The Wolf Of All Streets - Crypto Is Destroyed | FTX Failure Will Be Catastrophic | Caitlin Long, Mike Alfred, David Duong

Episode Date: November 10, 2022

This week's crypto team A: Caitlin Long (Custodia Bank), Mike Alfred (Iris Energy), and David Duong (Coindesk).  Caitlin Long: https://twitter.com/CaitlinLong_ Mike Alfred: https://twitter.com/mikealfred David Duong: https://www.linkedin.com/in/david-duong-cfa/ ►► JOIN THE FREE WOLF DEN NEWSLETTER https://www.getrevue.co/profile/TheWolfDen  GET UP TO A $8,000 BONUS IN USDT AND TRADE ALL SPOT PAIRS ON BITGET FOR ZERO FEES! ►► https://thewolfofallstreets.info/bitget   Follow Scott Melker: Twitter: https://twitter.com/scottmelker  Facebook: https://www.facebook.com/wolfofallstreets   Web: https://www.thewolfofallstreets.io  Spotify: https://spoti.fi/30N5FDe  Apple podcast: https://apple.co/3FASB2c  #Bitcoin #Crypto #Trading The views and opinions expressed here are solely my own and should in no way be interpreted as financial advice. This video was created for entertainment. Every investment and trading move involves risk. You should conduct your own research when making a decision. I am not a financial advisor. Nothing contained in this video constitutes or shall be construed as an offering of financial instruments or as investment advice or recommendations of an investment strategy or whether or not to "Buy," "Sell," or "Hold" an investment.

What's going on, guys? Nothing much over here. It's been a very calm few days. No, the entire crypto ecosystem seems to be exploding. Or is it? Is this just simply the case of one more platform going down, limited contagion, and then we rise from the ashes like the Phoenix as we've done in every situation in the past? Or is this time actually different? Now, there have been quite a few people that have been blowing the whistle on this behavior for a very, very long time. Years, in fact, of course, I have Caitlin Long and Mike Alfred, two of those. And then one of my other favorite guests who's here very often giving us quite a bit of color of information. That's David Young from Coinbase. You guys really do not want to miss this conversation. As usual, I'm looking for information and to be educated

myself because along with all of you, I was often duped by these bad actors and by the situations that are happening. You guys do not want to miss this one. It's time. Let's go. what is up everybody i'm scott melker also known as the wolf of all streets before we get started please subscribe to the channel and hit the like button now we are in the midst of obviously a financial hurricane at the moment in global markets and in crypto as well. But I'm actually also in the midst of a literal hurricane at the moment, which is hitting Florida as we speak. So if for some reason I disappear, it's because my power went out. I also have a third hurricane, which is that my children are home from school. And that's probably the most impactful hurricane that any of us could possibly experience while trying to do our work. Now, as I mentioned,

we may so we may see a bit of a lack of sync between audio and video as things go in and out, but we should be able to get through it. I'm going to go ahead right now and bring on our guests. I've got David, Caitlin, and Mike. Welcome, everybody. Thank you so much for coming on in this turbulent time. So I want to start with Caitlin, because at no point did you ever waver in your warnings about this kind of behavior. Of course, you saw it coming with Celsius, you saw it coming with Voyager, but you were actually talking about FTX quite a while ago, if I recall, and people somewhat dismissed it. So what are you thinking now? Well, I'm sorry for everyone who was caught up in it. You know, there were some innocents.

Obviously, there are a lot of people who made decisions to take the risk and roll the dice. But look, it's, you know, it's not good for our industry short term. And especially because in this situation, Sam Bigman Freed himself was so visible in and around Washington, D.C. And so a lot of folks thought he was the face of the industry in Washington, D.C. But it is wonderful for our industry to purge this leverage. And it's long overdue to just get it all out of here. The Wall Street mercenaries, in fact, there were a few people who pointed out that some of the worst actors in this last bull market that are blowing people up in this bear market were

Wall Street quant traders and hedge fund guys. Now, not every one, present company excluded, not every one of those is necessarily a bad actor, but there's a high correlation between people who came from that background and brought all of the bad practices that they were, that they learned, they honed their skills in regulated markets and then came to the unregulated crypto world. And it's just, look, it's just not an accident. And how is it that folks like Mike and I understood all this? It's first principles. It had nothing to do with the individuals.

It had everything to do with the behavior. And we really do understand Bitcoin is nothing to be messed with on a leverage basis. And it's the monetary base asset of the crypto industry. And the moment you start piling leverage on it and then leverage on leverage in altcoins, boy, this thing was a casino and it was inherently going to blow up. One last quick thing to add. I've kind of commented before, I think, Scott, on your show about some of these leveraged exchanges that were offering at one time 125 to 1 leverage in the perpetual futures, that that was a

99% house wins contract. And that the phrase I used was that the 1950s Vegas mobsters would have would have blushed to have had, you know, house odds like that. Right. And yet they still blew up. Just ponder that. Yeah. I mean, the house wins with a 51 percent edge in Vegas. And you're talking about a 99 percent edge here. Mike, obviously, she alluded to the fact that you are also well ahead of this. And Caitlin, I just want to point out, you say Bitcoin is not an asset for leverage. Well, how about FTT token, right? I mean, take that times 100 to a illiquid altcoin that's being printed by the very people that are leveraging it. Mike, I would love your thoughts. Yeah, look, it's been a tough week for people in the space. And a lot of smart people got duped by FTX, whereas I think Celsius, there were a handful

