The Munk Debates Podcast - Munk Dialogue: Why did FTX collapse?

Episode Date: December 21, 2022

The bankruptcy of FTX upended the entire crypto industry and cast doubts over the stability and future of digital currencies. David Z. Morris, CoinDesk's Chief Insights Columnist, joins us for a wide reaching conversation about Sam Bankman Fried, the venture capitalists who supported him, and why regulatory bodies were unable to protect investors and prevent this type of large scale alleged fraud from taking place.   The host of the Munk Debates is Rudyard Griffiths - @rudyardg.   Tweet your comments about this episode to @munkdebate or comment on our Facebook page https://www.facebook.com/munkdebates/ To sign up for a weekly email reminder for this podcast, send an email to [e-mail].   To support civil and substantive debate on the big questions of the day, consider becoming a Munk Member at https://munkdebates.com/membership Members receive access to our 10+ year library of great debates in HD video, a free Munk Debates book, newsletter and ticketing privileges at our live events. This podcast is a project of the Munk Debates, a Canadian charitable organization dedicated to fostering civil and substantive public dialogue - https://munkdebates.com/ Senior Producer: Ricki Gurwitz Become a Munk Donor ($50 annually) to get 72-hour advanced access to the full length editions of Friday Focus and Munk Dialogues. Go to www.munkdebates.com to sign up. Hosted on Acast. See acast.com/privacy for more information.

These statues have to come down. It's always been a pandemic of the unvaccinated. The problem now is it's a pandemic of the willfully unvaccinated. Falling birth rates are good. They're good for our planet. They're good for our societies. We're not responsible for the escalation with Russia. We're not the ones who invaded Ukraine.

I don't think it's fair to portray people of color as victims. It is a very dangerous time in American politics. Hello, Monk listeners. Rodier Griffiths here, your host and moderator. Welcome to this, our continuing conversations called the Monk Dialogues. These are in-depth question and answers with some of the world's sharpest minds and brightest thinkers. From each and every monk dialogue, we go deep into the big issues that are transforming our world and shaping our future. On this episode, we tackle the collapse of the now notorious cryptocurrency exchange, FTX,

and the arrest of its founder and CEO Sam Bankman-Fried on corruption and fraud charges. How could this scandal affect the future of cryptocurrencies? For this discussion, we are joined by David Zed Morris. He's coined as chief insights, columnists, and one of the first to come out before the courts to allege that FTX and Sam Bankman-Fried were indeed the site of a crime. crime, a fraud perpetrated against crypto investors. David joins us now from Brooklyn, New York. David, welcome to the Monk Dialogues.

Hello, nice to be here. Important conversation with you today about the larger crypto space, its future in light of the explosion of FTX, one of the largest kind of debacles in the crypto world of late, but also something that's kind of spilling over to the real world with potentially millions of victims of what's being characterized by the U.S. Southern District Attorney General's office as a crime, a series of possible crimes. David, you were out in advance of these legal actions by the U.S. government indicating that, yes, this indeed wasn't just simply

operator error. There was something much bigger going wrong here and something arguably that would end up being criminal. What did you see maybe that others didn't in the initial stages of FTX's meltdown? I think that what it boils down to is a lot of people get distracted by the fact that there's crypto involved here. And really, the fact that there's crypto involved is definitely secondary to the main problem, which is accounting fraud. And accounting fraud is as old as, commerce itself and this case you know it's it's for people who especially are you know maybe you don't feel too confident thinking about crypto you don't you're not entirely sure what's going on it doesn't matter you don't really have to understand

anything about crypto to understand what happened here it was a platform that was intended to allow people to buy and sell assets and instead of doing that it sold people receipts and then the owners of the platform went and did something else that they were totally unauthorized to do with those assets. A metaphor that maybe it's a little bit labored, but that I like, what happened here is as if you were going on vacation, you boarded your dog at the dog border down the street, and while you were gone without telling you, you have a very cute dog, so they decided, we're going to rent this dog to a movie production. And And so your dog was gone when you thought it was safe.

