This Week in Startups - Inside crypto’s wild rise and fall with “Number Go Up” author Zeke Faux | E1807

Episode Date: September 12, 2023

This Week in Startups is brought to you by… Vanta. Compliance and security shouldn't be a deal-breaker for startups to win new business. Vanta makes it easy for companies to get a SOC 2 report fast. TWiST listeners can get $1,000 off for a limited time at https://vanta.com/twist Lemon.io - Hire pre-vetted remote developers, get 15% off your first 4 weeks of developer time at https://Lemon.io/twist CLA. Innovation takes balance. CLA's CPAs, consultants, and wealth advisors can help you get from startup to where you want to end up. Get started now at htttps://CLAconnect.com/tech * Today’s show: Zeke Faux, the author of “Number Go Up: Inside Crypto’s Wild Rise and Staggering Fall,” joins Jason to discuss crypto’s crazy rise and fall (3:58), how SBF learned to play the game (16:22), red flags at Tether (26:13), and so much more! * Time stamps: (0:00) Zeke Faux, the author of “Number Go Up” joins Jason (3:58) Meeting Sam Bankman-Fried in the Bahamas and first impressions (10:23) Vanta - Get $1000 off your SOC 2 at https://vanta.com/twist (11:30) SBF, his colleagues, and a hint of substance abuse (16:22) The group psychosis and how they learned to play the game (24:51) Lemon.io - Get 15% off your first 4 weeks of developer time at https://Lemon.io/twist (26:13) Operations and red flags at Tether (35:44) CLA - Get started with CLA's CPAs, consultants, and wealth advisors now at https://claconnect.com/tech (37:15) Revisiting Zeke’s investigative journalism in Cambodia (44:16) From organized crime to legitimate business (46:59) Terraform Labs and the collapse of Luna (49:05) The VC perspective and regulations in place * Buy Number Go Up: https://www.amazon.com/Number-Go-Up-Cryptos-Staggering/dp/0593443810 FOLLOW Zeke: https://twitter.com/ZekeFaux * Read LAUNCH Fund 4 Deal Memo: https://www.launch.co/four Apply for Funding: https://www.launch.co/apply Buy ANGEL: https://www.angelthebook.com Great recent interviews: Steve Huffman, Brian Chesky, Aaron Levie, Sophia Amoruso, Reid Hoffman, Frank Slootman, Billy McFarland, PrayingForExits, Jenny Lefcourt Check out Jason’s suite of newsletters: https://substack.com/@calacanis * Follow Jason: Twitter: https://twitter.com/jason Instagram: https://www.instagram.com/jason LinkedIn: https://www.linkedin.com/in/jasoncalacanis * Follow TWiST: Substack: https://twistartups.substack.com Twitter: https://twitter.com/TWiStartups YouTube: https://www.youtube.com/thisweekin * Subscribe to the Founder University Podcast: https://www.founder.university/podcast

I had spent a couple of days hanging out at FTX's offices. I'd sat with Sam. He's answering emails from other CEOs. He's on Slack. He's like doing interviews. And in that time, I didn't pick up any clues. What I was suspicious of was crypto in general. And I would talk with Sam about this, which is that he claimed to be an effective altruist.

He claimed that everything he did was. so that he could do the most good for the greatest number of people. But meanwhile, he was running what I thought was at best, like an offshore casino where people could go gamble on like random tokens and would probably lose their money, which seemed like kind of bad for the world. But what I did not suspect was that he was taking all the money out of the back of the casino, bringing it to other casinos and gambling it himself and losing it.

and that when the customers went to cash in their chips, there'd be nothing left for them. You know, I didn't suspect that, and pretty much nobody else did. I don't think anyone can say that they called it. This week in startups is brought to you by Vanta. Compliance and security shouldn't be a deal breaker for startups to win new business. Vanta makes it easy for companies to get a SOC2 report fast. Twist listeners can get $1,000 off for a limited time at vanta.com slash twist. Lemon.io. Need to speed up your product development without draining your budget?

Hire vetted engineers from Europe at lemon.io. Go to lemon.io slash twist to get 15% off for the first four weeks. And CLA. Innovation takes balance. CLA's CPAs, consultants, and wealth advisors can help you get from startup to where you want to end up. Get started now at CLA connect.com. com slash tech. All right, you may remember back in 2021 at the height of the crypto chaos, did a little investigation on Tether on this podcast. So we had a couple of colorful characters on the show, including Bitfinex, the anonymous tether critic.

And one of our best guests during that time period, while we were all trying to make sense of what was very clear to a number of us, a griff, crime, and insanity that made no logical sense some people had suspended disbelief. Some people were in on the griff. But one of the best guests was Bloomberg investigative journalist Zeke Fox. And Zeke had just published an article titled Anyone Seen Tethers Billions.

That was back on episode 1300, 500 episodes ago. Zeke is back on the program because he has a book coming out today, T-O-D-A-Y, today. And I want you to go buy it because it's awesome. I'm listening to the audiobook. And this is going to be a classic. The book is titled Number Go Up, Inside Crypto's Wild Rise and Staggering Fall for the book. Zeke spent a lot of time with SBF before the FTX collapse and with Michael Lewis there doing a story on it. And you also purchased a $20,000 board ape.