of big investors that actually believed in that. But for the most part, in my experience, there were a lot of people who kind of were aware that there were issues there. I think to Caitlin's point, the fact that SBF was like in Washington, DC lobbying constantly sort of, it was like a misdirection play. Um, and it actually tricked a lot of people. And I never had an account there. I never really did any work on it. You know, SBF followed me on Twitter and I followed him back and I, I was hoping that he was going to be one of the good guys, you know, this effective altruism thing, I think also was a misdirection

play because he did effectively give away all of his wealth, just not in the way that we all hoped he would. The contagion issue is the issue that I'm sort of monitoring now because it does feel like even if somebody is not directly exposed to FTX, they may be exposed to one of the counterparties. If there's six or $8 billion, we don't really know yet how much of it is sort of a liquidity issue versus a real balance sheet and solvency issue. And so, you know, Genesis came out yesterday and said, Hey, we only, we only lost $7 million liquidating people. And I'm just like, well, who are the other folks that had loans out to Alameda, right? Who are the

other folks that are exposed to this? Is it, Is it crypto.com? Is it Nexo? I have concerns about BlockFi, right? Because that sort of bailout isn't really complete. And they're saying, oh, FTX US is different than FTX.com. But at the end of the day, that $400 million credit line has to come from somewhere. So that's what I'm watching now. I'm, in a sense, hopeful as a buyer of Bitcoin that we wash out all the leverage, that we see the lows of the cycle through this process. The only other thing, though, is that I do believe Binance has skeletons in its own closet. I know this is an unpopular, contrarian opinion, but I think Binance's behavior during all

this was actually quite suspicious. And I would not be surprised if they have as many issues on their balance sheet and behind the scenes as FTX, but they're much bigger. So it would take a long time to unwind if that's the case. And so the fact that ZZ volunteered to do proof of reserves all of a sudden the other day was like a red flag for me. Because people who don't have balance sheet issues don't come out suddenly and say, oh, I'm going to prove to you our balance sheet is okay, but we haven't done it. Because if you really wanted to do that and give people that comfort, you would have done it before. So kudos

to Coinbase though. Coinbase was one of the only firms that I would have vouched for over the last few years. And I did numerous times when investors asked me, which custodian would you use in the US? I love that Coinbase is public. I love that the balance sheet is audited. I love that they really are one-to-one. I mean, I've personally verified that with accounts that have been on there for years and nothing's ever moved and I'm able to track it on chain. So hopefully there are some good players that get stronger out of this.

I think that would be one good result. David, that obviously leads to you as he praises Coinbase. It seems like you guys are coming out of this at the moment smelling like roses to some degree. I don't think you would ever cheer, obviously, for the collapse of anything because of the contagion, but it is certainly separating the two kinds of exchanges and exchange leaders that we have in this space. Yeah, that's absolutely right. And we've kind of emphasized time and again that the broader story for us, at least as we zoomed out, and this has been ongoing now for a couple of years, we as a company have been seeking regulatory clarity. And unfortunately, in the absence of that, a lot of these investors go to unregulated exchanges and unfortunately can lead to blowups like this.

So we are hopefully looking for ways to resolve that. We don't want these risks to keep happening. It is fortunately a validation of our strategy. And as Mike kind of mentioned, we're not investing customer funds. We're not doing market making. It's impossible to kind of have what ostensibly looks like liquidity crunches, but it's fast coming insolvency crisis as far as STX is concerned. But, you know, we're regulated as a brokerage, custodian and exchange.

And I want to emphasize again, as Mike kind of pointed out, we are holding all of our customers assets one to one. Right. Which is obviously great to hear. And you touch on the fact, obviously, that you guys are audited, that you're public, you're operating in the United States. Both Brian Armstrong and Jesse Powell from Kraken have put out threads in the last two days.

And Brian responding to Elizabeth Warren as well, putting some of the onus and responsibility on the regulators who have not offered the clarity that we're looking for. Of course, you can't remove blame from the bad actors in this case. But to your point, it's been pushed offshore by our very own government and regulators with very little option for U.S. investors and people who want exposure to this class. I mean, Caitlin, do you think that regulators are partly responsible for this? Well, sure. And I wrote a piece back in June that ran in Newsweek pointing out that so much of the leverage that came into this industry was caused by an SEC decision.

And the unforeseen consequence of that was that it brought in, again, all these hedge funds that saw that there was an arbitrage in the GBTC fund. And specifically, this had nothing to do with Bitcoin. That was the main point, right? Bitcoin just keeps on trucking. It doesn't care about any of this. It's just adding a block every 10 minutes on average. It's, you know, as a system, unbelievably stable. But the trading markets, of course, were not. And a big source of that leverage was the GBTC ARB. And that stems from the fact that the SEC let one and only one fund be available to investors.

And it was a closed end fund structure. So again, had nothing to do with Bitcoin. What's the issue with a closed end fund structure? When you get supply demand imbalances, it can trade at an enormous premium to spot. And when all the hedge funds started to come in was when the price of Bitcoin started to rally and that arbitrage trade became huge in size and it was a sure thing. They could just short one side, belong the other and capture the arbitrage difference. They were just picking off retail. OK, and so I know the SEC did not have any intention to do this purposefully. But the fact that that was that there was only one fund structure for investing in Bitcoin for six years and it was a closed end fund structure. It was absolutely in retrospect foreseeable that this was going to happen when there was a supply demand imbalance. And then once that supply demand imbalance started to correct, when the second one was

approved back in January 2021, guess what? That premium went, I think it was at a high of around 175% of spots. And then it absolutely collapsed. And that actually was the beginning of this leverage flush that we're still seeing in the industry. There was so much leverage that was brought in. And the biggest message that I have for those who are interested in the future of this industry is that had nothing to do with Bitcoin. That was a regulatory decision that in retrospect, for those who understand market structure issues, it was completely foreseeable. And unfortunately, a lot of retail investors lost money. And you could actually argue

that none of the CeFi platforms would have been able to grow or scale without that effectively free money before it collapsed. And that they only collapsed because once that disappeared, they had to continue chasing those high yields in an effort to keep their customers. Right. You can't offer 9% for a year and then all of a sudden say, hey, we're giving you 1%. Right. So it seems like to me, largely a huge part of all of this was this never ending chasing of yield. Mike, do you agree with that? Yeah. Yeah, go ahead, Caitlin.