And then, of course, the movie production kidnapped your dog. Because the movie production in this metaphor is Alameda Research, a gang that couldn't shoot straight, apparently. They lost all the money just making bad bets on speculative assets. So, you know, that could happen with anything. This could have been an Enron type situation where they were, you know, supposedly trading energy futures. And they did effectively the same thing. WorldCom, this is, it rhymes very much with the, with the dot-com collapse in general. WorldCom also engaged in accounting fraud.

And, you know, notably both both the heads of Enron and WorldCom went to jail for significant amounts of time. David, I think what often confuses, you know, lay people from the outside looking in at this, at the FTX crash and now the subsequent criminal charges that have been levied against Sam Bankman-Fried, was the perception somehow that, you know, crypto by its very nature being built on blockchains would have levels of accountability and transparency that would make these very types of fraud supposedly much more difficult to accomplish then in an Enron world or the world of a Bernie Madoff, that there would be a ledger, there would be a chain of transactions

that would somehow either allow investors to know that it was a bad exchange and they shouldn't be, you know, doing business with Sam Bankman-Fried and or, you know, expose the fraud in process. So what happened here and why is there this dichotomy between what people think crypto could or should do versus what happened with FTX? Yeah. So this is one of the sort of tensions at the core of crypto in the real world, which is, yes, what the end use is supposed to be is this, in most cases, transparent global payments layer. However, to get onto that transparent global payments layer, in the present day, for the most part,

users will go through an exchange, a centralized exchange that includes FTX, that includes finance, that does include Coinbase and Kraken, although I would say those are U.S. regulated exchanges, so they are, I will say, less risky in this regard than a lot of those offshore exchanges. But those exchanges do not operate on-chain. They have basically, and there are nuances and exceptions to this, but basically they have a few big on-chain wallets that hold their assets. They custody big pools of assets. Those assets don't move in the same way as on-chain transactions normally would. Generally, what you're dealing with with, the centralized exchange is a separate ledger that keeps track of individual balances

without actually moving the tokens on chain. And that creates a lot of layers of risk and confusion versus stuff that is on chain. And I do think it's going to be a big transformation over the next year or two, because this has happened before. This is certainly not the first exchange to blow up. But I think that this one is dramatic enough that it is going to push much more activity on-chain, and that includes on-chain exchanges, which do what you described in your question, keeping track of where everything is at all times. And most importantly, one of the things that FTX did that was the root of the blow-up here was, I won't go too far into the weeds, but normally on a derivatives exchange, you have limits to the margin that is available

with the traders. So you have limits to what somebody is able to borrow, essentially. And you have very strict collateral requirements. One core of the problem here is that Alameda Research, the affiliated hedge fund, also founded by Sam Bankman-Fried, was exempted from the margin limits and controls that would normally apply to any user of a derivatives exchange. And we've seen over the past year, a lot of different collapses of centralized financial players, people like Threeters Capital, Celsius, Voyager, BlockFi, these other centralized organizations that collected people's money in one place and then in not transparent ways, did things with them. But you do have alternatives where that transparency is in place on-chain exchanges

like Uniswap, what we call a decentralized exchange, a different exchange, a different. decks. And those do have the protections that you're talking about, including being able to see transparently that everybody trading on the exchange is complying with those margin requirements. So they're not secretly basically borrowing other people's money, which is what Alameda was able to do on FTX because it was exempted from those rules in a way that was not transparent. Let's talk a little bit about the central protagonist at the heart of this story. I mean, it's no understatement to say that up into the mouth. down of FTC, Sam Bankman-Fried was kind of Wall Street's poster boy for the mainstreaming

of crypto into U.S. financial institutions, into mainstream culture, in a sense. You know, when you start working with Tom, with, you know, Brady and other big, you know, football players to bring this exchange to the masses, you really are, in a sense, opening up markets that hitherto maybe crypto didn't have that kind of exposure or the ability for people to seamlessly, you know, transact in the way that FTX allowed. So were there warning signs, David, that people could have seen earlier here? Or was this, was this a scam, a fraud that was well hidden that was masterfully conducted? What's your sense there? Should, and especially, should regulators and others have been taking a closer look at San Bankman-Fried and F-TX?