You get access to ape fest. He traveled to El Salvador to learn what happened or what happens when you bet your country's treasury on Bitcoin. And then quite excitingly, he went to the Philippines to meet a few of the only active AXI-Infindi players. And so much more. Z, welcome back to the show. Thank you so much for having me back on. I'm really excited. So you spent the last two or three years writing this book.

And there's so much you uncovered in terms of griff, crime, and insanity. And I guess everybody really wants to start with SBF. Sam Bankman-Fried is now in jail. He's in custody. He's not just charged. They revoked his bail, apparently. And you got to spend time with him. And you saw him at his peak when he had been paying people like Bill Clinton,

a quarter million dollars to come speak. That's going right for presidents these days. um jazelle and um who's the football player Tom Brady her ex-husband they got 50 million combined yeah 50 million and then a king of the grift who's the guy from Shark Tank who got like 15 million oh Mr. Wonderful yeah

15 million and I saw him down in the Bahamas at the celebration of FTX, polishing his dome with a razor right before he went on TV. I learned some tricks. Yeah. So let's start with that moment, which is very vivid in the book, by the way. You're a great writer, by the way, one writer to another. I mean, really take you to that scene.

But take us to that scene where you're staying on one side of the island, Sam Bankman-Frieds hold up in his penthouse. He's having this crazy conference. And all these people are running around, celebrating this hopped up on speed, degenerate criminal. And the question I have for you is, while you're watching this as an investigative journalist, doing actual journalism, not content creating, but like actually reporting from the field, was it clear to you this person was an absolute degenerate scumbag?

So I have to say, I have to admit, no. Like, I wish I was here to tell you, I'm the guy who took down SBF. You know, I could be on like my speaking tour right now as like the hero reporter who exposed the fraud. But I had spent a couple of days hanging out at FTX's offices. I'd sat with Sam. He's answering emails from other CEOs. He's on Slack. He's like doing interviews.

And in that time, I didn't pick up any clues. What I was suspicious of was crypto in general. And I would talk with Sam about this, which is that he claimed to be an effective altruist. He claimed that everything he did was so that he could do the most good for the greatest number of people. But meanwhile, he was running what I thought was at best like an offshore casino where people could go gamble on like random tokens and would probably lose their money, which seemed like kind of bad for the world.

But what I did not suspect was that he was taking all the money out of the back of the casino, bringing it to other casinos and gambling it himself and losing it. And that when the customers went to cash in their chips, there'd be nothing left for them. You know, I didn't suspect that. And pretty much nobody else did. I don't think anyone can say that they called it. Yeah. Well, I mean, and we've seen this before.

Bernie Mata went for, decades. And then even when people started to suspect Bernie Madoff, it took a little while for people to believe some of the whistleblowers. Enron took a little while. And Theranos took a little while. We have a trend here. Um, sociopathic criminals, uh, you know, deranged people. There's all different kind of archetypes here. Um, but do you think he was a, he outset, did you think at the outset he was trying to be a criminal or do you think he was just a dejective? Gambling Gambler on speed who did what people on speed do, which is, you know, get manic. What's your take now after all this information has come out? So what I think is that he and his buddies were so taken with this mission that they were going to be super rich, make a trillion dollars, and use it to save the world, that this made them even more dangerous. and they thought that any risk,

any illicit activity that it took to get there could be justified. And like, I've talked with people who hung out with them that suburb, like before the collapse, who said that all they were talking about was like the upcoming AI apocalypse

and how they were going to stop it. And I talked with people who knew him when he was a teenager, who knew him when he was in his early 20s. I think his interest in effective altruism utilitarianism was sincere. And like I said, that's what made him so dangerous. And that,

I don't know that when this decision was made, but at some point, Sam and his colleagues at FTX decided that it was worth it to dip into these customer funds to keep things going. Because in their minds, the payoff was so huge. Like, there was really a chance they could save the world. They were talking about,

buying an island nation that could be like headquarters for humanity an event of like a giant disaster they were really they, yes, they were really going crazy with the power that they had. The word that comes to mind to me.

Yes. So these young individuals who came from a lot of privilege and from Ivy League backgrounds they're elitists, right? These are elites in our society. You would describe them all as, like children of elites? Definitely. I mean, they all came

from, they all went to great colleges and some of these people that was their first job. And one thing I thought was really telling was that when FTX collapsed, before any criminal charges came down or anything, the kids that were running it were all gathered in the Bahamas. They're at Sam's apartment. They're crying. They're hugging each other. And a lot of them fled the island. It went back home to their parents' house.

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For $1,000 off, your sock, too. Okay, so just so we're teeing this up correctly, you've got a bunch of kids with elite parents. from Ivy League backgrounds who have never worked a day in their life, who are also, uh, who are enamored in having delusions of grandeur that they're going to be the ones who save the world. They get involved in gambling and criminal enterprise,

knowingly, uh, start stealing the money and start making these crazy bets. Um, but I've, I've sort of brought it up twice here. I'm going to bring it up a third time, uh,

because you haven't sort of locked into this. And I think it's, key factor because I interviewed SBF and he was shaking his leg. And this is a month before he got pinched, I think, or before all this started to come apart. And he was shaking his leg and moving his arm around and his head and the twitching made me as an interviewer doing random acts of journalism as a former journalist. And this was in a corporate private setting. I did this interview. I started to feel bad for him that he was having a panic attack perhaps because the shaking was out of control. And then I thought to myself, you know what?

