multiple times and has been surprisingly candid with me in interviews. And when I talked to him about this, he described to me a very, very important thing that he hasn't told many people about, about the first time he met Sam Bankman-Fried. And when he met Sam Bankman-Fried, it was a courtship, a very obvious courtship that now looking back, he knows about. It was one of those things where he was brought into this sort of campaign of flattery from

Sam Bankman-Fried and other executives at FTX who told him, we really want you basically and that we have these great ideas. So FTX was courting Kevin O'Leary essentially. They wanted him on board. Yes. Yeah. Not just him, but also a lot of other people. And that's kind of what became sort of this FOMO, this fear of missing out that they created with all these people. So with Kevin O'Leary, they actually told him that, you know, Tom Brady has signed up, that Gisele Bundchen has signed up, that, you know, all these other people might sign up like Steph Curry, you know, these big sort of celebrities out there that we have now heard have been impacted by the collapse of FTX. And that's what was sort of the FOMO that they created around it.

Where did they meet? And how did this courtship unfold? So I've increasingly learned over the course of the reporting for this story at The Globe that, you know, there was a conference last year in 2021 in Miami that seems to be the sort of pinnacle point for FTX, where right after this conference, everyone seemed to want to sign up to pay millions of dollars, if not billions, to FTX. We now know more than a billion at least was raised by these big institutions. But all these big institutions were present at that 2021 Bitcoin conference in Miami, which was this big, you know, hoopla, big parties going on, you know.

And at this conference, there were big, big, big conversations happening. One of which was Kevin O'Leary's conversation. And that was the first time he happened to meet Sam Bankman-Fried. He was courted, very much so. He found Sam Bankman Freed to be charming, articulate, and he thought his ideas were interesting. And then the next day, he gets asked, hey, we're looking for brand ambassadors. We're looking for spokespeople. Are you going to sign up? Because we're looking for someone who knows this regulatory space because, you know, the big sort of hoopla around FTX that really happened was all around this idea that they wanted to play friendly with compliance and regulatory bodies and agencies. You know, so people were on board well before Kevin O'Leary signed up. But this pinnacle point in Miami was very important because then millions slowly weeks after started signing up.

So this is this conference in Miami. It sounds like this is where you're talking about this idea of FOMO. A lot of this may be started where they're starting to court these celebrity personalities. Kevin O'Leary, celebrity investor, right? People look to him about what he says about where he puts his money. He gets on board here and he had money invested in it, too, didn't he? He did. He had a million dollars, US, of his own personal accord invested in it at an equity stake. But then they were going to pay him $15 million as well for his services, which among other things,

he was a spokesperson. He was the face in a lot of ways. And we've seen him be the face of a lot of things, especially here in Canada too. But this is what he was doing with FTX. And so does that mean that O'Leary then lost his money, too, when FTX filed for bankruptcy? Certainly he did. He's at least, he knows for sure, lost $10 million U.S. out of his whole deal as a whole. Some of that money, he claims, has gone to, you know, lawyers and that kind of a thing, $4 million or so, he claims. Another thing that's quite interesting is that, you know, lawyers and that kind of a thing, 4 million or so, he claims. Another thing that's quite interesting is that, you know, the money that he was paid or to be paid was paid to him also in crypto. I guess, what are the, are there criticisms now of his role in all of this?

There are staunch criticisms against him because he did boost FTX and he failed to spot any irregularities from the many that would come to light just over a year later. I mean, you know, this guy was going out trying to, you know, use his power as someone people trusted and telling them this was a great thing. We'll be back after this message. So part of the hype around this company, why people got behind FTX, was that Bankman Freed was trying to do things in a legitimate way, or at least to appear legitimate. And Tamor, you actually spoke to him in the summer when he was trying to get into the Canadian market. So why did he want to get into Canada? Like, what was the appeal? So that actually, I got to learn about Sam Bankman-Fried and FTX's sort of reasons for why they wanted to launch in Canada when I interviewed him over the summer about this deal.

And he, in a quote to me, said, we're looking to expand in places where regulators are working with the sector to create meaningful opportunities. But in particular for Canada, I think it's important in the context of the world that Canada is known as this entity in the rest of the financial markets that is very stable, that it follows the rules, that this is a sound investment for you to go in. If you want to be able to put your money into a country and launch somewhere, this is a country that's called a sure bet. And in the case for crypto,

unlike a lot of other countries, we have been slow, but we have come up with a lot of rules around it now that not a lot of countries have yet. And so for Sam Bankman-Fried, this would be a fascinating new market to go into. And that's what he had at least told me at the time. He was very excited about it, it seemed.

Okay, so let's talk about the how here. Crypto usually operates in an unregulated space. So how did FTX try to legitimately get into Canada? They started off with trying to go the right way. And then they would backtrack. So last year, the OSC, the Ontario Securities Commission, had actually been in talks, we've learned now, with Sam Bankman-Fried,

in particular with FTX though, as a company. They were trying to get into Canada. They were trying to launch in. At that point, it had been just a few months that the OSC had actually, the Ontario Securities Commission

has actually put out these rules about if you want to exist as a crypto company in Canada, you've got to follow these different rules that we've put out. They're quite vague still, but you have to, at the very least, register as a restricted dealer status before you operate here legitimately or start soliciting clients here legitimately. And what we've now learned is that FTX was trying to do that. They had been in talks with the OSC, but that actually never happened.