Yeah, I think it's one of the reasons that this was so shocking is that so few people saw it coming, and it really seems like there were so few warning signs. And how you interpret that, it's going to shake out. We're going to figure out what was really going on behind the scenes, because there's essentially two scenarios. One scenario is that Sam Bankman Fried was a conscious con artist from the very beginning. And he simply put on a really good show of being the kind of nerdy wonderkind that everybody wants to invest in because this guy's going to make me rich.

And in that first scenario, there are some signs that he was a conscious con artist on some level. There was an interview that he gave with a journalist from Vox, where he apparently did not realize he was on the record. And he seemed to confess, in particular, that his statements about effective altruism and philanthropy were specifically intended to mislead the public. And that's open to some interpretation, but that definitely seems to be what he stated. And so that's one scenario.

But I think that there is another much more complicated and much more interesting scenario where, like many scammers before him, he sort of thought he was doing the right thing at every step along the way and wound up in over his head. And to be clear, even in that scenario, he's stepping over some very clear ethical lines when he's using customer funds that he has promised not to use for speculative investments elsewhere. So this is in no way to apologize for him. It's to look at how somebody rationalizes something that is clearly wrong. And that's where you get into his worldview and the philosophy that he espoused, you know, whether he was sincere about it or not. There is some interpretation of this philosophy of effective altruism where, you know, it's okay to do something that might be morally suspect in the short term. as long as you're pursuing a good outcome in the long term. And, you know, the big $10 word for this is utilitarian consequentialism. And many people will tell you, and certainly many people right now after this collapse, many people will tell you that utilitarian consequentialism is a very problematic ethical framework and that it is how you end up with situations like this,

especially when you have somebody who grew up and especially got once he got into the limelight, certainly was told again and again what a genius he is, how special he is. And that can wind up telling somebody that it's okay to bend the rules because you're special. You're an outlier. You're not like everybody else who needs to follow the rules. And so I think that is a much more interesting and I think probably much more accurate version of events. that his image of himself in his head, and maybe even to this day, while he's, as we talk, sitting in a Bahamian jail waiting extradition to the United States, he still may think he's the good

guy. He may still think that he didn't do anything wrong. And, you know, I'm a big proponent of Freudian psychoanalysis. And so you can have a guy who fully believes that he's doing the right thing and that everything he says is true, but in fact, and we saw it over the past couple of weeks, while he was doing this media tour before he got arrested, his version of events, he didn't do anything wrong, and he still believes it maybe to this day. And that's the conscious mind, but in his unconscious mind, he's frantically scheming and trying to come up with an explanation for what he did that makes sense, and he's still the good guy. So you have the, these two minds working in one person at the same time. And I think that's what's actually happening.

The means kind of justified the end. But boy, what an end it looks like he is headed towards. How do you explain, David, these sophisticated investors? Because there weren't just, you know, you or me getting suckered in by Tom Brady commercials to use the FTX, you know, app on our smartphone. There were major hedge funds. There was, uh, where we're recording this from Toronto, Canada, the Ontario Teachers Pension Plan, one of the most supposedly stayed and sedate, you know, public service pension plans in Canada arguably had a $100 million investment in FTX. How is it possible that he was not only able to, in a sense, fool or dupe or mislead,

you know, individual, you know, crypto investors in terms of, of using his platform, but these supposedly sophisticated institutional representatives who were, have been equally wiped out by the FTX meltdown. Yeah. The teacher's pension one, I think, is a very, very puzzling question. Obviously, those are supposed to be very rigorous institutions. But I think that on a broader level, the venture capitalists really have a lot to answer for here, an institution like Sequoia.

I mean, they are supposed to be the front lines. They're supposed to be doing the due diligence. They're supposed to be looking at the books. And one slight mitigating factor here is that, you know, we have had 10 years now of a zero interest rate environment where venture capitalists have a ton of money. And essentially there is competition just to be there first. And as soon as you start asking hard questions in this environment, I guess the environment is now over, obviously. But in that environment for many years, if you start asking hard questions as a venture capitalists, you can actually lose access to a deal.