I know people who've been addicted to speed and amphetamines and adderol and the stuff. This kid's got to be banging 50 or 60 milligrams of adderol or something. What is going on? Your body does not shake like that. Did you see that same behavior? Because he seemed to be like a lot of these privileged kids who are around with all these mind-enhancing performance-enhancing drugs, you know, they've been on them in some cases since school

because they're so competitive in going to Ivy League schools and getting into them, that there's a lot of abuse in the system. What role did that play? And did you see that? So obviously, like, when the reporters around, you know, they put away the amphetamines, but there's been pretty widely reported that a lot of them had,

Adderall prescriptions. And I think Sam has complained that in prison he hasn't been able to get his ADHD meds and has impacted his ability to prepare for the defense. I saw the twitching that you were talking about. It was actually most crazy on stage in the Bahamas when he was with Michael Lewis or then later Bill Clinton in front of this big audience. His legs were tapping so hard that he would like, get his hands and try and hold his leg down.

Yes. But then like the other leg would start tapping. Yes, he was trying to control the shakes. Yeah, it was, uh, his mannerisms were really weird. And I don't know, I don't think I can read into like what that comes from if he's like that when he's not on meds. But when I saw him towards the end, um, just before he got arrested when I was at his apartment, he was wearing a t-shirt with like short.

her sleeves and I could see he had this patch on his arm. The M-S-S-M patch. E-M-S-A-M. Then this is another weird habit of his, which is that, like, one of the skills of being an executive is like knowing when to duck a question. So I asked him at that time,

I'm like, hey, what's that patch? Is that M-S-M? Because I think some people on Twitter had been speculating about it by that. Yeah, in fact, I just pulled up the tweet for those watching here of him at his, like, crazy desk. with like six monitors as a traitor.

And instead of it being the 80s and he's doing cocaine at the desk, he's got these M-San patches all over the desk. And these are for epilepsy or something? It's insane. It's, he said he's depressed. He's prescribed them for depression. But I said,

hey, is that just for depression or is that kind of a performance enhancing drug? And like, easy answer would be like, I'm depressed. My doctor gave it to me. Sure. That would have been true.

But he's like, well, I don't know. It's tough to say. I mean, does it enhance my performance? I'm like, oh, my God. But yeah, these guys thought they could work, you know, 22 hours a day. They could trade around the clock, trade markets in Asia and the U.S. and in Europe.

And Caroline Ellison, his ex-girlfriend and deputy, there's quotes from her on her old Twitter where she said, like, she really believed that, you know, Adderall was a big performance enhancing drug. I don't know if that's what led them astray. To me, I actually think it was their belief in their own righteousness and their lack of experience that led them to take these crazy risks and like illegal and to gamble away the customer's money, which is totally illegal.

Yeah. And these, it's just so people know, like, one of the things that these, this category of drugs can do, according to my research. And I'm not a doctor, so don't take advice from a podcast or investigative journalist. But these things can really mess with your judgment. They can give you delusions of grandeur, and they can make you feel invincible. And so I think that what was, this is a major part of the psychosis of this, a group psychosis that was going on here, because maybe you talk about the group dynamics here, putting aside, like,

They had some polyamory thing. Who cares? I don't think it's relevant. But there was a manicness to this group. And there was this, we're going to save the world, kind of ethos that you're talking about. And they seem to know how to hack the system.

They seem to understand that if you gave important people money, that they would say whatever you wanted them to say, they would give you their halo to grow your brand. and the cynicism here of like these elites, I think both his parents went to Stanford, right? They're professors from Stanford on, like, ethics. I mean, you can't make this stuff up. But maybe you could talk a little bit about how they knew how to play the game

and this group sort of psychosis. It's two-part question there. Well, I mean, it was really clear to me that they'd played the game well when I went to this conference. Like you brought up before. I just, I'm coming there. I'm thinking like, all right, it's kind of, I look down a little bit on this offshore casino. And I'm here, I'm at the conference.

I'm hearing about the stupidest ideas like, you know, crypto spaceships that are going to like make us all rich or like pictures of shoes that are worth hundreds of thousands of dollars. Like anyone who was at this conference would have known that the, this was like a world of make believe, right? Like the assets that are being traded on FTX were mostly like these dumb crypto coins that like, had you evaluated any of them as investments, I would think you would have passed, you know? Oh, I did. Literally, you're asking a venture capitalist. I literally did. Somebody said, how did you know that this was all a scam? I said, well, 99 out of 100 of the projects, I knew were run by people who were not qualified or they were farcical and insane and they had spelling errors in their.

like white papers and white papers is not how we invest in companies we look at prototypes and actual products and the person's like yeah but you knew and I'm like

when I say 99 of 100 I'm actually giving you a number I met with over a hundred of these I'm not that isn't like a made up number uh so continue when did you realize I'm really interested in you as

your journey here because you went on a journey you start to piece together NFTs are nonsense these people are morons they've got delusions of grandeur. They're on speed. They're paying people to come here.