Sorry. Yeah. Well, and actually, it's funny. One of the best things that happened to Coinbase as somebody who was just watching it from outside was the SEC saying, no, you can't get into the lending business. It's kind of funny how it worked out. I know that was really frustrating for Coinbase as a company. But boy, was that a good decision in retrospect, even though the place where that decision came from was, I'm sure, not welcome to Coinbase, but it certainly protected the

balance sheet. Yeah, Dave, I'll let you actually jump in on that. Do you view that now as sort of in hindsight, listen, nobody likes the fact that there was no clarity and that it was effectively regulation by enforcement. But do you think that perhaps that's a bullet that was dodged because the yield collapsed so badly in this industry? Well, in principle, I'm not opposed to credit, you know, and like to Caitlin's point, it's not for me, at least it's not simply that, you know, the leverage itself was a problem. It's the way it was done. And just kind of just to dispel one of the misconceptions I think this industry has as a whole, we seem to believe that, you know, over collateralization solves the problem here. Well, it doesn't. I mean, if you're holding like 200% collateral, but your asset drops 90%,

you can see clearly like there is a disconnect behind why that doesn't really solve the issue. I think that we really do need to quantitatively look at what the right haircuts are. We need to compartmentalize what the spot assets are away from the margin accounts, for example. There are a lot of good practices that can be done to actually insulate things and make sure that if we do offer credit, if anyone offers credit, really, that it can be done in a smart way. It's not just like that. But I believe that Caitlin's right. This was a credit issue at heart. It wasn't a crypto issue. But I'm not ready to throw the baby out with the bathwater. I just think it needs to be done in a better way. Yeah, Mike, I mean, you talked about the fact, obviously, you brought up Genesis, right? And they showed that they had a 7 million loss, basically got out of this just in time. And everybody's praising them. That was

the same with BlockFi, right? They said that they got out basically just in time. But it seems like everybody's like five minutes away from an utter collapse. If they don't make the right decision, which is a human can be very, very much reliant on humans making good decisions and not making an error i mean where does this stop do you remember like do you remember when when celsius said that they got out of luna just in time right and anchor um i didn't take away any comfort from that um because the fact that they were in it in the first place means they didn't have the appropriate risk management framework, right? And they weren't, I mean, look, people make mistakes, but it just seems like in this space, people are making mistakes

repeatedly, right? And then they don't replace the people who are making the mistakes. And, you know, my conversation with somebody very senior at DCG this week, they said, look, we were very disappointed with the former now former CEO of Genesis. There were a lot of mistakes that were made there. And the thing that the thing that strikes me about that is that Barry Silbert actually tweeted about the daisy chain of borrowers in the space. Right. And so like he literally sort of foretold what was going to happen. But because DCG is such a decentralized organization, they have all their operating units operating independently. His own unit was basically not reading his tweets or at least not reading them and comprehending them or acting on it.

And so now they've sort of cleaned house. I was told even before FTX blew up that they had sort of de-risked. So I wasn't surprised that they reported such a small loss. But, you know, at this point, I think there's just going to be no trust. The thing that's really broken down in the last couple weeks is, you know, even after Celsius and after Voyager and after Luna and all these things, this FTX thing I think is a major blow to trust because FTX was sort of a counterparty that, and SPF specifically, that most people

trusted. I mean, Tiger Global and Sequoia, right? And Third Point, I heard Third Point was livid when they found out about this. They called some of their other contacts in crypto, just expressing how disappointed they were at SPF and to be blindsided by this. But these are some of the best investors in the world and they've just totally misjudged this counterparty. So I think we're at a point now where you can't trust anyone. And so I think that will sort of throw the industry back a ways in terms of being able to get stuff done, being able to get equity for projects, being able to get debt for successful projects. And so who knows where this goes, but I think we may be in for a slightly longer malaise than most people think. Nobody should have ever been willing to trust anybody.

That's the thing, Mike. That's the point of Bitcoin, isn't it? It's so amazing. Exactly. Right? I mean, the whole idea of this was to try to create trustless transactions. And I take your point. The old market structure absolutely is going to get wiped away.

And good riddance, because it did actually work on trust. And the really important point is that the infrastructure building for the next bull market, again, for those who are not familiar, Bitcoin goes through bull markets every four years. And I never believed that the bull cycle, that four-year cycle was changed. I know a lot of hedge funders thought, oh, it's permanently done because we can trade around it now. And markets are efficient. But we saw last time that the happening is the happening of the inflation rate that's going to happen. It happens every four years, every 480,000 blocks, I think is the number. And the next one in March, 2024. And there was a big debate at the time is that, you know, efficient market hypothesis, is that already in the price? And the answer is,

it wasn't in the price. And there are a lot of technical reasons for it. But empirically, you can go back and see the market, you know, didn't trade ahead of that. And, and, and so there is a four year cycle in Bitcoin, and there is going to be another bull market. I mean, we've been through some of us grizzled long timers have been through. This is my third crypto winter. And I love these periods because it actually takes it. We can start focusing on the building. And here's the punchline. The building that is happening now is setting up for real-time gross settlement transactions involving US dollars and Bitcoin. And the impact of that is that you don't need to trust the counterparties if you know that both legs of the trade are settling simultaneously. The example I like to use is when kids trade baseball cards, right? Both kids end up holding both baseball cards and then they agree at the moment of the trade to let go of the one that they're trading away and they hold on to the one that they're receiving.