So this is how we wound up with situations like we work, for example. Another business model that was fundamentally flawed, regardless of the fraud angle, you know, people just wanted to invest in that charismatic. leader. And Sam Bankman-Fried in this case was that charismatic leader. Another parallel that I would draw that I think places the blame where a substantial amount of it should be placed would be to Theranos. Now, Elizabeth Holmes, consciously or not, was very careful about choosing her investors and her board and other people who would not ask too many questions. But nonetheless, it was their responsibility to ask those questions, and they didn't. And so that's how you wound up with Elizabeth Holmes, but with no product on the cover of major financial magazines,

is because the people who had supposedly checked didn't check. And the same thing happened here. And they just did not do the checking. They were not keeping an eye out for basic things. I mean, FTX effectively did not have a board. People who had invested in the company did not even request board seats. I mean, that's the single most insane thing about all of this to me is that not just did they not do the due diligence up front because, hey, maybe you're racing to get into this deal. Who knows? But to not have oversight on a day-to-day basis when there was $1.8 billion of external capital put into this company and no. Nobody got that board seat.

Nobody got that. Well, there weren't even really financial statements. There weren't audited financial statements by a major top five auditing firm, which just, again, it's shocking. Let's switch to the regulators, because there are another piece of this. Arguably, they're there to protect investors, including many of the small investors who've lost their life savings on FTX. We'll see what they can recover. It looks like maybe more promised through the. U.S. entity versus FTX International. But how, you know, is part of the story here,

Sam McMahon-Freed's political connections, the large amount of donations that he was making on both sides of the political aisle? Is there a story here about regulatory capture, about the extent to which an industry, crypto, you know, is exciting. It's exciting to the extent that governments see advantages to to their economies, to, you know, capital generation to business. Were regulators and government just too permissive in the environment that FTCS grew up in? And what role did Sam Bankman-Fried play in creating that environment? Well, I think that the regulators in the Bahamas were certainly too permissive. And that is an important thing to keep in mind here.

And it complicates the story about regulators, which is, you know, this was, not a U.S. entity. And in theory, U.S. users were not supposed to be using FTX. And a lot of them did sort of circumvent those barriers. Now, you can drill down and talk about FTCS as U.S. branch, and that's a different story. But on the macro scale, where the real huge problems were, I mean, U.S. regulators had limited responsibility, I think. I think that there was a path where he could have gotten certain things that he wanted. Sandbank and Fried was advocating for particular legislation that, at least according to critics within the crypto industry,

would have benefited him, would have pushed more money onto centralized exchanges like the one that he ran. There has been also discussion of his many meetings with Gary Gensler at the SEC and what appeared to be sort of sympathetic attitudes towards him. However, it is also worth noting that the regulatory and investigative process is slow. And you cannot, whether as an individual investor or as an industry, expect regulators to keep you safe from bad actors,

especially when they have explicitly gone out of their way to operate in a, let's say, light touch, regulatory environment like the Bahamas. I think there does have to be a degree of personal responsibility, both for users and especially for professionals who were using this platform. A lot of hedge funds that were not Alameda lost significant amounts of capital because they were trading on FTX as well. And so I think that the regulatory capture certainly was coming. It could have been months away. We could have had Sam Baintman-Freed's preferred legislation become law within the first six months of next year had it not been for my colleague, Coin Desks Ian Allison, who first exposed the little thread that was then pulled on to unravel the entire sweater. So I do also have to give a shout out to

not just us, but to journalists everywhere who are, you know, we are really the front line in trying to stop all these things. And unfortunately, we can't stop all of them. We can't catch all of them. But I think that in this case, we got to him before he did even more damage. And that's, you know, that's worth keeping in mind that the longer this went on, the worst it would have gotten. Yeah, great reporting by CoinDesk. It's one of the pleasures of this FTSK meltdown, if you can find one, is that I discovered Coin Dex and the great journalism that you guys are doing there. It's really, really impressive. Yeah, it's been huge for us. Thank you. Yeah, I bet. Let's talk about Z and Binance, because, you know, he played a role here. Some would argue that in a sense,

he precipitated the meltdown of FTX by instigating a run, a bank run, saying, in effect, the deposits were not secure. Binance being the Hong Kong, I believe, based exchange, and since the largest direct competitor to FTX. And now, surprise, surprise, Binance itself is coming under pressure as it recently released anything but an audit. I don't know what you'd call it a snapshot by, again, a kind of third, fourth tier accounting firm this causing some questions about their own, their own reserves. So tell us what's going on. Who is CZ? Do you think he played you know, a purposeful and important role in the FTX meltdown? And is, in a sense, karma coming back around. Is there a risk here that Binance might be the next exchange to go down?