When do you start to realize, wait a second, Emperor has no close? So I'm sitting there. I'm basically in the Bahamas. I'm basically thinking that, but I'm feeling kind of depressed because I'm like, seemingly so many smart people who I respect have been co-opted to promote crypto gambling. And I saw like, Michael Lewis, he's on stage at this FTX conference put on by FTX to celebrate Sam and what a genius he is. I'm kind of excited to see like, all right, Michael Lewis, he showed me like how the subprime crisis worked.

Surely he's going to have some smart points about crypto. But he's on stage interviewing Sam and he's like, I felt like it almost felt like he was, right this, like, he was like a school headmaster and Sam was like his star student and he was there to give him a prize. He's like, wow, you're breaking land speed records. You're, you know, you've got billions and billions of dollars. Like, you're going to revolutionize Wall Street. And that I saw, you know, Bill Clinton up there, um, being interviewed by Sam. And Sam was asking him like, he was, this was like a Hall of Fame and his leg tapping. He really, he had prepared like no good questions. It was really embarrassing, uh, performance on stage. And he dressed like, I mean, he was physically uncapped and you're like, so you're saying in your mind,

am I the dumb one in the room? Because these are successful smart people I respect. Michael Lewis, how do you not respect him? This guy wrote Moneyball. This is like one of the smartest, greatest writers of our time. And Bill Clinton, hero, yeah. You know, and I don't want to let the venture capital world off the hook. No.

Venture capital was funding a lot of. of these transparently dumb ideas. At very high valuations. Yeah. And I, you know, Solana was one of Sam's, like the Sam's favorite coins. I met the multi-coin guy at, uh, at Sam's conference. And the thing that I realized was like the goal, time and again, like, I would ask these crypto guys, how, what is your thing?

for? Like, can I use it? Can I try it out? Because I think that, like, eventually the product has to be good for it to take off, you know? It's like a basic tenet of business, yeah. Yeah. I mean, at this point, crypto's as old as, like, WhatsApp and Uber. And, like, we use those every day. And, like, nobody uses crypto. And these guys never, oftentimes they had nothing to show. Like, the virtual spaceship guy, he was like, oh, yeah, I've sold like 300 million of virtual spaceships. And I was like, I love video games. Let's play. and he's like, oh no, that's like years away, you know?

But meanwhile. Yeah, and the book you say he's like five years from now, but he sold the spaceship. So he just sold people pictures. I mean, I just, I couldn't believe it. But I sort of thought that Sam had talked his way to the top and that like, I believed he was running this offshore casino, but an honest one. And that maybe like, that's what the title of the book comes from a little. bit. Its number go up. And it was like, the number was just going higher and higher. And it was sort of like, could this number just go so high that these crazy things could turn into reality?

Like, I didn't really believe it, but it was like, I didn't think, oh, the crash is coming next week. Like I, it was, it was, it was truly weird. I felt like I was living in like a alternate reality for, you know, a couple of years there. But at some point, uh, being a business journalist, a finance journalists, you are aware of what a Ponzi scheme is. And Ponzi scheme is the oldest form of grift, I think, in the finance world. I'm trying to think of one that's more prevalent or more well documented over time. And it's clear this is a Ponzi. The new money coming in is paying off the old folks. And there's no there there, whether it's made off or it's, you know, whatever, one of these

regazy crypto video games or NFTs, it's obvious. And there's no regulation in it, which was disturbing. So Ponzi's must crash. The question is when? When does the Ponzi crash?

And the Ponzi did crash, but you also found out that there was this rails of the internet, of the crypto space. And the rails of the crypto space were something called Tether. and last time you're on the pod, we talked about Tether.

And this was obvious to all of us. Listen, if you've got tens of billions of dollars that you've collected and you really have it, you would do what's called an audit. And then they were telling all of us that we were crazy. They didn't attestation. And we all go look up what an attestation is. And it's like, oh, that's a screenshot of like a bank account with a certain amount of money. But there's no way comparable to an audit.

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So maybe a good point for us to pivot to now is these insane people running tether. and meeting them. Yeah. And so Tether, when I started looking into it, I write, the company seemed to be quilted out of red flags. Like, I'd never seen a weirder company.

The top executives never gave interviews, rarely even seen at these types of conferences, or, and it wasn't clear what country the coin was based in. They wouldn't say where their money was. The one bank, one of the founders was a child. actor who had been in the Mighty Ducks, the one bank I found that would own up to owning, holding some of Tether's assets was owned by the guy who created Inspector Gadget. And like when I was on with you last time, I had found that Tether, while it said it was reserves were in super safe assets, had invested a lot of the money, billions of dollars,

into loans to other crypto companies and Chinese commercial paper. So, like, at that point in time, it seemed to me like there could be a run on Tether any day because, like, if you're an investor and you've got your money in Tether, I mean, you don't want to be the one who's holding these Tether coins when something bad comes out. But it just didn't happen. And I started to wonder, yeah, like Tether, even in 2022 in the summer, when These companies started falling one after another, Celsius, Voyager, Gemini, FTX, like, tether held up. And people redeemed billions of dollars of tether.