And it's the adults that screwed that up, right? Because we have all these delays and all this net settlement and the over-the-counter market, you're absolutely right, Mike, traded a lot on trust. These big, huge trades were done over Skype channels and they gave each other 24 hours to settle typically. And the biggest counterparty usually got to settle second.

So it didn't have the counterparty risk of the unsettled trade that the smaller counterparty had. Well, we don't need that kind of counterparty risk. And the infrastructure bill that's happening now that's allowing for real-time gross settlement of US dollars versus Bitcoin is just going to wipe away all that need for trusted counterparties, that ultimately at the end of the day, it's crystal clear. Nobody knew what the counterparty risk was and there was no way to measure it. Can I guys make one comment on this Scott? So I, I agree with Caitlin philosophically on, on almost everything. And I agree that Bitcoin itself is a,

is supposed to be a permissionless kind of trustless system. But the reality is that all of these things, all of them started originally with people and somebody has to believe and trust in something, right? Like Caitlin has a startup, right? I've invested in a bunch of startups. Venture investing is fundamentally, you know, something where you make a judgment on whether you believe somebody is sort of trustworthy in a sense. You're also making a guess as to whether they're competent. Putting aside the fact that low interest rates and massive money printing over the last 15 years has caused firms like Tiger Global to fund Series B companies at hundreds of millions of dollars

of valuation with less than a million in revenue and barely a functioning product. Putting that all aside, at the end of the day, the space, almost all the companies within it started with an investor believing in an entrepreneur. And so while I totally philosophically agree with the idea that Bitcoin itself and even things like Maker and Compound and Aave, who did quite a good job of liquidating Celsius properly, better than the humans did because the humans called the counterparties and said, would you please respond to my email? Would would you please send us more collateral and maker and avian compound just didn't give a shit and just liquidated the counterpart right and so that's great and philosophically i agree with that but but i find caitlin uh you know more credible than

i found alex moshinsky and that ended up being right you don't get them all right because i also thought spf might be credible um so the point is, is we're all human. Even some of these projects that functionally work without trust now were started by humans that had to be trusted by, by somebody, right? Somebody put capital in, somebody deployed it, somebody hired engineers, somebody built something, somebody had a vision and that doesn't go away. Even if Bitcoin is successful long-term. And I continue to make this point. I made it yesterday. But at the end of the day, if you're a United States citizen and you want exposure to Bitcoin, you still need an on and off ramp.

Right. And so, right. And obviously, you're building a bank that does that. And Coinbase arguably is the most popular place to do that, David. But as much as we can sort of wax poetic about this ideal world where we live in Bitcoin, it requires no counterparty. You still do need to live your life by getting in and out of dollars, right? I mean, David, that's what you guys are obviously offering, but that's right now, especially seems like a very tough needle to thread between the trust

and being able to offer that and basically the stink of all of these bad actors probably affecting you guys yeah i mean definitely i feel like we're still in a place in the world where you still need these kind of centralized entities to provide that on-ramp off-ramp kind of uh scenario maybe in the future that will change i don't know how i don't know how much how far in the future that's going to happen. Definitely, it felt that some kind of consolidation, I think, was expected in this sector. So maybe this is kind of happening faster than many pundits were kind of looking ahead to. But I think right now, we're really just kind of looking to have this asset class really kind of settle down. I mean, if it hadn't been for this remarkable kind of surprising series of events, I would have actually thought markets would actually be performing pretty well. I mean, we got, for example, a pretty decent inflation print today and we were expecting that the setup for crypto was actually looking pretty good.

Like we've been outperforming since like probably the last four months on a risk adjusted basis as an asset class. So I think it had to not been for this. I really wasn't seeing like large marginal sellers out there. Granted, there weren't too many large buyers either. But that's precisely what it's been kind of keeping us inside this range and what's been giving this asset class a lot of stability. I think it's just unfortunate to kind of see something like this happen because it's a crisis of confidence in a lot of ways that we easily could have avoided. I truly believe Bitcoin would be $25,000 today with the CPI print, even seeing the move that it just made literally on the CPI print, which was kind of hilarious, even in the midst of all this contagion. But maybe that means we reset back. I guess the question then we should discuss is what does this look like going forward? I mean, should FTX be bailed out? I know that as

we want to see users made whole, right? We always want to see customers made whole. Sam just released a 22 tweet thread of which 11 of them were apologies, but basically saying that their number one priority was to make customers whole. But is this a situation where we let it die or do we bail it out and then continue to see repeats of this same behavior? I mean, Caitlin, you talked about the fact that the infrastructure is being built for the next bull run, but do we have faith that we don't just build these same things over and over again? Because this is 2008 Lehman Brothers. There's no new lessons here, right? It's just us this time. Yeah, well, your points are well taken, all of you, about the humans involved, right?

Because ultimately human nature is that there are a lot of people out there who are really short-term oriented. Again, present company accepted. We are all building durable businesses and walking before we run and very slowly doing it and really building for the long term. But that's not how everyone thinks. And a lot of folks have debates about, are we going to just repeat the same mistakes? Is there going to be, because you're always pulling new people in, right? And some of the new folks are just chasing the momentum. One of the most interesting things about all the press in the last few months,

the interviews of Sam is that, I think it was in the Financial Times, he admitted that he didn't know what a blockchain was when he started trading the assets, right? And that's quite a statement because that's obviously an admission that that's not, that he wasn't here for the ethos of it, right? It was sort of the mercenary Wall Street trading approach. And will that come back? It very much depends upon how aggressive the regulators get, I think. And whether there are really, truly regulatory approved places to transact. And this gets into now a slightly different question, which is what's going to be the thing in the next bull market, right? In the previous bull market, the excesses came from ICOs.