Yeah. Well, I would clarify a few things in your questions first. One is that, you know, what Binance did was they announced that they would be selling an asset called FTT. And that is essentially unrelated to the question of the security of FTX user deposits. Or it should have been, and this is the problem. So FTT, to put it very inaccurately, but as quickly as possible, it is essentially a form of digital equity in FTX. That is not in any legal sense true, but from a market perspective, that's how people were trading it. And so it's not that when CZ said he was going to sell his FTT position, it's not in any way that he was signaling he had doubts about the security of deposits on the exchange. What he was signaling was that he had doubts about the viability of FTX as an ongoing business.

And that's pretty different. Basically, it turned out that things were even worse than CZ imagined. The reason that the FTT sale was a problem is that FTX and its sister trading firm Alameda Research had basically printed, let's say a billion of this FTT token. I don't actually know how many there are. It doesn't really matter. It's garbage anyway. And then they had sold, let's say, a million out of a billion of those tokens.

Then based on the public price of that very tiny slice of those. those tokens, it had decided that the $999 million that it had left were worth 999 times as much as the 1 million that they had sold. They basically, the technical term is they mark to market their entire stash of this token that they had printed. They extrapolated the value from a small float to everything. This is, by the way, this is actually not uncommon in crypto and it's something that's getting fleshed out bit by bit. They're called low flow, high fully diluted value tokens or low float high FDV.

And it's essentially, it's accounting fraud. It's a form of accounting fraud. Because then what you do is you take that fully diluted value of the tokens that you've printed, you use that as collateral for loans. And sometimes you can get a real third party to take that as collateral. But it's really convenient when you have a hedge fund

like Alameda that is actually related to your exchange that printed these tokens and in fact still being run on a day-to-day basis substantively by Sam Bankman-Fried who's going to say, of course, I'm dealing with myself. I'll take that loan backed by something that I made up that doesn't actually have the real value. And that's ultimately one of the places where user funds went, is that these FTT tokens were used as collateral back and forth. And they falsely said that it was collateral for loans of what were effectively user deposits. And then, of course, once CZ started selling that FTT, that was a huge market signal for a lack of faith in this one asset.

And then you get margin calls, you get those loans going bad very quickly. And of course, you have withdrawals. And this is the second thing that I would clarify about your question that I think is very important, is that we should not be referring to this as a bank run. The bank, a bank run happens when you have a bank, which is explicitly there to use user deposits for loans. They use those loans to do productive stuff. They loan it out for mortgages. but the money is kind of locked up elsewhere. And so if everybody comes back to the bank at once in time and wants their cash, that's a bank

run because maybe the cash isn't there in the form of dollars. It's out as loans doing productive work. Now, Sam Bankrun-Rone-Fried will say bank-run, bank-run, bank-run, bank-run, bank-run, bank-run, because he wants people to think of it that way. But an exchange is not a bank. an exchange, and this is in the FTX user agreement that everybody who signed up to trade on their used, there was a small portion of people who had margin accounts and they had agreed to different things. But the vast majority of FTCS users and the vast bulk of the economic value

on FTX was from people who had said, okay, I'm going to buy assets on your exchange and you're going to hang on to them for me. You're not going to touch those. You're not going to do anything, and that is in our agreement with each other. And then Sam Bankment-Fried turned around and did whatever he wanted with those deposits. So it is not a bank run in any simple sense. And framing it in that way is one way that he is trying to soften the perception of what he did. It wasn't a bank run. It was misuse of customer assets.