And if they didn't get their money back, like they would have complained, right? It was basically stress tested at a certain point where I think five or 10 billion came out of the 70 or 80 billion that they had. So we have red flag, red flag, red flag, red flag, we have so many red flags. And they've also been banned in Canada. I believe they got banned. They got banned in New York State. So you do have some legal action. And people in regular are saying, you know, we don't want this around because we see red flags.

And they, but they kept telling us we're all crazy. Some redemptions happened. So then you got to think like, huh, what's happening here? What are the possibilities of what could happen? The only one I came to was, well, maybe they did a bunch of Fugazi stuff. But unlike what FTCX did, FTCS took the money in. lost the bets that he was making on the side. Maybe Tether was doing things that wouldn't pass regulatory scrutiny, but the bets worked

out for them, i.e., maybe they just put everything in Bitcoin, and it had a run up, and they just had all the cash. So what did you discover there? And you got to meet some of these crazy lunatics, yeah? Yes. So I went to the Lugano, Switzerland, twice, to try to track down Jean-Carlo DiBasini, the boss of Tether. He's a

former Italian plastic surgeon who then got into like the low end computer import, export business. And what I went to this, his girlfriend, it turns out he, what your theory is not a bad one because he's like a real

Bitcoiner. Like he's one of these Bitcoin kind of cultists, I think. Maximus, I think they call them. Yeah. Yeah. Like, like he's not a big social media guy, but he'd have the laser eyes on there, I think. She goes to El Salvador, hangs out with President Buckele, who's

made Bitcoin legal tender. And his partner is a Bitcoin artist who makes this really, like, kitsy art that's like pictures of Satoshi or like a dollar bill, but George Washington is screaming because, you know, central banks

will be replaced by Bitcoin. So she was having a, I heard she was having an art show in Lugano, and I thought, this would be like the time to track down the reclusive boss of tether. So I flew out there. Let me ask you a question. Do you fly out there on your own time? Or does Bloomberg believe in investigative journalism so much that you come to

me like, you know, I need some tickets. I need to go somewhere. I don't know when the story is going to come out. And how much do they spend on these articles you write? And how often do you file? And what you tell me about that process. Or do you do it out of your book advance? I'm curious.

So Bloomberg is game for whatever. They are great about this sort of thing. they, I'm glad though, that I did not have to ask them for some of this book stuff because, like, I don't think they would have covered my $20,000 mutant ape out of the expense budget or like the second time I went to back to Lugano. They're like, because I didn't find John Carlo the first time. Oh, the second time I went back, I did track him down. But like, I wonder what the editor would have said.

And then this gets into another theory about Tether, which is that maybe some. some of the users are up to no good. They don't really care because they're like crooks themselves. And to investigate that, I ended up going to Cambodia to a town run by Chinese gangsters where they're doing like, is like your Indiana Jones going here. It is,

these are towns that are controlled by the Chinese mafia where you can get in, but you can't get out and explain these call centers and the vibe there. Yeah. Yeah, I mean, this, it sounds like some sort of like Q&on thing, but basically, if you get one of those spam text messages that's like addressed to the wrong person, there's a decent chance it's sent by someone who has been trafficked to Cambodia or Myanmar. The UN estimates more than 100,000 people have been victimized this way. They're held in these towers.

They can't leave. They're beaten. They're forced to send these spam messages all the time. and if they hook someone and become friends with them, they run a crypto scam on them. They convince them to send in their savings because they're going to make lots of money on this great trade. And they always use tether.

I don't think the tether guys have anything to do with this, but they've, tether with the stable coin has created this amazing way that some lonely retired guy in Indiana can zap like 100 grand to a Chinese gangster in Cambodia and like the money will never come back. And tether's gotten so popular and accepted that one thing I found really telling, I never see any like tether stuff in the United States or anywhere else that I traveled for that matter. But when I got to Cambodia, I was at the entrance to one of these most notorious sites of crypto human trafficking called Chinatown in Sihanukville.

And right at the entrance, there was a shuttered money exchange store. And I could see on their sign that they were advertising that they traded. USDT for cash. And I found lots of other stores like that in Panampen and was able to trade USDT on my phone for US dollars. No questions asked. And like it doesn't prove anything, but I felt like I discovered, oh, this is what crypto is good for.

This is why. And these guys don't care about, Tether. Want you to know your customer. And we're enforcing regulations here because if you don't enforce regulations with money like this. bad guys in Cambodia who are doing human trafficking and crimes can use it as like an anonymous way or a very fluid way. It's kind of quasi anonymous, but a very fluid way to move money around you. Yeah.

And some of these guys just bring it full circle, some of these criminals would then send their tether. I talked with like blockchain analysts who are tracing their accounts and they could see that the tethers would end up at, regular crypto exchanges, including FTX. And on that last visit to Sam's apartment just before he got arrested, I was like, you know, we, he would, he loved reporters. You'd talk to reporters. I had to leave because I was getting tired because I didn't have any drugs. But we were running out of stuff to talk about with his predicament.