And that was really the Ethereum-based community. And you started to see stable coins take off. And then in this past bull market, it was all this Wall Street leverage game that was inherently going to blow up. And then the next one I think is actually we get to the durable payments use case and signal through the noise, man, what Elon announced yesterday was pretty incredible, that people are going to be able to move money on the Twitter platform anywhere in the world among the different users and not use traditional payment rails to do it. The on-off ramps he talked about were debit and credit cards. And then he gave the example of off-ramping back to a traditional bank account. But, boy, all that money movement within Twitter is not going to happen on traditional payment rails.

We all know it can't. And Twitter registered yesterday with FinCEN to become a money services business. So this is not a surprise to those of us who've been watching, frankly, understood Elon's career. He was always setting out to kill ACH. And that's one of the things he set out to do back in the PayPal days. PayPal failed to do it. And back then, it was a simple, the regulators had a simple path to block it, which is that they didn't have licenses. Well, PayPal obviously went out and got licenses. There was still an interesting business to build there, even though they didn't succeed in what they set out to do, which was to kill ACH by disintermediating it. They basically still, because they much better user experience, were able to build an interesting business. But I think this whole team has

reconstituted with some new faces, ZZ included, to take another run at it. And that's the signal through the noise. There is so much happening in the payments world. And that's the signal through the noise. There is so much happening in the payments world. And it's kind of funny because it's, I like your phrase, Mike, misdirection. While everybody's looking at the wreckage of all these leveraged trading players and, you know, rubbernecking, you know, over here, there's something big going on

and nobody's really focusing on it. And the regulators aren't talking about it. And is Elon going to be able to get ahead of them is the interesting question. Mike, what do you think? I mean, is that how you believe this will go down? Or do you believe that now we've given the regulators all of the fuel they could possibly need to make this very difficult moving forward? I'm not quite as optimistic as Caitlin, but maybe that's because we're in the depths of it here and we're all human beings with emotions attached to it. But I feel we might repeat some of the same mistakes. I like the view and I know it's a joke, but I think it's funny that SBF is just a plant set by the government to basically drag the regulators into the space. He's just an actor, and he's literally doing exactly what you do if you want to convince

regulators that they needed to do more, and that CBDCs would follow him after he blows up. I think the CBDC momentum will probably pick up after this. There'll probably be more misguided regulation. But at the end of the day, there are regulated exchanges and counterparties right now like Coinbase that people could use. I get the argument that a lot of people internationally don't have that option. In fact, I got a DM from somebody pretty big in the space who was like, yeah, I got my money off FTX just in time. I would have liked to use Coinbase, but I guess he can't for some reason. And so I don't know what the solutions are for people outside the US, but inside the US, I think there's already viable ways to avoid some of this stuff. As it relates to regulation though, I'm not as smart as Caitlin. So I don't know exactly

how this plays out. I don't know whether or not they'll be able to stop these things in the future. My guess is that every few years, every bull market will see like five or ten of these things again, no matter what regulations they put into place. regulatory approach is what they do in the banking system since the great financial crisis, where it's so regulated and it's so controlled that there really isn't any innovation at all, which is why all the innovation has gone into fintech. So the banks haven't gone bust, but they haven't done anything interesting in years and their stocks are basically stuck, which is why I don't own any of them anymore because I just don't see much of a future in that business. David, how much do you think that what's happened in the last few days has fundamentally changed the view moving forward?

Yeah. I think that the fear right now is that we're going to see more stringent regulation coming out of DC, except keep in mind what just happened wasn't happening in the US. This is all happening offshore. I mean, my first point at the end of this call was that like because of the lack of available regulation or guidelines in the US, a lot of people have been moving offshore. It's pushing a lot of people offshore and that really becomes a problem

because most of the regulators have been so focused on these US onshore companies that, you know, and, you know, at Coinbase have been trying to follow those rules and that's fine for us and that's great. But it's not great from the user standpoint because there's no focus on the customers who are finding themselves with no alternative. And I think that whether the regulators want this or not, they're unfortunately, you know, they're not sanctioning that activity. Sure. But they're also not preventing that activity. And I think that's really at the core of the issue. Now, separately from that, you know, and you kind of pointed to like the tweets sent by SBF just this morning, I think it was kind of interesting to see that

one of his tweets said that what his expectations were in terms of leverage on this platform was 0x. And what it actually turned out to be was 1.7x. And that liquidity he thought he had was somewhere around 24 times, and it was actually 0.8. Now, those expectations to reality kind of show me that, I don't know, like he's trying to position this as negligent behavior, which I guess that's better than being malicious, but it's not much better. And, you know, like, I really don't have the, like, introspection to know, like, what really fully happened there. But just to kind of unpack that, I mean, like, there are a lot of underlying problems here that I think weren't strictly, like like I'm not sure if the right regulation

could catch that and I think that's kind of what we need right now we need to kind of focus on trying to understand like how could something like that have happened like even from a just malpractice kind of standpoint like you know that shouldn't have been available in the first place and of course we kind of knew about like FTT and the collateral kind of sitting behind that. And perhaps like, you know, the loans going between like Alameda and FTX. But I mean, like this is kind of just a crazy, surprising set of events from someone who we expected to be a fairly benign actor. Yeah, I think even I think benign is even putting it nicely, right, Caitlin? Yeah, look, there were some, let's put it this way. There were a lot of people who actively disassociated with FTX and myself included.