He was not just breaking the law. He was breaking his own user agreement. And so whenever you hear anybody say bank run, they're kind of covering for him intentionally or not. Yeah, good point. It's in a sense saying that he was the subject to something outside of his control. It was just a loss of confidence when in fact, as you say, there was kind of no there there. And that precipitated the collapse. David, there's a feeling here, you know, having this conversation with you and just thinking about as you listed all the bodies that,

are now washing up on the kind of the beach of crypto bankruptcy, you know, multiple exchanges, multiple hedge funds, one after another. Is it right to be worried that for many of these exchanges and many of the market participants remaining that there's an awful lot of what you call cross-collateralization. There's really very complicated owner structures. There's probably assets that have been pledged against other assets to create values that may or may not be real in terms of what these companies are worth or what their own kind of, quote, reserves are. Are you concerned right now that maybe in a sense that's what we're seeing as the onion is peeled back, that this industry has, unfortunately, by the very nature of the extent to which it is deregulated,

that it's not the subject of accounting standards, of banking and other kind of legal frameworks, that there's just been a lot of messiness that has gone on now for an extended period of time. And just, I guess, how deep, David, do you think this goes? I mean, how, and how long does it take to flush it all out? Yeah, I think if we're not at the end of the flush, we're very close. I mean, I think there still will be more shoes to drop, but we've seen so many at this point. And the cross-collateralization that you're talking about is clearly a huge issue. And it was, frankly, it seems in retrospect to have been a significant accelerant of the entire bull market in crypto that we saw starting in 2020, and especially into 2021,

where you have people, frankly, finance people, not crypto people, which is an important distinction, but they saw, you know, an opportunity to make money on crypto. So for example, Sam Bankman-Fried was a, you know, a conventional trader at Jane Street. The two guys who started three hours capital were also foreign exchange traders before moving into crypto. And so it's this process of financialization, leverage, and yes, cross-collateralization. And, you know, as somebody who's been in this space for a long time, there have been previous sort of blow-ups driven somewhat by not quite similar financial dynamics, but financial dynamics. And I guess the thing from inside the industry that you'll hear and that I think is largely true,

A lot of people who are actually building this technology have been in the space for a long time, and they've built real assets that they've benefited from. And, you know, I don't want to downplay the impact too much, because obviously there are a lot of people, particularly retail investors or speculators, and people who have entered relatively recently and have engaged in a lot of financial speculation. But at the same time, you know, you're not going to look at something like the Ethereum Foundation. They're, you know, they're unaffected by this. They don't care.

Their capital base is set back in 2017. So all of this is just weather. And that's true for a large portion of the organizations doing real work in the space. If you're a financial speculator, yeah, you're probably in up to your neck right now. But if you're a company that's actually creating products and there are, you know, despite what people might say in five second sound bites on MSNBC, there are real products here. There is a lot of usage. We just came off of the Africa Bitcoin Conference, which was one of the biggest and most exciting events in our industry in quite a while because that's where, you know, there is real usage for these tools and real substance to what is being built. And, you know, I mean, I think. that the attitude of a lot of people like me who have been at this for a while and who are really committed to some of the big ideas here, there's a significant, I mean, I guess maybe I shouldn't downplay it too hard because there's a significant sense of relief right now. There's a

sense that, okay, we've taken out the trash to a certain extent. We've cleared out some of the people who are trying to free ride on stuff that we've built and leverage it to the hilt. And it sounds weird to say about something where, yes, it's a financial tool. It's a monetary tool. And at the same time, these hedge fund guys, these venture capitalists, they're not entirely welcome. And certainly a lot of those that have come along in the last couple of years are not entirely welcome. And to an extent, we're glad to see their backsides. Great point. Final question. What is the mood in the community right now in terms of the future? Are people welcoming the idea of greater regulation and scrutiny as a way of trying to either root out the bad actors that are still there or to try to deter others from coming into the space? Or is the community on balance still kind of doubling down on the idea of, you know, a financial system and the creation of currencies as units of exchange and stores of value completely outside of, you know, the systems of the traditional state, because that certainly seems