And I was like, Sam, have you ever looked into this? Like, your exchange is being used by these criminals. they're like scamming people they're trafficking workers from across Southeast Asia and he was just like huh that's like really bad but I don't know like what we can do

and shut their accounts off you could know your customer I mean there's like a thousand things you could do right but I felt like that was that was the attitude I saw in crypto in general like the people who created Axi Infinity this like

disastrous play to earn game that was popular in the Philippines. You don't see them apologizing to all the Filipinos who lost their money. You don't see the A16Z guys who funded it and who I think did pretty well, you know, acknowledging what had happened. And like the crypto people are happy to create some crazy scheme and to watch the token go up. And if you get in early, you're in it by early i mean if you're the guy who made it or like one of his buddies you can do great even if the scheme doesn't really work out that well in the end all right everybody stephen estes is a principal at c l a clifton larsen allen is a professional service provider that specializes in CPA tax consulting in wealth advisory welcome to the program steven thank you for having me

so you specialize in vc backed high growth startups what's an overview of how you advise these companies in the early stage and then what typically gets complicated as you go? First and foremost, I'd say CLA exists to create opportunities for our clients, our people, and our communities. And we do so by taking an industry specialized approach, becoming experts in our respective industries. And that really enables us to identify those kind of opportunities and spot issues before they become problems. We work with a variety of companies in the tech space, right, from incubator all the way up to IPO and, and things. the exit. So we generally will come alongside them and partner with many of the early stage

companies right when they come out of an incubator and then kind of expand that relationship as those companies scale and grow. And we come alongside and assist for like fractional CFO work, audits, M&A assistance, international. We really just kind of help those companies throughout their entire life cycle. It's our promise to know you and help you that really enables us to transition from being just an accountant to a trusted advisor. Get started right. now at c l a connect.com slash tech let him know your boy jkowell sent you c l a connect dot com slash tech to get started right now

you yourself put yourself in harm's way in cambodia and these like uh crime fell towns so tell me a little bit about that so okay i don't want to like overstate it because there's reporters who are like in ukraine right now like embedded with you know the ukrainean arms to land on their head yeah i got it yeah this wasn't like Basically, I teamed up with two reporters in Cambodia, Mecdura and Danielle Keaton Olson, who they were super brave without like the kind of institutional support that I have. They had exposed this problem for this tiny publication.

And instead of getting journalism prizes, the president shut down their newspaper and was like, let's just ban reporting. There's very little independent press there anymore. So they took me to, Chinatown where it was really spooky because I'd met I'd met with victims who'd escape from these places so I'd heard what went on inside and I'm there and it's like these brutal like office towers these dingy gray towers I'd heard this this it's like a whole

kind of office park that holds like maybe five or six thousand people total and you these towers each room has like a balcony and they looked like maybe they were built to be nice, but there had been bars welded on the balconies to turn them like into cages, because otherwise people would jump to try and get out. Oh, wow. And so the wildest thing was there's a hotel in the middle of this that looks pretty nice. And I had heard from victims who escaped that that hotel was where the bosses would go to like, uh, sleep with prostitutes.

And, but at the time I got there, uh, it was listed on booking.com and like appeared to be open. So I was like, I got to check this out. So I walked in and the management's all Chinese. Not everyone speaks English. They're definitely giving me weird looks. Like, what is this guy doing here? I walk, it's got the lobby.

It's a nice looking hotel. The lobby has like this eight foot tall golden pineapple. I go up the marble staircase to the buffet. Nobody's here. It's like a ghost town. And when I get to the restaurant upstairs, which looks great. It's like a,

you could host like a 500 person wedding there. There's nobody there. And the host is sort of like confused that anyone has walked in to the point that like, he doesn't even really have an established system for how to charge people who are customers. Like as far as I could tell, this is like the buffet for the bosses who are running these like scams. And so I'm sitting there. Yeah.

Yeah. No, they're like, there definitely, there was a free, there was a fridge in the back with free beer. the head Budweiser, which I like. And so I'm chatting with one of the waitresses who does speak English. And I'm just, I play kind of dumb.

And I'm like, what's with this place? Why is nobody here? And she's just like, this is Chinatown. And I'm like, you know, I know what that means? But I'm like, what's Chinatown? She's like, listen, like, the people here, like, they can't come and go. Like, they can't come to the restaurant. And I'm like, I make this like,

this face of horror. And she's just like, she was like, oh, oh, but don't worry. The wait staff, we have our freedom. And I was just like, Jake, it's Chinatown. Yeah. I was just like, first of all, I was like, oh, my God, this is, this is, I can't believe this is real. It's so horrible.

And also, I'm sort of left with like, I don't know, where do I go from here? Like, the Tether investigation, you know, started back when we first talked. I'm like going to the Bahamas talking to, you know, their banker. It seemed kind of silly. Now I'm here. I'm like, oh, this is like enabling whether the tether guys know it or not. Oh, they know. This is enabling.

Yeah. Well, they do now. Well, and it's designed, let's be honest, it's designed for this use. It's designed to not require, you know, anybody to know what's going on, to know their customer. It's meant to be fluid. It's meant to be frictionless. is meant to be permissionless.