In fact, I was invited to a regulatory conference that was sponsored by them. And as soon as I found out it was sponsored by them, I actually declined the invitation. I didn't want to be associated. I don't agree with some of the things they've been doing. And, and then once, once their sponsorship, once they, they, they came back and said, no, it's not being sponsored by FTX, then I agreed to participate. So look, I, you know, some folks I think had a, a brighter view of it than, than others in the industry. But I, but I actively disassociated. And, and, you know, some of it is because I understood the practices and, you know, there's, boy, there's a lot, I think there's a lot that's going to come out. And, and I won't share it here, but just be

prepared because some people were saying yesterday, you know, the documentary, the movie that's going to be made about this is going to have a lot. And, you know, when these kinds of things happen, inevitably what you see and you see it in the traditional financial services industry as well is that people come forward and all kinds of crazy stories come out that weren't covered by the media, but yet a lot of people knew about them. So I've seen that in this industry with some of the players. Again, I'm not saying anything about anyone specific here, but there are a lot of bad actors in this industry. And I will go as far as to say, I hope all the fraudsters end up in jail. I was glad when there was an announcement that the department of justice was getting involved in the investigation because they have subpoena power.

They have the ability to prosecute. And if indeed there were crimes, then you know, all throughout the industry, I think the, the, the, the,

those who were committing the crimes belong in jail. And I would say the same thing with the traditional financial services industry. I know there's a lot of frustration that folks like, for example, the MF Global collapse, John Corzine, he actually did, it is a fact, dip into customer accounts to try to save the firm. Now, if you get into the details of it, technically, he had the ability to do that, which is why he didn't end up in jail. But most people didn't think that that was something that could happen. And there were a lot of people pointing out yesterday that the terms and conditions of FTX actually allowed for the commingling of assets. And essentially, they were not promising anything to the users. And so will that stand up in court? That's going to be an interesting question. And

if indeed there is a bankruptcy filing, there was a lot of discussion yesterday about where would it be? Would it be in the US? And I was back and forth with a couple of bankruptcy people yesterday. One of them pointed out that the automatic stay in bankruptcy was deemed unconstitutional in, I think it was Antigua, which is where the parent company is based. And so if indeed this does go to a bankruptcy filing, it's likely to come on shore in the U.S. And then we're back into the same problems we faced with, for example, the Celsius bankruptcy filing. There were 29,000 individual people who had their personal information doxed by the bankruptcy court. And everyone looks at that and says, well, that's normal. Well, no, it's not really good protection for the individuals. And that's one of the biggest problems with the regulatory structure that does exist right now. The only banks and broker dealers have special receivership and the commodities firms have special receivership regimes that protect the privacy of the customers. So you don't get doxed in the bankruptcy court

by nature of the fact that you're an unsecured creditor of a bankrupt organization. And creditor lists get published, folks. And that's what happens in bankruptcy. And oh my gosh, that creditor lists get published, folks. And that's what happens in bankruptcy. And oh, my gosh, that creditor list in Celsius doxed a lot of individuals. And who knows what something like that would be here. But these are the kind of conversations that are going on behind the scenes right now is the speculation about what it might look like if indeed that happens. And I obviously have no insight. I'm not connected to it. But

a lot of folks are very worried that this could end up being a particularly complex onshore, offshore hybrid bankruptcy and test a lot of the ambiguity that we've all agreed exists in US law. And Celsius was testing that alone. In fact, actually going back, the first Chapter 11 filing of a crypto company was Cred. And that's still going on. In the beginning of the conversation, we talked about the fact that I think it takes in some cases 10 years for these bankruptcies to unwind. And boy, that's going to be a mess if indeed we get more institutions filing Chapter 11 onshore in the U.S. So, Scott, real quick, I thought it was interesting that Suzu, sort of the discredited, one of the founders of Three Arrows, used this opportunity to basically mount the beginning of his comeback story. And joke on. Yeah, he posted a tweet about his spiritual awakening and his surfing. And I jokingly responded. I gave him a list of my favorite surf spots.

I doubt he's good enough to surf at any of those spots. But the thing that strikes me about that is none of these guys have sort of been held accountable. And part of it is this corporate shell game where there's these companies offshore in the virgin islands or in antigua or in malta or in cayman and there's all these different entities nobody can figure out who controls what and i get it from a corporate structuring standpoint like if you want to protect assets and you want to do things that are actually above board because you're trying to uh you know protect your your shareholders or protect value or whatever.

But it seems like we've gotten a little bit carried away. And these corporate structures are now being used to essentially obfuscate what's actually going on and protect people who, in many cases, have committed crimes. So again, I laughed a little bit about that tweet. I couldn't believe he had such poor taste to be talking about surfing when FTX was collapsing and thought that was a good thing to do. But the other thing is, wow, the guy's out surfing right now. He's not sitting in front of a judge. He's not accounting for his sins or trying to find assets for the people they screwed that they stole money from. He's surfing. And the attorneys and the corporate structures allow that. And maybe he'll still be surfing 20 years from now. And so my thought is maybe SBF will take up surfing. He does look a little overweight. He looked terrible yesterday. He seems like he's

gained like 40 pounds. And so, you know, maybe he can get away with it too. But if that keeps happening, like at some point, there's got to be a reckoning, right? At some point, people need to be held accountable for this. Well, I think it's the kind of people obviously that they are, which was reflected in the collapses in the first place, that level of hubris and sort of self-empowerment. But we've seen that across this industry for a long time. I mean, everybody obviously loves Arthur Hayes now and his writing is so entertaining. But like he was the guy who was literally counter trading against retail. Right. And people forget very quickly.