with FTX to be, you know, one of the tensions here that you could make an argument to say that earlier on if there had been stronger regulation, if there have been more controls, if simple accounting procedures had been followed, this debacle probably wouldn't have happened. But at the same time, it does kind of go against the whole spirit of what crypto is supposedly about its more libertarian, anarchical kind of impulses that have really driven it from the beginning. Yeah, I think that there may be a temptation for people at this point to look to regulators as saviors. And I would just point out that that sure hasn't worked in traditional equity markets so far. You'll still get somebody like Bill Huang who blew up a

hedge fund just, you know, a year ago. And he did it with stocks. you'll still get, you know, all kinds of fraud. If a sociopath wants to steal from you, they will figure out a way. And there may be specific regulatory interventions, but actually a lot of those are already in place. And so it comes down significantly to user education, specifically on the question of these centralized exchanges and whether or not they are, you know, honestly stewards of. your money. In the U.S., I mean, we already have two extremely reputable cryptocurrency exchanges, one called Coinbase and one called Kraken, which, you know, I trust them to be good stewards. I mean, it's, you know, you can never know, but I don't see any additional regulation that

would make them more trustworthy than they already are. I think that one, One of the problems here is that this is international. And so you start looking at how do you get a unified global regulatory regime? And it's really challenging to think about a path to that. Because again, the issue here was that FDX was regulated in the Bahamas. I mean, there were possibilities that U.S. regulators might be obviously protecting the interests of U.S. investors looking at something like that. Maybe they could have done more.

Maybe there could have been different rules. But at the end of the day, if you're going offshore for any financial services, you're taking your life into your own hands and you need to know that. Whether it's a crypto exchange, whether you're like buying gold offshore or doing anything, I mean, that's not going to change regardless of the asset that you're dealing with. So I think it would be a mistake to talk about this strictly as a crypto issue. I mean, it's an issue of an offshore asset exchange. that is being accessed by U.S. residents and or that has this digital reach, right?

Like you're able to get at it from anywhere. And so, I mean, there's a scenario going forward where unless you have truly global regulation, which is, you know, kind of not going to happen in our lifetimes, you can park an illegal operation in a sovereign nation that has like two machine guns on a concrete bunker. in the middle of the South China Seams. And you can put up a satellite and some servers and ban. You're running an unregulated crypto exchange. There's not much that the SEC can do about that, you know?

And so I wonder about the question of regulation. I think that regulating crypto assets is a different question. It essentially has little or nothing to do with the situation here. So these proposals to, I don't know, like ban, Bitcoin mining. I mean, that's not going to protect anybody from the kind of thing that happened at FTCS. It's apples and oranges. I think people need to understand that crypto is a technology that can be applied to a vast number of different applications. Most of the time, people who are starting new crypto assets aren't doing anything useful or specific to that technology. But there's

no regulator who I think should have the option or the ability to come in and tell you, you can't create this thing, whether or not you can sell it in a way that is profitable for you on an exchange that's based in the United States. That's a good question. I think there should be real scrutiny of what an exchange that is regulated should be allowed to sell. But I think it's important that, you know, you wouldn't have wanted somebody to come in in 1994 and tell everyone what kind of email service they were allowed to build. And that's That is somewhat still where we are with crypto technology at this point. And so I think I would be very cautious on that front.

However, if you are a hedge fund engaging in speculation, if you are charging a transaction fee to help somebody buy and sell these assets, those are sites for regulation where I think there could be some progress. Well, David Morris, thanks for all your great reporting on CoinDesk. It's clear you spent a lot of time thinking through this industry, this technology, and it's just been a pleasure indeed to spend the Monk Dialogues hosting you today to kind of go deeper, gain some important new analysis and insights. Thank you so much for coming on the program. Yeah, thank you for having me.

Well, while that wraps up today's dialogue, I want to thank our guest, David Z. Morris. He certainly gave us a lot to think about. If you have questions or feedback on what you've just heard or any of our other podcasts, please send me an email to podcast at monkdebates.com. Also a reminder that our free weekly current affairs podcast Friday Focus comes out. Yes, surprise, surprise every Friday. Join Janice Stein and me for an in-depth look into the big news stories shaping the week that was. We hopefully leave you with some new analysis and insights on the big issues and ideas shaping our world.

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