And so mission accomplished. And they know full well that if you make something that's permissionless and frictionless and, you know, to whatever extent, less traceable or untraceable, you know who's going to be attracted to that. Yeah, definitely. And it comes up in criminal cases from time to time. I saw one where this like Russian money launderer was talking. There were interceptive communications that the FBI published.

And he's just like, he's talking to a client. He's like, yo, get USDT. It's like, you don't need to say your name or anything. It's so fast. It's awesome. Everyone uses it. And like, but where we leave things at the end of the book is that these guys are not in trouble, as far as I know.

And they've got now, it used to be you had to do some crazy gambles to make money if you were sitting on 50 or 80 billion dollars. Now you can invest it in treasuries. and earn 5%. That's what they say they're doing. And if you believe their numbers that they're publishing now, they are earning like a billion dollars or more per quarter. Tether's one of the most profitable companies in the world,

like more than Nike. It's a small crew that runs it. They're all billionaires now. They come out ahead as like one of the, of all this crypto carnage. They're the winners at the end. end. And it was certainly not what like anybody would have predicted. I don't think. One point, I'm looking at their quarterly reports because now they're releasing quarterly reports, like they're a public company, I guess, to dunk on everybody who thought they were committing

crimes. And listen, they were committing some crimes. They were, you know, prosecuted in certain areas and banned from certain areas. But if they have whatever it is, $80 billion in assets, you put it in treasuries, you make 5% on that. That's $5 billion a year, you know, $4 billion a year. It's a lot of cash. Right. That's like a great business. And I've reported that they were under investigation by the US DOJ for bank fraud.

But as far as I know, like no charges have been announced. It's been years. They, I find it unlikely that this, they will just grow and grow and Tether will one day like replace, you know, J.P. Morgan and the government will just say, you know, I didn't really care so much about banking regulation and know your customer rules and whatever. Let's just let somebody else hold billions of dollars and move it around with these tokens. Um, but, uh, yeah, I don't know what's going to happen. Hmm. Uh, it's wild. I mean, there, it's somehow, uh, you know, as you go through this book here, there's like, um, massive risk taking fraud, crime.

and then some people figure out a way to go legit maybe. And so you had this happen in organized crime in American history where you had people who, you know, were committing all kinds of crimes. And then at some point they flipped over and like, you know, let's be legit. Let's stop running numbers, prostitutes, drugs, whatever. And let's get into construction concrete. Let's try to, you know, own buildings or whatever it happens to be. And I think, you know, if I'm just taking a pure guess here, I think Tether, yeah, might be in the process of doing that. And that's why they've avoided the full audit, right?

They don't have to do a full audit. Well, there's no real regulators so they can do what they want. And they still say the audit's coming. They've released this attestation, which honestly, I mean, it's fairly detailed. like if you believe it's released by an auditing firm. At some point, it becomes kind of a, the real tether truthers are always saying like they haven't done, they haven't delivered the proof, but it's like, I don't know,

they've made it this far. Now they have the, like we've said, they have this way through buying treasuries where they could be making billions of dollars. It could be that if there was a hole at one point, they've earned it back by now. Correct. Correct.

Yeah. That's the likely scenario. I think that's a distinct possibility is that, you know, and imagine if instead of FTX and SBF spending their money, giving $15 million to Mr. Wonderful to go on CNBC. And I don't think they let them on CNBC anymore after all this. Like, I don't know what the fallout is for people. Like, do Giselle and Tom Brady have to give the money back? Does Mr. Wonderful have to give the money back? So I think most of these people got paid in equity.

So they may not, unless they were able to sell it, they may not be, they may not have anything to give back. Got it. And, you know, now we've got like maybe the top five people at FTX have been arrested or pleaded guilty. And a lot of the people who worked at FTCS kept their money on the exchange. lost all their money. So, and one thing I thought was pretty funny was that there was another crypto Ponzi that

we haven't talked about yet called the Terra Luna. Yeah, no, I had, uh, Do Kwan on this podcast and he couldn't explain to, I had him on. I'll send you the episode after we get off or just do Do Kwan, Luna, this resource. And I kept asking him, can you explain it to me one more time? There's a Luna, it's pegged to this, but then there's like money coming out. Where does that money come from? and, you know, I consider myself somewhat sophisticated in terms of investing in 400 companies and, you know, putting $100 million to work or whatever and getting returns for investors.

And I couldn't understand. Like, where is that? Where are the profits coming from? And it's like, well, you know, they're staking. And I'm like, well, who's on the other side of the stake? I don't understand. So, yeah, maybe talk a, and he got, he's pitched. He got picked up in, what did he get picked up, Montenegro or something, like a Von

Vering or something? It was like, Montecarlo. It was some place with the casinos. He got picked up in. I think it was Montenegro. Yeah, but he was still doing like Twitter spaces, you know, like the occasional live stream while he was on the run. Who picked them up, Daniel Craig?

There was this one guy who had called Tara Luna and made a lot of money on that. And then he lost his money when, because he kept it at FTX. And this gets to like, like the one question that comes up a lot with writing a book about cryptos, people are like, where is it going from here? And to me, I'm like, did you watch the last two years? Yeah. This is some of the craziest stuff that's ever happened in the history of finance.