And that's not for me to judge or not. But I would not be surprised if we saw all of these guys surfing down the road. I wouldn't be surprised. Well, that's what happened in the banking industry, right? Yeah. How many people went to jail in 2008? Yeah. Yeah. But which is why, like, I, you know, I just am less optimistic, I guess, than everybody else that we won't repeat these same mistakes over and over and over again. So now, does anyone have color here or an opinion on whether we will see somebody give FTX $8 billion, which is the conjecture right now? I mean, do you think that they get made whole and somebody

fills it? Or do you think we end up in bankruptcy? I don't see how you can, frankly. I mean, if we believe the source of that hole is coming from an FTT back loan, like, I mean, we could see that we have good evidence that that's the case, right? Because we went from a potentially $1 billion hole to a $6 billion hole to an $8 billion hole, right? When FTT's price was dropping from 25 to 22 to 18 to six to like two. So clearly there's a correlation between those two things. Like if you are simply just doing a, you know, sitting in the middle classic borrowed lending structure where you are trying to match assets and liability.

So let's say you have one client who's trying to borrow another client who's trying to lend, you can kind of match them up. That's fine. But the problem is when you start introducing the slippery problem of having not just in a liquid asset, but a liquid asset that is tied to the health of your company. Well, if your company looks less and less healthy, then the value of that token looks less and less attractive. You get into that spiral where there's no way you can really patch that up because you don't have any alternative to actually revalue that loan. So that hole is just going to sit there. And I can kind of understand from a practical perspective why someone might come in and say, listen, at $1 billion, there's a lot of good assets sitting on top of FTX that might be worthwhile. But at $8 billion, there's a lot of good assets sitting on top of FTX that might be worthwhile.

But at $8 billion, that's not something that I think any casual observer, anyone can really try and try to fix. Right. But he's clearly out there trying to do it, anyone who read the thread or the leaked emails. And I want to go back to your point, David. I have it right here from SBF. He's talking about the full story here is one I'm still fleshing out every detail of, but as a very high level, I fucked up twice is what SBF said. The first time a poor internal labeling of bank-related accounts meant that I was substantially off on my sense of user's margin. I thought it was lower. Literally, how can that even happen? Can anyone explain to me how that, and when you're, as to your point, we're defaulting to negligence and I was wrong and literally admitting fault publicly, how bad this must be. How's that happen?

Caitlin, you run a bank. of regulation and testing and policies that have to be in place and just you know what's what they call tabletop exercises running out the different risk scenarios so it just the banking industry it is it is by far the most regulated industry in the united states um but there's a reason for it this kind of stuff doesn't happen um And in the fintech industry, it doesn't have that level of regulation. There is a difference. And in the offshore, unregulated industry, like where FTX was playing, there's really nothing, not even a requirement. The onshore U.S. money transmission licensing regime at least requires 100 percent permissible assets against customer funds. Those permissible assets can have some credit risk in them.

But there's there's at least it's supposed to be assets there and they wouldn't be, you know, FTT tokens, shall we say. There's a list of the things that can be invested in by fintechs. And it's mostly, you know, money market type assets. It's not certainly anything crypto. But I'd like to go back to the discussion because I think that both David and Mike and I would disagree on something, which is, can you safely leverage any of this at all? And my answer is no, it cannot be safely leveraged because you will always end up with a shortage of collateral, always end up with a shortage of good collateral. So specifically, there are 19.2 million Bitcoins outstanding. There will only ever be 21 million

of them algorithmically. And as a result, anyone who ends up with a short position, which is what leverage is, it's a short position, they are insolvent and they will hit the wall when eventually there is a liquidity crisis. I don't think there is a difference between an insolvent company and an illiquid one because solvent companies do not need liquidity bailouts. And the whole reason why a liquidity bailout might exist is because the mark to market on the assets has dropped so that the company can't sell those assets. That's exactly what apparently happened here with the FTT tokens. The mark to market dropped. Company didn't have the asset value to be able to solve them, had a liquidity crisis as a result. But my point is that was always a solvency crisis. Liquidity crises are just the manifestation of solvency crises. I don't see that there's a difference between the two. A solvent company, by definition, can survive those mark to markets and always stay liquid. Mike or David, what do you think? I have nothing else to add to that particular

comment. I generally, for pretty much all these companies, solvency and liquidity has been functionally the same thing. And so when Celsius first started to have issues, the speculation was, oh, it's just a liquidity. It's a temporary liquidity problem. But I agree with Caitlin. It's almost always a solvency, if not always a solvency problem as well. So look, I don't know. I'm not good enough to be able to handicap specifically

like what is going on with FTX. But the thing that really got my attention is that Justin Sun from Tron now seems to be running things, which we haven't spoken about. Like if you read the tweets, his team is in there, like changing the code and getting some of the trading pairs working again. So you can actively trade TRX on FTX right now. Yeah, that should tell you the level of desperation, right?