They walked away from that deal. And then later, a year later, they tried to come at it again through a different method to try to launch in Canada. And that was over this past summer. Um, so this past summer, they tried to come again through, again, the right way they would like to say, because they were trying to acquire a Canadian company called Bitfo, based in Calgary. And this company is registered by all the different territorial and provincial regulators, which would then imply that if they bought it out, they could be able to continue to exist in Canada. FTX would be able to then that way be regulated

as a default. That was their method now. That's really interesting. So they tried to go the regulated way with the Ontario Securities Commission the year before. That didn't actually work out for them. But then their new plan is let's buy a company that's already regulated and then therefore will be regulated. Exactly. And you, I mean, if we're connecting the dots here, part of the way that you need to come in to sort of be able to be registered is you do have to open yourself up to a lot of, you know, rules that include financial questions,

that include people peering into your books. Part of that is the OSC having to look into your books, which now the OSC, you know, the same person that told me about these talks told me that is the reason why they never got to see their books. They never got to see their books last year because they walked away from that deal. It would seem that now with the context of what we've seen happen with the collapse,

that might be a big sort of reason why they just didn't want to open their books up to regulators here in Ontario. And so, of course, this deal with FTX and Bitfo, it eventually fell through. It didn't happen. Exactly. It never went through. And actually, the CEO is very happy that it didn't go through, Pamela Draper. She's quite happy about it.

She told me she is thankful because she, quote unquote, narrowly escaped the situation, which would have tied her with everything in the bankruptcy court, potentially freezing all her customer funds. You know, it really, really, she almost, almost, almost was caught into all of this. Yeah. So, yeah. So it sounds like FTX and Sam Bankman Freed really kind of, there was a bit of a concerted effort here with Canada. And they were making an effort too to seem kind of legitimate. And people invested, even the Ontario Teachers Pension Plan invested. They're the third largest pension fund in Canada. And now they're out a lot of money. But I guess,

can we just go back to the reason behind why they would choose to get on board here? Like, why did they decide to invest in FTX? And that really has been the golden question. A question when this implosion happened that we kept posing to them was, how did you do this? Why did you do this? And now we've learned through some very high level sourcing there what actually happened. So teacher spokesperson Dan Madge actually told us

that prior to investing, they spent years tracking digital asset markets, and that they concluded that investing in crypto exchanges such as FTX, rather than digital assets themselves, could reduce risk. They said they spent months of due diligence on FTX in partnership with what they claimed were experienced external advisors that assessed the risks associated with the investment. So the real reason here was they had learned that crypto was this big sort of thing to be making money out of. And they had also been talking to other pension funds and other institutional investors in informal gatherings. And they had learned that this is something everyone's getting on board with. Why can't we get on board with it?

They had also actually missed out on a very, very lucrative deal out of Coinbase Global Incorporated. It was a company that had gone public last year and, of course, has done some pretty big layoffs this year. But at the time, that was something they had considered was a big missed opportunity for teachers. So actually, when it comes down to it, it sounds like the teacher's pension plan got on board because of FOMO too. Everybody else was kind of jumping on this. They thought this was a good way to make some money.

They didn't want to miss out. Absolutely. It would seem that way. In our conversations with people from teachers, it really does seem that way. That is the sense that I have gotten. And that is the sense that I've gotten, really was something where I spoke to a professor at Queen's University, a business professor, Erica Pimentel, who studies this stuff with cryptocurrency. And she said to me, nobody was asking questions. She said to me, you know, even the white papers that were coming out for these crypto companies were barely being read.

You know, in her own words, you didn't want to be that guy or girl in the room asking the cool crypto kids for their financial statements. Just lastly here, before I let you go, Tamora, I guess, what are the takeaways from all of this? We talked about a lot of things that are going on here, but what can Canadian investors and businesses learn from all of this experience? I think one thing we've learned all of us through all of this big, you know, collapse that continues to reverberate, that continues to get investigated, that will definitely go in court now. Sam Bankman Freed is arrested. All of these things has been that a charm offensive and the appeal of a white hot sector should not be enough for you to be able to say

that something is the big thing, is the thing to invest in. You should look at the financial statements at the very least. If we're going to tell us that this is a company to invest in as a general public, then that is a responsibility you have taken upon yourself and it is a responsibility you should not take lightly.

That's the one big lesson we should learn from all of this. All of us, really. Tamar, it's been so great to talk to you. Thank you so much for being here. Of course. Thank you for having me. That's it for today. I'm Mainika Raman-Wilms. Our producers are Madeline White, Cheryl Sutherland, and Rachel Levy-McLaughlin. David Crosby edits the show. Kasia Mihailovic is our senior producer, and Angela Pichenza is our executive editor. Thanks so much for listening, and I'll talk to you tomorrow.