Right. Are we just going to like memory hold that and be like, you know what? Now it's time to. It's exactly like Trump. It's like this got out of control. It makes no sense. And because the crimes were so rampant and so frequent. people have given up.

It's like, it's literally how the KGB does sciop is that if there's so many crimes, it just becomes the default, right? I mean, I think people just have become inocuated to how heinous and insane these crimes were. But said it, like, even if we're talking about the ones that were not crimes

that were just like crazy bubbles, do you think that, like in the VC world, this could ever get going again? Like, what's the, How is the... It depends on... So bubbles will always happen

and that's like actually a good part of the ecosystem. We over-invest and then some big winner comes out and you have a duopoly and, you know, Uber beats Lyft and Lyft has some amount and DoorDash and you got three or four players in that space now. So you do have these boom-buss cycles and that's fine. But people flaunting the regulations in finance, I haven't seen any VCs who have been taken to task over investments or clearing of positions. And it might be because if they didn't clear their positions, you know, a lot of people have, you know, talked about Andreessen Horowitz, which is, you know, they were kind of the lead investor in a lot of these companies.

I don't know that, you know, if I think they may have done X Infinity, but whoever did Axe Infinity, right, put a bunch of money. Yeah, they were the lead investor in that, I believe. So if they put $100 million into it and lost it, I don't know that they committed a crime. It's not a crime to lose your money on an investment. If they put $100 million into it and they sold all their equity and they distributed $400 million to their LPs, at some point, does somebody come knocking on the door and say, was this a security? And, you know, Gensler's been kind of strong about what he believes is a security. And so there needs to be some sort of regulation here.

You cannot trust a bunch of smart people with tons of. of money and you give them an unregulated casino, bad things happen, period, full stop. Yeah. And if people were being offered, you know, tokens at a discount with not much of a lockup, like, I can see why a venture capitalist might say, sure, I don't care about, you know, give me some, give me the Luna tokens. As long as this keeps going for a few more months, I'll be able to dump them on some sucker. Yeah. And like, like you said, I haven't seen cases come out like that, but I'm kind of find it hard to believe that no one did that. And I also agree that, yeah, the SECs basically come out and said that a lot of these, pretty much most of these

things probably were securities and that the laws would apply. So I'm waiting to see like, what cases do come out of it. I think they're going to be digging through this for like a decade or, well, five years. I think that's their statute of limitations. And, you know, there are regulations around when you can liquidate tokens and who can invest in companies. We have accredited investors. We have qualified purchasers. These are sophisticated folks. It's about 6% of the country. They're allowed to invest in these things. If you were involved in Axe Infinity or an NFT program and you knowingly sold to the public or you didn't put the controls in place for the other 94% of non-accredit investors, non-qualified purchasers

do invest, that's a pretty serious crime. You know, doing a unregistered secure, you know, selling security in an unregistered fashion like XRP did. And so, or I believe XRP did and the government believes they did and pretty obvious they did. The only thing that's not obvious is, is it an actual security? It was like for a couple of years, just like no one cared about the rules. Like when I was there at ApeFest, the Yuga Labs, which is the company that created the board apes, like the ugly monkey pictures, they had just announced the creation of Apecoin, which was like a useless coin that didn't do anything.

maybe they could use it in some metaverse that didn't even exist yet. And they're giving people ape coin. It's trading on Coinbase. People are making tons of money. For some reason, it still has some value on Coinbase. People are making tons of money. I'm at the conference, which is like a party on a here in the South Street Seaport in Manhattan, Snoop is performing.

And he's singing a song. I don't know how this didn't get on the internet, but he sings a song that's like, ape coin like don't buy doge coin buy ape coin and i'm like sounds like promotion to me ape coin yeah like do you own any ape coin like is that going to be disclosed in like the third verse like this is pump and dump i say pump you say dumb pump i mean it's literally laughable how crazy this was and you know the cc i know was looking at euga labs back in 2022. I don't know.

Yeah. I broke that story because I was, I was talking to somebody else in crypto. I asked them about Yuga and they were like, oh, yeah, they were going to do like a deal with them, but they got some like big problems with the SEC. And then meanwhile, the person I was talking to, I'm like, you're doing the same stuff. Aren't you going to have problems with that? You're not worried about this. But like people suspend disbelief. You know, this is what I've learned. and they convince themselves whether they're high on

speed or they're high on their own supply, does not matter. The book is incredible. Zee, Fox, number go up, inside crypto's wild rise and staggering fog. I can talk to you for hours,

but I don't want people not to buy the book. You got a taste of it. The stories are even crazier. I'm two thirds of the way through the book. You're a great writer. You're a great investigative journalist.

The book's important, and it's very entertaining. I hope to make a movie out of it for you or a TV series, or something. Did you get options yet or no? No. Michael Lewis has got his for $5 million. I just read.

Oh, really? You can have mine like a lot cheaper. Yeah, yeah. Give me a call. Go ahead. Just get a million to Zique. And go buy the book right now. Audio book's great.

Congratulations, Zik. And the story is, you know, you're going to have to do a follow-up because I think we're only halfway through the story. We'll see you all next time on this week and startups. Bye-bye.