SPF literally threw up his hands. He got basically his veil was pierced by by cz again i think there's some weird stuff going on there and maybe it'll come out in the future he spf alluded in that tweet storm that there may be some things that will come out about cz and i wouldn't be surprised i think there's a lot of skeletons in that closet as well but the fact that justin sun is in there basically running operations uh right now should tell you almost everything you need to know about the likelihood that this thing is going to come back. And so, look, maybe he can save it. Maybe a Hail Mary play will work and it'll actually come all the way back because it's not dead yet and they haven't filed. But I would be very concerned if I had capital there. Let me ask this with five minutes or so left. Absorbing all of this and everything

that's happening and knowing how much the game has somewhat changed over the past few days, what would be our ideal scenario moving forward? If this industry was in control of what regulation would look like and how we would proceed from here, because you can't expect regulators to have an answer if we expect regulators to have an answer if we don't even have an answer. What should crypto in the United States look like? Anyone can jump in. I always thought that crypto intermediaries in the US

would be banks or broker dealers, and none of us are. Well, Custodio is a bank, but we're not yet approved by the Fed with a Fedmaster account. But the bankruptcy treatment of banks and broker dealers, as I said, is specifically designed to be consumer friendly with a special receivership regimes that handle the receivership of such organizations fairly quickly and try to protect consumer assets, protect the segregation of consumer assets. And none of that exists in the US right now. So I think it will be banks and broker dealers, but there's a debate as to whether that would need to have congressional approval. There's a lot of conversation happening behind the scenes now about the impact of crypto regulation.

Certainly the things that FTX were pushing on the Hill are on the back burner, shall we say now? Eric Voorhees' tweet about all the politicians in Washington who took campaign contributions from FTX and are they going to give them back to try to make the consumers whole? And the silence is deafening, shall we say. But that said,

there were a couple of other crypto legislation proposals that I think are going to pick up steam. And from what I understand, there's a very real possibility now that something gets done in the lame duck session and gets implemented by December. And frankly, for those of us on this company or on this podcast, all three of us, the companies that we have and have in the recent past been associated with, I think would welcome that. Because frankly, we are looking for the regulatory clarity. And it is interesting that that regulatory clarity hasn't existed. We haven't had banks and broker dealers licensed to do this, with the exception, of course, of Bank of New York, which was approved to do crypto custody. But we haven't otherwise had the ability-panelists here have been spot on. It has de facto pushed the activity offshore. And a lot more consumers got hurt as a result of that. But I do believe finally the regulation is coming, no question.

And that's ultimately good for the lit markets, the good players in this industry. So I agree with that. I mean, the traditional brokerage business in the US has a pretty good track record. Like you don't see a lot of Fidelity's or Schwab's going away. Some of these firms get acquired, but they never usually blow up and the depositors slash holders of securities within those institutions don't generally lose any money. So now there's some hybrids like Robinhood, right, that sort of started as a FinTech, but has all the same rules and regulations as as a schwab or fidelity and that actually worked out really well during the gamestop drama where they behind

the scenes had to do stuff to de-risk which if they hadn't had those regulations they might look a lot like ftx because they're just as poorly run in my view of an organization as ftx and celsius and others but but luckily they they have the traditional brokerage regulation in the US to keep them in line. And I know this intuitively because I'm starting a hybrid fund next month. It'll launch probably in the middle of the month and it's got equities and tokens in one vehicle. And I chose a traditional equities broker as my prime, not a crypto broker as a prime. And not just because I want equity exposure, but also because I just don't trust any of the crypto primes. I just

don't think they have enough regulation. I don't know for sure that they'll protect my capital. I don't want to generate a return for my LPs and then not be able to actually access that capital because I put it into FTX. And so I think that's where it needs to go. A lot of people in the space want this fluid, innovative environment where you can do whatever you want, but I just don't think that's healthy long-term when you're talking about holding people's assets. Yeah, I would just add that we would all love for this to be treated as a unique asset class, but it's kind of hard to get there because this is not how we kind of think, and it's not how we kind of move as human beings. I will say that, you know, SPF got a lot of criticism for his support of the DCCPA bill that's going through Congress. And, you know, some of

that, unfairly so, some of that, it could be right, because a lot of that criticism with regards to DeFi, I think, you know, it really needs more kind of thoughtful kind of exposition. But as a starting point, as a way of heading in the right direction, you know, even though it would be great to kind of parse more of that language, even though it's kind of good to take explore that more fully, the idea of a bill actually coming in and trying to enforce a little playing field for the whole industry. I mean, that's kind of really what's needed right now. And that's what's not happening today. You know, if we look at, you know, just spot and future volumes, you know, 95% of crypto activity of the trading volume has actually moved outside of the US. And that's precisely due to the lack

of regulatory clarity. So I think having just at least a starting point that we kind of operate on and talk about, I think that's going to be at least the most useful thing we can have right now. Well, I think we're obviously experiencing yet another drop on the roller coaster, but I do get the sense that we're all at least optimistic that once again, it will play out. And everybody here, I think, agrees that Bitcoin will continue to survive no matter what happens with regulation or centralized platforms or any of it, period. I see a lot of comments saying that, you know, we're all here, obviously pushing banks and the regulation and the things that we were supposed to be raging against. And that's the machine. But I think there's a level of pragmatism that's required to understand what needs to be done for this industry to exist and what's coming, whether you agree with it or not. And so in my very humble opinion, I think the best we can do is put our smartest minds forward to help impact that regulation and what happens moving forward.

I want to thank all three of you. I'm shocked that we got through this, quite frankly, with what I hear raging outside my window. David, Mike, Caitlin, you guys are always welcome. Amazing guests. And it's just personally the best thing for me now is that almost everyone I have on the show, I've actually sat down with and hung out with in person, which didn't used to be the case.

And it's been great to be able to get out there and do that. So thank you guys very much. Everyone else, I will be back tomorrow morning at 9.30am Eastern Standard Time. Of course, please subscribe to the channel and like the video. Because apparently, if I don't say that I get kicked off YouTube. Thank you guys once again, and I will see everybody tomorrow. Bye guys. Thanks. Thank you. Thank you.